The drop of the share of public debt in GDP and favourable forecasts regarding further public debt trends create room for a strong tax reduction, says a weekly analysis by the Croatian Employers Association (HUP), authored by HUP chief economist Hrvoje Stojic.

Stojic noted that the European Commission has significantly lowered the estimate of Croatia’s budget deficit in 2023 to only -0.5% of GDP from -2.4% in November 2022, while the deficit estimate for 2024 has been halved to 1.3% of GDP. This puts Croatia among the three leading EU countries in terms of the expected improvement of the balance in relation to the autumn forecasts and among the six EU countries with the most orderly public finances.

Of all EU countries, Croatia has seen the biggest improvement of public debt projections for both years, enabled by its fall to slightly above 62% of GDP by the end of next year, that is, below the Maastricht limit of 60% following adjustment on account of the not so small budget reserves (of around 5% of GDP).

In addition to that, Croatia has reduced the cost of interest on public debt to only 1.2% of GDP in the next two years, which is 0.5 percentage points below the euro area average. Finally, in 2023 the gross needs of the state for financing will drop to 12% of GDP, which is the lowest level in 15 years.

Thus the state of public finances is much better than many have expected, which is one of the key preconditions for a comprehensive tax reduction, which in addition to the strong labour productivity growth (+2.7% in the last three years or 2 pp above the euro area average) would additionally strengthen Croatian companies’ competitiveness, he said.

He added that owing to one of the lowest activity and employment rates Croatia should opt for bolder tax cuts in relation to the reference averages of the EU or CEE countries, in line with recommendations by the OECD for the creation of sustainable and quality jobs.

HUP welcomes contribution of local government to tax changes

In that context, HUP welcomes the next round of tax reform, including a certain contribution by local government units, Stojic.

“The stronger than expected positive balance of local government units as owners of income tax in the context of enabling faster wage and employment growth is a welcome opportunity for a contribution by local government units to the competitiveness of labour costs,” Stojic said.

They are a 25% increase in personal deduction from €530.89 to €663.61, a decrease in the lower income tax rate of 5 percentage points – from 20% to 15%, and an increase in the nominal threshold of €3,981.68, which is the gross monthly amount to which the higher, 30% income tax rate is applied.

He also said that HUP advocates limiting the highest amount of pension and health insurance contributions to four average wages for all payments to workers under the work contract.