The 2018 national reform plan, which the government approved on Thursday, projects GDP growth to continue in the coming years and the budget deficit to continue falling. The plan also sets out plans to reform state-owned companies in the transport sector, including finding a strategic partner for the ailing national flag carrier Croatia Airlines.
The convergence plan projects Croatia’s GDP growth in 2018 at 2.8 percent, and 2.7 percent in 2019, inching down slightly to 2.5 percent in 2020 and 2021.
The government said these projections are conservative, adding that in 2016 and in 2017 expectations had been exceeded, and that adopting a conservative approach had a positive impact on investments.
The programme focuses on investments as the main driver of growth, rather than government spending, the government said, adding that effects of the tax reform had already been seen in 2017, as private investments grew by 7 percent. They also said Croatia’s dependence on imports should be reduced, as imports have so far neutralised the contribution of exports in the country’s GDP growth.
As for this year’s budget, the government predicts a budget deficit-to-GDP ratio of 0.5 percent. This ratio is expected to contract to 0.4 percent in 2019 and to zero in 2020. For 2021 Croatia plans a budget surplus of 0.5 percent.
In reducing public debt, the plan is based on economic growth to continue, along with with further steps to consolidate and put to use state property.
The government is set to cut the public debt-to-GDP ratio to 66 percent by the end of its term in 2020, while the government’s programme initially put this ratio at 75 percent.
At the end of 2017, Croatia’s public debt-to-GDP ratio was 78 percent. In 2018 it is expected to fall to 75.1 percent and to 72.2 percent in 2019, further down to 69.1 percent in 2020, while in 2021 it is expected to drop to 66 percent.
The government also expects the cost of interests on Croatia’s borrowing to drop below two percent of GDP. In 2015, the cost of interests amounted to 3.3 percent of GDP, and in 2017 it fell to 2.7 percent.
The national reform plan also lists a set of measures to boost competitiveness, including the easing of the tax burden, although the details of this have yet to be defined, the government said, and added that a detailed analysis is in the works to devise a plan to reduce the overall tax burden by 2 billion kuna (€270 million) for both companies and individuals.
Regarding the profit tax, the government said that there was some room for its reduction but that this would requires a thorough analysis and discussion first.
The reform plan does not mention the introduction of property tax, although plans to reduce of the standard VAT rate, currently at 25 percent, are to be discussed.
Transport sector to be overhauled
The national reform programme also includes plans for the restructuring of the state-owned parts of the transport sector, i.e. road management companies and the national railway HZ, finding a strategic partner for the national flag carrier Croatia Airlines, as well as better regulations for maritime domain and the use of land for tourism purposes, on which bills are being drafted.
In restructuring railways, a comprehensive plan has been prepared which aims to improve business operations HZ Infrastruktura and HZ Cargo, sister companies of the state-owned HZ railway which specialise in railway maintenance and cargo transport. A project with the World Bank, similar to the one already agreed for the road traffic sector, is in the works for railways as well.
State administration will also see some reforms, with the bill on changes to public administration currently fine-tuned. The new legislation should introduce provisions aimed at de-politicisation of the state administration, and also new rules for salaries of public officials and employees.
The proposed measures will introduce 12 salary brackets in public administration, and provides for promotion based on performance, which will be evaluated regularly. The new bill will also bring the option for one-off bonus rewards for public employees, but also their demotion.
The National Reform Programme, and the Convergence Programme, must be sent to the European Commission by the end of April.
The Reform Programme is a document that defines the current state of affairs, and contains plans to implement the government’s key structural policies, while the Convergence Programme defines the key points for the country’s macroeconomic and fiscal policies.
Both are part of the mandatory reporting and harmonisation mechanism of EU member countries’ economic policies, to align them with the common goals and regulations of the EU.
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