Abstract
The chapter deals with key underlying factors that shape impact of fiscal policy on Croatian competitiveness. These are historical and political factors, impact of international institutions, structural problems of Croatian economy and different policy actors within the country. The paper limits its focus to overall effects of government spending, tax policy and structure and interaction of fiscal and monetary policy. The main argument is that fiscal policy was not conducive to improvement on the level of competitiveness mostly due to inability of main political forces to devise a consistent, sustainable and feasible long-term plan of economic development. Fiscal policy adapts to dynamics of economic system and basis on ad hoc decision-making. Continuations of such a policy will inevitably lead to social clashes and tensions. The paper suggests another path, which is much more endogenous but demands high level of social capital in the country.
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Notes
- 1.
Fiscal policy can be defined as a set of government activities that uses taxation and spending to achieve goals of high and stable rates of economic growth, low unemployment and stable and low inflation rates (and a number of other goals depending on the priorities of a particular society). Competitiveness is a set of institutions, policies and factors that determine the level of productivity of a country (WEF 2013). Fiscal policy, affects every pillar of competitiveness, and directly and indirectly determines the level of productivity.
- 2.
This refers to the efforts towards decreasing the labour costs by wage reductions. In public sector directly, and by reducing taxes in private sector.
- 3.
The “ voracity effect” is defined as a more-than-proportional increase in discretionary redistribution in response to an increase in the raw rate of return in the efficient sector (Lane and Tornell 1999, p. 34). This effect increases with the strength of the leading interest groups in particular society which exploit their position to increase transfers from the government and appropriate higher share of government redistribution. This has a negative effect on lower rate of economic growth.
- 4.
If 800–900,000 members of the society have the opportunity to claim only 9–10 % of the total (gross) income, it is a society that is away from such social goals.
- 5.
A phenomenon where government resources are misused by interest groups in times of economic prosperity and high level of government revenues. Due to the fact that all interest groups gain share of government revenues, there are no incentives to reveal corruption.
- 6.
The main reason has been political sensitivity of the required reforms.
- 7.
However, in the long run systemic (credit) risk that stem from unsustainable burden of financial costs for declining economy presents a major threat for banks.
- 8.
Sanader resigned from position of Prime minister and all functions in HDZ on July 1st 2009.
- 9.
- 10.
- 11.
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Drezgić, S. (2015). Fiscal Policy and Competitiveness in Croatia. In: Thomas, M., Bojicic-Dzelilovic, V. (eds) Public Policy Making in the Western Balkans. Springer, Dordrecht. https://doi.org/10.1007/978-94-017-9346-9_3
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