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Croatia’s Post-communist Transition Experience: The Paradox of Initial Advantage Turning into a Middle-Income Trap Read chapter Read first chapter

2019 | OriginalPaper | Chapter

9. Fiscal Policy and European Semester in Croatia: Why Should We Focus on Public Debt?

Authors : Hrvoje Šimović, Milan Deskar-Škrbić

Published in: Policy-Making at the European Periphery

Publisher: Springer International Publishing

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Abstract

In this chapter we analyze the mid-term fiscal developments in Croatia through the lens of the European Semester-related indicators, procedures and policies. We show that despite the more favorable fiscal position public debt in Croatia is still excessive when compared to SGP and Fiscal Compact rules, the level of economic development and debt levels in CEE peer countries. This is especially worrying as our empirical results confirmed the thesis that public debt level significantly affects and reduces the effectiveness of fiscal policy, the main economic policy instrument in Croatia. An extended SVAR model with public debt, compared to the baseline model, clearly shows the reduction of impact and cumulative government spending multipliers. Thus policy-makers should not only focus their efforts on further and stronger reduction of public debt only to comply with EU economic governance rules but also to mitigate the negative effects of debt burden on the effectiveness of fiscal policy in Croatia.

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previous chapter Monetary Policy in a Highly Euroized Economy
next chapter Banking Regulation in Croatia: Qualitative and Quantitative Assessment
Footnotes
1
In this chapter we focus on a narrower definition of public finance, as well as on institutional framework, while other related reforms like healthcare, pension system, healthcare and state-owned enterprises are mostly covered in other sector-specific chapters by our respected colleagues.
 
2
Composite (complex) indicators are omitted from this analysis. Most common composite (complex) indicators are credit ratings, bond spreads and credit default swaps (that closely track the current financial markets’ assessment of a given country).
 
3
Beside aggregate indicators like public debt level, or liquidity indicators like interest payments level, vulnerability indicators include the analysis of maturity and currency risk which goes beyond the scope of this text (due to extensiveness of the analysis and limited space).
 
4
Methodology is adjusted according to Hiebert and Rostagno (2000) and Mihaljek (2003).
 
5
Empirical papers regarding impact of public debt on fiscal policy effectiveness are rather scarce for Croatia. Only one paper, using SVAR, is found where structural characteristics like trade openness and public debt level are used to analyze fiscal multipliers in Croatia along with Slovenia and Serbia (see Deskar-Škrbić and Šimović 2017). Regarding analysis of public debt sustainability, there are many papers that deal with certain types of public debt sustainability issues. The most common are static analyses of stability indicators (e.g. see Mihaljek 2003; Sopek 2010; Šimović and Batur 2017), or certain dynamic analyses of fiscal sustainability (Babić et al. 2003; Sopek 2011), and analyses that involve composite indicators (Mihaljek 2009; Cota and Žigman 2011; Bajo and Primorac 2013; Šimović and Batur 2017). Almost all papers alert to mostly unsustainable projections of public debt level and fiscal policy in general.
 
Literature
Babić, A., Krznar, I., Nestić, D., & Švaljek, S. (2003). Dinamička analiza održivosti javnog i vanjskog duga Hrvatske. Privredna kretanja i ekonomska politika, 13(97), 77–126.
Cota, B., & Žigman, A. (2011). The Impact of Fiscal Policy on Government Bond Spreads in Emerging Markets. Financial Theory and Practice, 35(4), 385–412.
Deskar-Škrbić, M., & Šimović, H. (2014). Porezna politika Milanovićeve vlade od 2012. do 2014. Političke analize, 5(20), 22–32.
Deskar-Škrbić, M., & Šimović, H. (2017). Effectiveness of Fiscal Spending in Croatia, Slovenia and Serbia: The Role of Trade Openness and Public Debt Level. Post-Communist Economies, 29, 336–358.CrossRef
Mačkić, V. (2014). Political Budget Cycles at the Municipal Level in Croatia. Financial Theory and Practice, 38(1), 1–35.CrossRef
Mihaljek, D. (2003). Analiza održivosti javnog i vanjskog duga Hrvatske pomoću standardnih financijskih pokazatelja. Privredna kretanja i ekonomska politika, 13(97), 29–75.
Mihaljek, D. (2009). The Global Financial Crisis and Fiscal Policy in Central and Eastern Europe: The 2009 Croatian Budget Odyssey. Financial Theory and Practice, 33(3), 239–272.
Šimović, H. (2017). Impact of Public Debt (Un)Sustainability on Fiscal Policy Effectiveness in Croatia, EFZG Working Paper Series, No. 17-05.
Šimović, H., & Batur, A. (2017). Fiskalna održivost i održivost javnog duga u Hrvatskoj. In H. Blažić, M. Dimitrić, & M. Pečarić (Eds.), Financije na prekretnici: Imamo li snage za iskorak? Rijeka: Ekonomski fakultet, forthcoming.
Šimović, H., Ćorić, T., & Deskar-Škrbić, M. (2015). Mogućnosti i ograničenja fiskalne politike u Hrvatskoj. Ekonomski pregled, 65(6), 541–575.
Sopek, P. (2011). Testing the Sustainability of the Croatian Public Debt with Dynamic Models. Financial Theory and Practice, 35(4), 413–442.
Vučković, V. (2011). Političko-poslovni ciklusi: postoje li u Hrvatskoj. Privredna kretanja i ekonomska politika, 20(125), 61–88.
Metadata
Title
Fiscal Policy and European Semester in Croatia: Why Should We Focus on Public Debt?
Authors
Hrvoje Šimović
Milan Deskar-Škrbić
Copyright Year
2019
Book
Policy-Making at the European Periphery

Print ISBN: 978-3-319-73581-8

Electronic ISBN: 978-3-319-73582-5

Copyright Year: 2019

DOI
https://doi.org/10.1007/978-3-319-73582-5_9