
The Croatian Employers' Association (HUP) outlined its goals for this year on Friday, which include optimising local government, further relieving the tax burden on labour income, reducing parafiscal levies, and strengthening the competitiveness of Croatia's economy.
As highlighted in HUP’s latest publication “Focus of the Week”, authored by the HUP’s chief economist Hrvoje Stojic, the start of the year has been marked by global uncertainty caused by geopolitical changes and the restructuring of value chains. Key EU economies are losing the race for competitiveness, and the EU faces a potential “economic storm” due to the intensification of trade wars between the U.S., EU, and China.
Croatia is navigating an environment of diminished opportunities, relying on consumer optimism and public spending but facing inflation driven by uncontrolled wage growth and record spending. The strong wage growth has also been fueled by state interventions, with budget payroll spending increasing by 58% over two years and the minimum wage rising by 55% over three years.
Time for fiscal consolidation
The HUP believes it is time for fiscal consolidation, advocating for the optimisation of three-quarters of the 576 local and regional government units, which could yield potential savings of up to €150 million annually.
It also calls for improving the competitiveness of the tax system by further shifting the tax burden from labour income to income derived from asset use. It advocates reducing the tax wedge, which currently stands at 42.4%, to the level of the five most competitive EU member states.
“To become leaders in the Central and Eastern European region, we need to reduce the tax wedge by approximately 10 percentage points by increasing the threshold for applying higher income tax rates and capping the healthcare contribution base at four average salaries,” the publication says. The HUP forecasts that Croatia’s economy grew by 3.5% last year and expects growth to slow to 2.7% this year.
The HUP also proposes abolishing and/or reducing parafiscal levies by 30% over four years, alongside digitalising administrative processes and streamlining obligations arising from the implementation of EU regulations.
Strengthening competitiveness
The HUP emphasises the need to boost competitiveness through investments in research and development, greater competition in the energy sector, and proactive labour and capital market policies.
The Investment Promotion Act should be aligned with best practices in neighbouring countries, enabling a threefold increase in investments in research, development, and innovation, to bring Croatia closer to the 5% GDP level. This should be achieved through tax incentives and stronger support from institutions and capital markets to accumulate sufficient funds for investments in artificial intelligence, robotics, and green technologies.
“Today, more than ever, Croatia needs investments from countries that ‘deal the cards’ in the reshuffling of global value chains,” the HUP says.
Achieving energy self-sufficiency by 2030
The HUP advocates for fostering competition and innovation in the energy system, strengthening corporate governance and project capacities of the HEP electric utility, and accelerating the process of connecting renewable energy capacities. It emphasises the need to unblock investments worth approximately €2.6 billion in renewable energy sources.
In addition to the planned €800 million investments in the power grid over the next 10 years, significantly increasing investments in renewable energy is crucial to achieving energy self-sufficiency by 2030, the HUP says.
The HUP also advises enhancing labour force supply through active labour market policies aimed at increasing the participation of young people, women, older workers, and immigrants, considering the expected decline of the working-age population by more than 350,000 over the next 20 years.
To address this, the HUP highlights the importance of improving education standards, developing dual education systems, removing regulatory obstacles, reducing discrimination, increasing labour market flexibility, and introducing targeted tax incentives and integration programmes. Strengthening administrative capacities to identify labour market supply and future needs in line with investor requirements is also necessary.
Strengthening the capital market
To strengthen the capital market, pension funds should be given greater flexibility to invest in the domestic economy. The HUP also suggests enhancing the tax attractiveness of registering start-ups, introducing citizen investment accounts with tax incentives, and aligning the tax treatment of equity and debt.
The HUP emphasises that investments in venture capital funds are critical for developing a “high tech, high skill, high wage” economy.
Healthcare and public sector wage policy reforms
The HUP advocates structural reforms in the healthcare system and public sector wage policies. Public healthcare should be enabled to invest in new technologies, knowledge, and preventive measures, while savings should be achieved through a smaller hospital network, centralised public procurement, reduced “double” diagnostics, and a focus on treatment outcomes. This approach could reduce costs by 20 to 40%.
Regarding public sector employee wages, the HUP believes they should be tied to performance and task complexity.
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