Zagreb - The Fiscal Policy Commission, considering the government's proposal to revise the 2024 budget, has warned of the importance of prudent budget planning and called for a return to anti-cyclical fiscal policy next year.
The commission met on 7 October and adopted a position on the government's proposal to amend the state budget and the financial plans of extrabudgetary beneficiaries for 2024.
"Taking into account the current macroeconomic and fiscal situation, the Commission accepts the proposed budget plans, but warns of the importance of prudent fiscal (budgetary) planning and calls on the Government to return to anti-cyclical fiscal policy in the coming year. As many times before, we call on the Government to implement necessary structural reforms", said the commission.
Last week, the government sent the budget revision proposal to parliament, increasing revenues by €1.8 billion to €30.3 billion and expenditures by €976 million to €33.6 billion. The budget deficit would be reduced from €4.1 billion to €3.3 billion, and its share in GDP would be reduced from 4.9% to 3.9%. The consolidated general government deficit would be reduced from 4.5% to 3.5% of GDP.
Using the European System of Accounts (ESA) 2010 methodology, the consolidated general government deficit and the debt-to-GDP ratio would be within the Stability and Growth Pact limits, with the general government deficit projected at 2.6% of GDP and the public debt at 58.9% of GDP.
Fiscal situation deteriorates
The commission assessed that the proposed amendments to the state budget are necessary in order to correct certain revenue and expenditure categories.
In 2024, the macroeconomic achievements have improved compared to the macroeconomic projections from November 2023, on which the budget for this year is based, while the fiscal situation has worsened, the commission points out.
So far this year, fiscal policy has been pro-cyclical in nature and largely characterised by an increase in revenues, due to real and nominal GDP growth and partly due to the impact of inflation, but also by a marked increase in expenditures, primarily on employees and benefits to citizens and households.
A comprehensive and prudent fiscal adjustment needed already next year
"Although the general government and public debt balance is expected to be achieved within the limits of the Stability and Growth Pact (...), in 2024 the fiscal space needed to adjust to possible negative economic shocks in the future has been reduced," the commission warned.
It noted that the excessive expenditure growth is indicated by a strong increase in the primary structural deficit of 1.9% of GDP and a strong increase in the structural deficit, from -1.8% in 2023 to -3.6% of GDP in 2024.
"In the context of such an increase in expenditures, from the point of view of the long-term sustainability of public finances, it is necessary to launch a comprehensive and prudent fiscal adjustment already next year, in the amount of at least 0.25% of the structural primary balance per year in GDP when adopting a seven-year fiscal adjustment plan, in accordance with the reformed directives of the Stability and Growth Pact, with further (non)tax relief and tighter expenditure control," the commission said.
It also drew attention to the increase in the government's share in GDP, which is returning to the levels recorded during previous recessions, and which might expose Croatian public finances to greater risks in the event of a significant slowdown in economic activity.
The commission noted that it recognises the government's efforts to reduce the debt-to-GDP ratio as an indicator of fiscal sustainability.