Fiscal Austerity versus Growth in Croatia

The role of fiscal austerity has been questioned for centuries, but a rapidly increasing deficit along with the financial crisis in 2007/2008 influenced a renewed debate on the economics of austerity. This paper analyzes the role of austerity versus the role of economic growth. It also attempts to highlight the role of the theoretical context of austerity policy and the economic history lesson learned during the transition from the Bretton Woods model to Washington’s consensus. Despite numerous studies and polarized debate, no consensus on the implementation of fiscal austerity has been achieved because this complex subject has not been the subject of a sufficient methodological exploration. Emphasis should be placed on defining the methodology of austerity and gathering statistical data to influence the implementation of social transfer policies. In addition, it is necessary not only to take a hybrid approach to fiscal and monetary policy but also to adopt economic laws and quantitative economic relationships. The benchmarking country used in this paper is Croatia. The outcome of this research can serve as the basis for future decision-making and research.


Introduction
The concept of "fiscal austerity" and its adjustment has attracted considerable attention in recent years. This focus on fiscal austerity is of particular importance, especially in transitional countries affected by declining GDP, decreasing wages and social protections, increas-tion from the from Bretton Woods model to Washington's consensus. Despite numerous studies responding to the issues of whether governments should adopt austerity despite their weak economies and whether balanced budgets can ensure sustainable economic growth, because these complex issues have not been the subjects of a sufficient methodological exploration, there is no consensus-only a polarized debate.
The dramatically negative experiences of the PIIGS countries' European debt crisis and the vulnerability of the Croatian economy indicate the need for a methodological investigation to determine whether there are other forms of adjustment that focus on employment growth and prosperity. To achieve the moderate scenario of a "Goldilocks economy", it is necessary to build an optimal model of economic growth and to forecast that model based on knowledge of economic rules and quantitative economic relationships. In this way, crises and economic cycles can be foreseen and managed. Thus, just as in Keynes's proposal that depending on the period of an economy's business cycle, the implementation of austerity should be emphasized (Keynes, 1936). In addition, it is necessary to require a hybrid approach to fiscal and monetary policy. To ensure sustainable growth in light of the budget deficit, it is of the utmost importance to implement appropriate redistributive policies based on the macroeconomic indicators that reflect societies' well being. In the 21 st -century context in which human relationships are becoming increasingly complex, scholars and scientists must reconsider the position of human beings in the contexts of new technologies, science, global economics, social relations and future prospects. Consequently, a multidisciplinary approach is always required (Sharma, 2013). The outcome of this research could affect transitional countries' immediate decision-making related to the implementation of social policies. It could also serve as the basis for further research. Its implications, limitations and directions for further research are offered. This paper is structured into four sections.
Section I analyzes the theoretical context of austerity policy and the lessons of economic history. Section II provides background research. Section III analyzes austerity versus growth using the example of Croatia.
Section IV presents concluding remarks and policy recommendations.

The theoretical framework of austerity policy versus economic growth
The phenomenon of austerity economics has been the subject of scientific research for centuries. According to Konzelman (2012), no general agreement has emerged from the polarized debate about the economics of austerity about what austerity is, when it should be applied or in whose interest it is presumed to operate. Austerity measures therefore include some combination of public expenditure reductions and increased taxes. The aim of economic austerity is to reduce a country's deficit-i.e., the difference the government's revenues and expenses. The economics of reaffirming austerity and the economics of the deficit-financing problem were greatly influenced by the emergence of the Industrial Revolution in the mid-18th and 19th centuries, WWI (1914WWI ( -1918, WWII (1939)(1940)(1941)(1942)(1943)(1944)(1945)   Reagan. With the appearance of neoliberal policy and "market fundamentalism" to increase profits, measures were established to reduce workers' real wages and social rights, market deregulation begin. That deregulation included the liberalization and privatization of economic enterprises and even of the public sphere (railroads, electricity, water supplies, education, health, etc.), a reduction of public consumption (particularly in health, educational and social institutions), a reduction on taxes on capital and assets, and in increase of the consumption tax, which ultimately shifted the tax burden from capital to citizens and thus increased inequality and poverty. Actual growth factors stimulated by multinational corporations have contributed to the erosion of the role of nation states, which through a lack of internal dynamics neglected their own technological capabilities and industrialization (Sharma, 2002 Ensuring economic and social stability required the state to play a more active role, but neoliberalism advocated a free market in which the state budget would play a reduced role in redistribution of income and so on. Opposing the power of transnational corporations was difficult with weakened trade unions and workers suffering from a degraded status. As the 80s brought new obligations to neoliberal politics, debts increased and under the "curtain" of stabilization, a shift in the policy's focus been justified by not only aggregate demand for economies with productive capacity but also the use of monetary policy to fight inflation. From the 1980s onwards, theory and policy looked to pre-Keynesian ideas such as the "Treasury view", which plunged the economy into an even greater depression. Growing public debt has renewed interest in the economics of austerity. According to Konzelmann (2012), austerity has become a policy objective rather than a policy whose objective is macroeconomic stabilization. The 1990s were marked by an increase in world production accompanied by inflationary pressures and many developing countries' failure to service their debts. Furthermore, the prolonged period of expansion described as the "Great Moderation" (a period of stable global inflation, high global growth and low interest rates), which was built on an unsustainable growth model, preceded both the global financial crisis (2007)(2008) and the debt crisis. According to Minsky (1992) and his financial instability hypothesis, during periods of prolonged prosperity financial institutions invest more in riskier assets, which boomerang in the end, causing the system to experience Despite numerous studies, no heterodox model that could serve as an economic panacea has been found.
The financial crisis has been reflected in high fiscal deficits, increasing debt, and a decline in aggregate demand and production, all of which have had a negative impact on employment and have deepened both inequality and poverty, especially in transitional countries that are confronted by structural problems.
To simultaneously reduce both fiscal deficits and the public debt, governments have shifted their policy from fiscal stimulus to austerity. However, according to Alfred Calcagno (2012), if slow growth or recession is caused by insufficient demand, a new round of fiscal tightening will further depress economic activity. As a result, governments will reduce tax revenues and increase social expenditures without guarantee that fiscal balances will improve. In the infancy of the global financial and economic crisis, the Croatian economy-which has been confronted by structural problems since the transition-was affected. Although  rope reveals that the crisis was generated by the private sector but it was paid for by the public sector. He concludes that in the future, financial repression and high taxes on top earners will become a part of the landscape. We will be forced to solve our debt problems in this way because austerity simply does not work. Papadimitriou and Hannsgen (2012), in a paper researching how the Eurozone countries have fared under austerity, note that austerity is the wrong policy at the wrong time. They conclude that austerity has brought pain, not relief, to the Eurozone. Austerity has resulted in slow growth, rising unemployment, declining aggregate demand and falling profits. The authors support Keynes's argument that the right time for aus-terity is during a boom, not a slump; they also make proposals. Their general approach is to propose tax cuts that primarily benefit the wealthy, which would help to loosen fiscal policy for little social purpose rather than a macroeconomic one. They support increased programmatic spending aimed at solving key problems, along with tax cuts and transfers to individuals and families with the highest needs and lowest saving rates. They hope that a large proportion of the new spending would be used in ways that increase employment.
According to Ogujiuba and Ehigiamusoe (2014), the government should reduce wasteful non-development-related spending financed by domestic and foreign borrowing and instead should allocate more resources for developing the education, health, and infrastructure sectors of the economy.
In his book "Bad Samaritans", Chang (2008)  to argue that that neoliberal policy propagated by the "Bad Samaritans" who promote an ethos of "do as we say, not as we did" can be very harmful to economic growth and development. Chang's (2011) book "23 Things They Don't Tell You About Capitalism" argues that the huge budget deficits created by the crisis will force governments to significantly reduce public investments and welfare entitlements, negatively affecting economic growth, poverty and social stability-possibly for decades. He concludes that this catastrophe was ultimately created by the free-market ideology that has ruled the world since the 1980s. Although, he emphasizes that being critical of free-market ideology is not the same as being anti-capitalism. His criticism is of a particular version of capitalism-free-market capitalism-that has dominated the world for three decades.
According to Calcagno (2012), austerity policies are based not only on an incorrect diagnosis of the nature and depth of the crisis but also on an erroneous view of economic mechanisms. A strategy of cutting education, research and infrastructure investments will deliver neither growth nor competitiveness. The implicit identification of fiscal tightening with fiscal consolidation shows the deficiency of the macroeconomic approach. The author notes that if slow growth or recession is due to insufficient demand, a new round of fiscal tightening will further depress economic activity that will reduce tax revenues and increase social expenditures with no guarantee that fiscal balance will be restored. Additionally, by deepening the recession, larger parts of the financial system may need government support, which would cause fiscal accounts to become dramatically disoriented. Thus, he concludes that governments that criticize "living above their means" often forget that government expenditure and revenues are linked. Furthermore, he notes that only a recovery in growth, with nominal GDP expanding at rates higher than interest rates in the medium and long terms will abate debt-to-GDP ratios. Such growth can result from coordinated supportive policies, which may include changes in the level and composition of public income and expenditures and a better distribution of income and credit that would expand fiscal multipliers and the purchasing power of low-and medium-income groups with a high propensity to consume. His analysis highlights that fiscal tighten-ing has become almost a universal recommendation, despite countries' different structures and levels of development. For instance, high fiscal deficits and rapidly growing debt ratios resulted from the crisis, but only in developed economies: in most developing and transition economies, the debt-to-GDP ratio resumed its downward trend following recovered growth and in many cases, the terms of trade resulted in new gains. Arestis and Pelagidis (2010) note that the "post-Great Recession"-era policy has finally prevailed globally, especially around Europe; the UK and similar countries might find it even harder to administer an export-led policy medication to their economies. In Europe in particular, the near absence of a stimulus has indeed brought the Eurozone close to dissolution.
According to the authors, the problem is that embarking on austerity increases risk of dreaded outcomes in Europe, including negative growth in gross domestic product, sovereign default, political instability and shuttered capital markets. Such outcomes make bank failures more likely, not less. They note that it is easier to understand the embrace of austerity in a political context. Namely, the emphasis on austerity has emerged even in countries with strong balance sheets despite the fact that one of history's most well-known lessons is that in times of recession, fiscal stimulus is the best medicine. They explain phenomena with the following facts; if state budgets are restricted, sovereign bond prices will rise, rescuing imperiled banks.
In that way, moribund interbank lending will be resuscitated and government borrowing costs will decline.
In another way, it is obvious that European politicians are incapable of directing stimuli towards productive public investment and the public continues to reject tax increases to cover the future deficits that would create a stimulus today. According to the author, the government should support postsecondary education, investment in clean energy, new transportation infrastructures and so on. Otherwise, austerity mania will hit us very hard.
According to Škare (2013), an important aspect of fiscal austerity dates from approximately 375 BC, as seen in Kautilya's papers. Škare states that Kautilya opposed any strict fiscal policy measure, recognizing the negative effects of fiscal austerity-including generating both negative business cycles and "deficit fetishists"-that are clearly implied in his remarks. According to Škare, fiscal austerity is a road to economic distress because it ruins personal wealth and the power of consumption-generating business cycles. The author stresses that Philips's theory (1962) of economy as a science attempts to explain how the system works. In that paper, he notes that production activities are the main imperative when creating wealth and therefore, banks and economic policy makers should work on defining an interest rate that will reflect a reasonable rate of profit and risk. With respect to Kautilya's critique, he notes that Kautilya was aware of the market's negative consequences, for example, the legacy of tax 10.5709/ce.1897-9254.162 DOI: CONTEMPORARY ECONOMICS Vol. 9 Issue 1 77-92 2015 and tax policy (higher taxes lead to lower consumption, lower production, and therefore, higher unemployment and economic cycles). Accordingly, Kautilya had no intention of using tax policy for income (re) distribution. His idea was to limit profit margins in the market (by taxing extra profit) while either limiting or protecting markets that generate an unfair income distribution.
Furthermore, Škare (2010; a) shares the opinion and legacy of A.W. Philips (1962) that none of the economic policies designed and adopted without the knowledge of quantitative economic relationships between the three most important economic variables (unemployment/ inflation /output) can be considered effective and appropriate economic policy. Otherwise, the knowledge of such quantitative relations could be used to design a set of monetary and fiscal policies with the able to ensure a sustainable, long-term combination of unemployment, inflation and growth. One way to confirm this approach is to conduct an historical examination of economic crises; for example, over the last 200 years, the United States has experienced more than 47 of them. The author states that world economies reacted differently to the economic crisis, although the budget deficit, social rights and strong state intervention can be reduced under a common denominator.
According to the author, the budget stabilization that becomes the exclusive goal during a crisis actually deepens and prolongs the crisis. Furthermore, Škare Despite numerous studies, this complex topic has not been the subject of a sufficient methodological exploration. Due to the lack of methodological implementation and statistical data, it is not surprising that there is no consensus on the application of austerity policy.

Data and analysis
The financial turmoil of 2007/2008 affected many countries, especially EU and transitional countries, but the roots of the structural difficulties and fiscal unsustainability confronting national economies were in place long before the world crisis. Aristovnik and Berčić (2007) state that in the early stage of transition, the need for major fiscal reforms was generally underestimated. According to them, the need to rapidly privatize and "get the state out of the economy" were emphasized, unlike more recent practices, which have admitted the need for an entirely The effects of this "austerity experiment" are questionable given increasing unemployment, the decline in aggregate demand, increasing public debt and the lack of revenue to repay that debt (See Tab below). We begin our analysis with the effects of the primary problems in Croatia's economy, to determine whether fiscal austerity contributes to Croatia's economic growth.

Results
Structural imbalances are reflected in the decline in annual percentage growth rate of GDP recorded by Croatia records since the beginning of its transition.  Table 1) marked a new development cycle with growth that continued until 2009 and the financial crisis, after which we see a contraction of growth.
As noted by Mendonca (2014), the European crisis presents a structural dimension that has been developing for years and has gained momentum primarily from an inability to respond in a timely way to the factors that caused the shocks.
It is important to emphasize that the pre-2009 economic growth was built on an unsustainable growth model based on household consumption rather than investment spending, thus creating the foundation for the crisis. These negative developments are interpreted in the Table 2.  The policy advanced by the creators of the Washington consensus has ensured liberalization and deregulation of the capital markets, resulting in increased foreign borrowing and significant credit expansion.
Most of the spending in 2000 and 2012 was directed at household consumption typically financed by foreign borrowing-62% and 60%, respectively-whereas the lowest percentage-19%-was directed at gross savings. The effect of the recession is primarily reflected by the decline in household consumption expenditures (62% in 2000; 60% in 2012) and government consumption expenditures (21% in 2000, 20% in 2012). The inability of even the private sector to generate aggregate demand is confirmed by the data regarding share in gross savings. Indeed, households have a higher propensity during recessions to save than to invest. Gross capital formation (19% in 2000, 19% in 2012) primarily includes investments in roads, railways, buildings and so on, which ultimately do not create additional value (see Table 3).    The revenue side primarily reflects shortfalls in income tax and taxes on international trade, which increases social contributions, grants and other revenue.
The earnings model based on industrialization, exports, savings and investments has been replaced by a model based on imports and deindustrialization, as indicated by the Table 9.
This table shows that from 2000-2012 agriculture, industry, and manufacturing showed a decreasing trend, whereas services are the only sector that showed an increasing trend. The structure of investment and output reveals an unsustainable path to economic growth and development. More specifically, deindus-trialization, technological backwardness, and directing investment policy towards infrastructure development and services instead of capital expenditures (education, health, development centers) created the basis for increased public debt (see Table 10).
The continuous growth of Croatia's deficit caused an increase in public debt: by 2013, it reached 67.4%.
The table shows that public debt is a matter of concern not only because of its amount but also because of the dynamics of its movement (i.e., the growth rate of total public debt was higher than the growth rate of GDP).
Croatia's long-term deficit also indicates structural problems with the national economy. More specifical-   Issue 1 77-92 2015 "sharp cuts" policy-i.e., a policy in which the main instrument of economic policy is fiscal consolidation, whereas monetary policy is neutral and pro-cyclicalhas created negative effects. Those negative effects have been particularly severe with respect to employment and citizens' standard of living, most notably for citizens who are at the bottom "of the scale. " Therefore, we must ask what has happened to the goal of reduced unemployment and increased prosperity. According to Bejaković (2013), a significant number of Croatians suffer from difficult social conditions and lack adequate access to public goods and services. With increased unemployment and budgetary problems, we can expect further deterioration of social conditions. Indeed, Croatia has one of the highest unemployment rates in the EU. Given the dynamics of movement and the amount of public debt, it is important to note the importance of rationalizing-not necessarily reducing-public spending. The funds freed by rationalization can be used for active employment policy measures, co-signing loan obligations, improving general liquidity, etc. Based on an analysis of macroeconomic indicators, it can be concluded that the objectives of increasing domestic production and economic growth are mutually transversal with the aim of solving budget deficits by applying austerity policy.
If we reach the bottom of the business cycle by reducing wages, we will not see an increase in employment, national income, exports and competitiveness, as demonstrated in the previous tables. Instead, we will see a decrease in economic growth. Therefore, this author supports Keynes's idea of the impact of business cycles on the application of austerity. In translated terms, austerity can have both positive and negative effect on the economy depending on the business cycle. To avoid repeating the negative experience of the PIGS countries, Croatia-like South Korea-needs to create a macroeconomic environment based on industrialization, production and employment, thus solving the deficit problem. As noted by Radulescu and Druica (2014), in today's world of financial and economic turmoil, labor is a key resource that (in their opinion) is considered to have relatively high education and training levels and a strong scientific base. The above referenced steps will result in higher wages and productivity, which is important for economic growth. Blažević (2013) notes that from the public policy perspective, the minimum wage is an attractive tool because it carries strong political symbolism without requiring increased public expenditures. She concludes, however, that most empirical studies find that the minimum wages has effects that are both negative and self-interested.
When an economic policy experiences radical changes, its objectives must be redefined.

Conclusion
Mainstream economic theory and neoliberal economic policy were called into question after the global financial crisis highlighted their limitations. No consensus on the implementation of fiscal austerity has been achieved be-