Former Finance Minister Slavko Linic, who served from 2011 to 2014 in the Social Democrats' cabinet under Prime Minister Zoran Milanovic, talked to N1 television's morning show Novi Dan on Tuesday, to comment on the proposed pension reform, income tax, and ways to reduce the tax burden on salaries.

Why did all the governments so far avoid seriously reforming the pension system. When you were finance minister, what was considered to be in the realm of possible?

“The five percent (compulsory) contribution into the second pillar is not enough, and it will not allow people to have decent pensions. During my term we went towards reducing health care contributions, and we tried to increase salaries, the solution is for it to be about seven percent, and that the rest goes into net salary increase and the raising of contributions towards the second pillar.

The funds missing for the health care system should be made up through income from property tax. Simply put, wealthier people should fund health care for all citizens of Croatia. We attempted it (to introduce the property tax) and after a year or so former Prime Minister Zoran Milanovic gave up on it. The unions and employers said that two percent was not enough, but it was a good step forward… We (as a country) are lacking employed people, so the only solution is to raise the tax rates.

I have to say I am shocked and surprised with everyone saying now that the solutions now proposed by the government are unacceptable. The government suggested an alternative – you can either take your savings, or you can opt to take the pension from the first pillar only, with your savings going into the state budget. That’s an option. Until we realise that we need is 300,000 more employed people, we will never have enough income to fund the pension fund. It has to come from taxes, and that has to be real estate or property tax. Without that kind of reform, there is no way out.”

The government announced it would cut some taxes, reduce the VAT from 25 to 24 percent, which should result in increased net salaries. Is that even possible?

“The five percent increase (gained) will not be felt by anyone, because businesses will not reduce their prices, there will be less revenue for the state budget, and there will be even bigger problems in maintaining a positive budget balance. The budget deficit will be between 19 and 20 billion kuna (€2.6-2.7 billion) per year. On the other hand, introducing a new tax bracket, or a zero tax rate, would certainly be felt. It’s clear that VAT should not be touched, we should move towards reducing the health care contribution rates, so that we can reduce the overall tax burden on salaries.”

How realistic is it to really reduce income tax, so that 5,000 kuna (€677) would become minimum salary?

“It is a burden for the employers, Croatian economy is so uncompetitive because of high taxes on salaries, it is hard to expect some sectors of the economy to shoulder that kind of burden. I’m against the government making decisions to the detriment of employers, we should reduce health care contribution rates, and once we do, there will be some room for net salaries to increase. Any other solution leads to questions on what can we do to create jobs.”

Should the income tax bracket for the highest salaries be reduced?

“That’s something the government already did in the first phase of its tax reform, with some success. Would it be possible to further reduce it? I believe so, but then we would have this issue of needing to find a different source of funding for local governments. We could increase the tax base in order to have lower taxes on higher salaries, that would be possible, but only if we change something in the way local governments are funded.”

Will the government get support for the measures it proposed?

“The real solution would be increasing the rate (of contributions into the second pension pillar), and if that doesn’t work, employed people should be given a choice, as envisioned by this reform. Every worker would get to decide, I don’t see any problem in that. Then there’s the issue of the psychological effect of having the retirement age set at 65 or 67, but that’s something for the unions and the government to discuss and agree.

Our problem is the lack of work force, I would try seeking solution to that through people who had went into early retirement – why couldn’t they work again? Let’s bring back pensioners – those of them who had been retired early because of various reforms, privatisation, or from the army, or the police, let’s bring them back into labour market. They could have lower salary contributions and still have the right to collect their pensions and work – not like in the current system where if somebody works, their pension is taken away from them.”

(€1 = 7.38 kuna)

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