(A McLin, CC BY)
Croatia passed the fiscal liability law in 2010 that came into force in early 2011. This law stipulates that total general government expenditure (state and local government budgets and financial plans for extra-budgetary users) will be reduced annually by at least one percentage point in the estimated GDP, while the primary fiscal balance will be zero or positive. With amendments at the beginning of 2014, this rule was replaced and stipulated that the target value of the new fiscal rule becomes a medium-term budgetary goal to be achieved by the adjustment plan.
By the end of May this year, the European Commission forwarded four recommendations to Croatia, the first being the strengthening of the fiscal framework, and the rest referred to the adoption of two laws—budget and fiscal responsibility, including strengthening the mandate and independence of the Fiscal Policy Commission.
Four fiscal rules
The first is the rule of the structural balance—the target value of the structural balance becomes a medium-term budgetary objective to be achieved according to the adjustment plan and in accordance with the legally binding acts of the European Union. With regard to sustainable expenditure trends, the second rule would be that annual growth of general budget expenditures should not exceed the potential GDP growth rate established in accordance with legally binding EU acts. Exemptions for certain categories of expenditure are also permitted.
According to the third rule the share of public debt in GDP must not exceed the reference value of 60 per cent. If it exceeds this value, the difference between the public debt and the 60 per cent of GDP reference value must be reduced according to the dynamics that complies with the EU acts.
In order to strengthen the reliability of the mid-term national budget projection, the fourth rule of magnitude of deficit for the state budget projections (thus far prescribed by the Budget Law) would be introduced. This rule stipulates that the deficit of the state budget, as a percentage of GDP, as determined by the budget for the next year, should not be higher than the deficit established by the Parliament’s previous year’s projection. Also, the law defines the circumstances in which the application of fiscal rules will be temporarily postponed and which will be permitted in case of extraordinary circumstances in accordance with the EU legislation and provided that this does not endanger fiscal sustainability.
Fiscal Policy Commission
The Ministry of Finance also states in the explanatory memorandum that the new law continues to strengthen the independence of the Fiscal Policy Commission, defined as a permanent, independent state body, and membership of that body would be incompatible with membership in political parties. Currently, the Fiscal Policy Commission is elected by the Croatian Parliament, the body has seven members and is chaired by the Committee on Finance and the State Budget. And according to the new law, the Commission would have seven members appointed by the Parliament on the proposal of the Finance Committee and the State Budget. However, the function of the President of the Commission would be professionalized, and he/she would be elected on the basis of a public call. The law also stipulates that the President of the Commission is entitled to a salary of the Vice-President of the State Election Commission. He or she would also be an official in terms of regulations regulating the prevention of conflicts of interest, which means that the President of the Commission will be obliged to submit property statements and have other obligations in accordance with the Law on Prevention of Conflicts of Interest.
The other six members of the Commission would be proposed by the State Audit Office, the Central Bureau of Statistics, the Zagreb Institute of Economics, the Public Finance Institute, the Croatian National Bank and the Economics Faculties. These members would receive compensation for their work, and wages would be determined by multiplying the base for state officials. The Commission would also employee civil servants, who would carry out as experts, administrative and technical employees. According to estimates of the Ministry of Finance, for the work of the Fiscal Policy Committee, additional HRK1.5m will be needed in the budget.
The proposal of the new law also provides procedures in the event that the Government or the Fiscal Policy Committee finds significant deviations from the fiscal rules defined by law. If the Commission considers that there is such a risk, it shall draw up a report on the existence of risks related to the fulfilment of fiscal rules submitted to the Government. The government has to respond within 45 days, and if it assesses risks, it is obligatory to propose a plan of necessary measures with deadlines for implementation that will lead to the fulfilment of fiscal rules.
Exemptions
If, during the budget year or when drafting medium-term budget documents, the Government considers that there is a risk of significant deviations from the fiscal rules of the structural balance and the rules of expenditure, it shall prepare a report and submit it to the Commission, which shall be reported by the Parliamentary Finance Committee and the State Budget. In its report, the Government is obliged to state the magnitude and causes and to propose measures that will lead to the fulfilment of fiscal rules with an effect not later than the budget year following the year in which the deviation was established. If, however, the Commission compares major macroeconomic projections with the latest available projections of the European Commission for a period of at least four consecutive years, it submits the report to the Government, which should explain deviations and take the necessary measures to improve the quality of macroeconomic projections.
As in other countries, fiscal rules also include certain exemptions (for example, expenses are excluded from interest payments, EU funding), and situations where the rules are not applied. In Croatia, they don’t apply in the case of disasters and major economic disturbances, provided that these don’t endanger fiscal sustainability over the medium term. The procedure for determining the occurrence of these circumstances is within the remit of the Fiscal Policy Committee. In this context, it is also important to mention the Fiscal Pact, which has not yet been applied by the UK, the Czech Republic and Croatia, from the EU group of countries, which requires that a specific fiscal rule be incorporated into a national constitution or into a constitutionally enforceable law. This rule implies that the signatory states have to maintain a structural deficit at the level of 0.5% of GDP or below. Governments must also introduce an automatic corrective mechanism triggered by deviations from the balanced budget rule.
The growth of the number of countries adopting fiscal rules at a national and supranational level suggests that petty-fiscal policies are increasingly transferred from the discretionary zone in the area of solid rules. However, despite the existence of supranational and national rules there are many problems in their implementation. Some of them are complexity, too many exemptions, mutual exclusivity, inability to understand them from the public, still high levels of non-transparency, data problems, etc. However, the key issue lies at the supranational and national level in most countries that apply the rules, sanctions for fiscal policy makers are undefined or their laws leave a relatively large space for a different interpretation of the rule or subsequent „patching”. Without real sanctions and greater powers of fiscal advice fiscal rules will largely remain dead letters on paper.
Vedran Obućina is an analyst and a journalist specializing in the Croatian and Middle East domestic and foreign affairs. He is the Secretary of the Society for Mediterranean Studies at the University of Rijeka and a Foreign Affairs Analyst at The Atlantic Post.
