Reduce Public Administration, Introduce Real Estate Tax, and Boost Public Sector Investment

Representatives of the IMF mission, who have just completed the regular annual consultations with the Croatian authorities have addressed the question of how to achieve that, given the low investment, declining supply of labor due to migration and the outflow of human capital. The IMF believes that major changes need occur in the public administration and the judiciary for a more favorable environment for economic growth to be created.

Court proceedings

- A more dynamic state can facilitate lasting growth - says the Fund in the concluding statement of the report.

- Compared to the similar countries in the region, the expenditures pertaining to total employment in the public sector in Croatia [12 percent of the GDP] are among the largest, given the size of the economy.

IMF explains that the reduction of expenditures does not necessarily mean lower pay levels - indeed, those who deserve better pay should get it. It mostly means a reduction of the number of employees on certain jobs in public administration. The Fund sees the latest draft Efficiency-Based Public Employee Salary Setting Act as the first step towards a more effective public service, but also suggests that it should be supplemented by 'an appropriate reduction in total staff expenditures to create room for increasing the pay of the more productive employees'.

A greater number of employees should be active in increasing the withdrawal of EU funds. Also, a reform of judicial and legal proceedings would well complement the restructuring of public administration.

Early retirement

The IMF is largely satisfied with the pension reform, though it would welcome a stronger discouragement of early retirement. It sees room for improvement primarily in a review of weaknesses of the 2nd insurance pillar which has been 'justifiably placed on the agenda of the Croatian government'. Changes are also necessary in the labor market, with the IMF advocating a rather cautious approach, 'to balance the interests of employers and employees'.

Healthcare

One of the solutions could be a 'hybrid' model combining the current fixed-term and full-time contracts, which would offer employees an initial trial period and then a mandatory transition to a full-time contract. The transition of employees from public to private sector should be encouraged, 'with appropriate but temporary security mechanisms'.

Although the fiscal policy has achieved good results, additional efforts are needed to reduce the vulnerability of state finances in the event of a change in global conditions. In the opinion of the IMF, the main priorities are the increase of public-sector investment, the reduction of total labor costs in the public sector and better targeting of social benefits. When it comes to revenue, the IMF again recommends introducing the modern real estate tax, which would create room for a reduction of other taxes. It reiterates the need for greater efficiency of the healthcare system and better governance of state-owned enterprises.