The European Commission (EC) recommended that the European Council remove Croatia from the excessive deficit procedure (EDP) in its European Semester Spring Package published on May 22, thanks to the improvements in the Adriatic country’s budget metrics.
In its previous European Semester Winter Package published in February, the Commission kept Croatia among the EU members experiencing excessive imbalances due to its vulnerabilities linked to high levels of public, private and external debt, both largely denominated in foreign currency, in a context of low potential growth.
“Today we have positive news for Croatia and Portugal – we recommend the Council to abrogate the Excessive Deficit Procedures for the two countries as they have brought their budget deficits below the 3% of GDP and this for the whole forecast horizon,” Valdis Dombrovskis, Vice-President of the EC, said at the press conference for the release of spring semester package.
In its country-specific recommendations, the EC advised on May 22 that Croatia pursue its fiscal policy in line with the requirements of the preventive arm of the Stability and Growth Pact, which implies keeping to its medium-term budgetary objective in 2018. Croatia should reinforce budgetary planning and the multiannual budgetary framework, including by strengthening the independence and mandate of the Fiscal Policy Commission by September 2017, according to the Commission.
The Adriatic country is also encouraged to take the necessary steps for the introduction of a value based property tax and to reinforce the framework for public debt management, including by ensuring annual updates of the debt management strategy.
The EC also recommended that Croatia discourage early retirement and accelerate the reform of the education system. Croatia should also improve the functional distribution of competencies in public administration and speed up the divestment of state-owned enterprises.
Zagreb has been planning to reform the public administration, but this has been delayed several times by the collapse of successive governments. Reforms are not currently expected in the immediate term, since politicians are focussed on the split of the latest coalition between the Croatian Democratic Union (HDZ) and Bridge of Independent Lists (Most).
Meanwhile, Zagreb is targeting a general government deficit of 1.6% of GDP in 2017, according to the 2017 budget. Croatia’s consolidated general government deficit fell to HRK2.78bn or 0.8% of GDP in 2016 from HRK11.4bn or 3.4% of GDP in 2015.
The Croatian government aims to reduce public debt to 81.5% of GDP in 2017. Public debt is targeted to further decline to 78.6% of GDP in 2018 and 75.3% in 2019. Croatia's public debt fell by 0.9% m/m and 1.6% y/y to HRK286.3bn (€73.4bn) in January.
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