February the 10th, 2023 - Croatia is among only three European Union (EU) member states to have actually improved its budget balance when compared to the pre-pandemic year of 2019.

As Jadranka Dozan/Poslovni Dnevnik writes, the energy crisis and ongoing high inflation has forced the national governments of the majority of EU member states to implement various generous packages of fiscal incentives, from various subsidies and one-off benefits to reductions in VAT rates. As rising inflation followed the coronavirus pandemic, some enacted as temporary measures until coronavirus no longer pised an economic threat were prolonged, and some new ones were also introduced, primarily related to energy and food.

For many of these measures, which were conceived as temporary as mentioned above, the deadlines finally expire in the next few months, and among them are the shock absorbers that the Croatian Government introduced for gas and electricity prices in the spring and autumn package of measures last year. As things stand, it's realistic to expect new prolongations throughout the EU as a bloc, in the same form or with some modifications. The global overviews regularly published by the VATcalc portal, specialised in VAT, are also on that same track.

Belgium, for example, has already converted last year's temporary VAT reduction from 21% to 6% into a permanent one for electricity, natural gas and other supplies in heating systems, and excise tax reforms have also been announced. Under the influence of double-digit inflation, Greece extended their reduced VAT rates on certain goods from 24% down to 13%, which is already the fourth extension of the temporary rate reduction introduced during the coronavirus pandemic. Currently, the duration of this measure is planned until the middle of this year.

At the same time, already this fall, the German Government, along with the introduction of temporarily reduced VAT rates on gas (from 19% down to 7%) until the end of March 2024, also extended the application of the lower VAT rate for catering and hospitality establishments for the second time. From the end of 2022, it was extended until the end of this year.

Although statistics suggest a slowdown over the last two or three months, inflation is simply still very high. Last year, 16 out of a total of 27 EU member states ended the year with double-digit rates (in Hungary, Lithuania and Latvia, they were above 20%), and almost as a rule - wage growth trotted quite far behind the rising prices. Very soon, the Croatian Government will also announce a new framework or a possible extension of the measures regarding electricity and gas prices.

At the end of next month, the deadline for applying the lowest VAT rate of 5% to natural gas deliveries, for which as part of last year's April package of measures for Croatia, the rate was permanently reduced from 25% to down 13%, and exceptionally temporarily - down to a mere 5%.

As part of Croatia's autumn package, a scheme was designed to limit or mitigate the rise in electricity prices for households, the public and non-profit sector, and enterprises, also with the now looming date of March the 31st, 2023 as the expected deadline. It remains to be seen what the solutions will look like from April on, i.e. whether the 5% rate for gas and the existing price limit model for electricity will only be left as it is until a new deadline is drawn up.

However, given the drop in standards (despite nominal growth, the average salary in Croatia has fallen by 5% in real terms over the past year), as well as the fact that an election year is coming, it is easy to assume that issues related to peoples' living standards will gain additional importance. This also facilitates a better state of public finances compared to recent expectations. According to the latest consensus forecast by FocusEconomics, until recently, analysts expected a deficit of around 2% of GDP in 2022. However, it seems that the beneficial effect of inflation (especially with a good summer tourist season) on filling the budget was significantly stronger.

More specifically, in a weekly overview of selected economic and financial topics, the chief economist of the Croatian Association of Employers (HUP), Hrvoje Stojic, stated that Croatia "had returned to the budget surplus zone, namely 1.1% of GDP in the consolidated general government budget". This ranks Croatia among only three EU member states that have improved their budget balance compared to the pre-crisis year of 2019.

Admittedly, the surplus in the budget is primarily highlighted by HUP within the wider context of the question of the expediency of introducing an additional income tax and the generally high tax burden compared to the rest of the EU.

For more, make sure to check out our dedicated news section.

As Hina/Novac writes on the 9th of September, 2020, the Croatian state budget can withstand the crisis, there's no need to panic, PM Andrej Plenkovic assured on Wednesday on the Croatian Radio show "A sada Vlada/And now the Government", adding that he believes in a quick recovery of the Croatian economy.

When asked how much space there is in the budget and how much more it can endure in this crisis, PM Andrej Plenkovic said that it can endure it all and that there shouldn't be any panic. He added that those in the public space and the media space should stop creating panic.

"Recently we had a discussion at a meeting of exporters. Not only my message, but also the message of ministers and governors (CNB, op.cit.) Is: ''Let's not create something that doesn't exist''. We've had the biggest economic crisis in the last hundred years and we solved it so that we have practically the same level of employment, ie unemployment is as it was before the crisis, and the tourist season managed to happen in the best possible way,'' said the Prime Minister.

He added that the fall in Croatia's GDP is likely to be smaller than the first projections during the spring, and he expects its growth next year. According to him, the government "fought well" for 22 billion euros from European Union funds from the new seven-year budget.

"We've dealt with all the preconditions. We're continuing to help vulnerable activities with 4,000 kuna, micro-enterprises with 2,000 kuna, and there is a measure for part-time work in the amount of 2,000 kuna per worker. That will cost us about 800 million kuna by the end of the year. The government has been making decisions on time, sending out a message of security and predictability to the private sector. For the budget, we've solved everything properly, gone to domestic and international financial markets, and we've contacted international financial institutions and secured what we've been lacking," PM Andrej Plenkovic said.

According to him, Croatia is more resistant to the current crisis than it was to the one which occurred back in 2008 and 2009.

"Therefore, let's not panic. We're working very seriously and responsibly, and it is up to the businesses to do the best they can in this framework. We'll ensure stability, and it is up to them to fight. Enterprises are fighting in other countries, and we were quicker with our national measures than some other larger EU members who were waiting for European solutions,'' the prime minister stressed.

Commenting on the articles according to which Croatia is undercapacitated to withdraw EU money, he pointed out that it is easy to problematizs this when someone else fights for 22 billion euros.

He added that from the current financial perspective for 2014-2020, Croatia contracted 101 percent, and more than 40 percent of the available funds were paid out, and that money can be spent for another three years.

"The absorption capacity isn't the same in 2013 and in 2020, now, the mechanisms are faster, people are more established, projects are better and things are going much more concretely," assured Plenkovic.

He added that he is personally leading a group of ministers tasked with preparing Croatia's recovery and resilience programme which is based on EU guidelines.

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