ZAGREB, November 7, 2018 - Addressing a traditional conference of the Croatian Economic Association in Opatija on Wednesday, President Kolinda Grabar-Kitarović expressed satisfaction with positive economic trends and praised the government for the reform measures it is taking, but she also warned about crucial problems affecting the national economy.
In her address, titled "Key Challenges and Preconditions for the Economic Development of Croatia", the head of state underscored a GDP growth rate of 2.9%, continued economic growth, a 3.5% increase in retail sales in the first eight months of this year and positive employment trends, as the biggest achievements in the period since last year's meeting of the Croatian Economic Association.
In addition, a surplus in the general government budget of 2.8 billion kuna or 0.8% of last year's GDP, plus a surplus of 1.6 billion in the first half of this year, were also underlined as successes. In her speech, the president pointed to a fall in the public debt-to-GDP ratio to 80.2% at the end of 2017 and further to 74.3% at the end of the first half of this year.
"The above-mentioned facts clearly indicate that we have made some headway in the context of increasing economic growth, reducing unemployment and bringing order to public finances. These results can satisfy us to a certain extent, but we must not rest on our laurels. They are just the first step and a sign of encouragement for us to accomplish our real goal, and that is an annual growth rate of 5%," the president said.
She praised Finance Minister Zdravko Marić for implementing tax measures that make an additional 6.3 billion kuna disposable to the business sector, and described this as an impulse for a more robust growth. She said that unlike his predecessors, the current finance minister had done a good job by easing the tax burden.
Grabar-Kitarović, however, called for a fairer income taxation system and proposed the introduction of "a synthetic tax system whereby the aggregate income would be taxed equally, regardless of the source of income."
Currently, income from work is taxed progressively, while income from the property rent is taxed with a preferential rate of 12%, which applies to only 70% of the base. "That, together with some other taxes, has turned us into a society of rentiers," she said. "We can change that and the tax policy can be conducive to such efforts," the president said.
President recommends strengthening of second pension pillar
In connection with the reform of the pension schemes, Grabar-Kitarović warned that the pension system in the present-day circumstances "is unsustainable and poses the biggest financial risk for the state". Therefore, reinforcing the second pillar for pension contributions is the only right way to improve the system in parallel to cost cutting and certain changes in the structure of investments by pension funds, she said.
Concerning demographic trends, gradually raising the statutory retirement age and encouraging workers to retire later can help efforts to make the pension system viable, she added, praising the efforts which Labour and Pension System Minister Marko Pavić has been investing in that regard.
The president said that she attached great attention to decentralisation and regional development and in that context welcomed the government's tax measures resulting "in positive headway towards intensified fiscal decentralisation, more effective fiscal balancing and more even regional development."
She called for the strengthening of administrative and financial capacities of local authorities for the absorption of EU funds, noting that 32 out of 127 towns and municipalities had failed to withdraw any money from EU funds since Croatia's admission to the EU in mid-2013.
In her comment on the latest Doing Business report of the World Bank that criticises Croatia for a low level of productivity of the state administration and a slow judicial system as well as a poor business climate, the president called for a reform of the state administration and legal system so as to reduce red tape and lessen legal insecurity.
Lack of clear vision, development strategy biggest problem, says president
Grabar-Kitarović said that the biggest problem of the national economy "is the lack of a clear vision and a development strategy", adding that "we have to decide what we want to present and with what we want to position ourselves on the European and global markets in the long run."
She underlined tourism in that context and warned that it was both "impressive and discouraging" that through its direct and indirect effects, tourism accounted for close to 20% of GDP.
The question is how long the current concept of tourism, based on the country's geographical features, can be sustainable, while the existing transport and local infrastructure is becoming more and more vulnerable to a growing number of visitors, the president said.
She added that she saw Croatia's agricultural sector as its comparative advantage. "It is amazing that the Dutch make polders to meet their needs for agricultural production... while we have very good and fertile soil that is largely not cultivated," she said. "Maybe it is true that the national farm sector was destroyed by excessive imports, but that means that we joined the EU unprepared and did not have a pre-accession strategy, she said.
"I believe that these two examples - tourism and farming - are sufficient to illustrate how problematic it is not to have a strategy and how much the lack of a clear vision and economic development strategy can also affect the segments where we are very competitive," said Grabar-Kitarović.
Croatia must work to change the structure of its economy towards the production of technologically more complex products with added value as well as create conditions for greater productivity and development of the private sector, notably small and medium businesses, without neglecting public companies, she said. "This is important primarily for the sake of our people who are disappointed and are emigrating. If we want to stop or reverse that trend, we must primarily ensure job creation and higher salaries," she said.
She warned that a clear vision and an economic development strategy were especially important "in the context of geopolitical reshuffling, in which Croatia must capitalise on its position in terms of geo-transport and energy routes, as well as ongoing business and technological changes" so that it could become a strong European transport and energy hub.
"I am a big optimist and can say with certainty that we can succeed in all our efforts. We have enough wisdom and competence but we need a little more resolve, a proactive approach and optimism," Grabar-Kitarović said.
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