Labor taxes and fiscal policy in Croatia Sandra valjek, The Institute of Economics, Zagreb Conferenc - PowerPoint PPT Presentation

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Labor taxes and fiscal policy in Croatia Sandra valjek, The Institute of Economics, Zagreb Conferenc

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Title: Labor taxes and fiscal policy in Croatia Sandra valjek, The Institute of Economics, Zagreb Conferenc


1
Labor taxes and fiscal policy in CroatiaSandra
valjek, The Institute of Economics,
ZagrebConference on Labor Markets, Growth and
Powerty Reduction Strategies May 27-28,
2005Thessaloniki, GreeceParallel session
Labor taxes and fiscal policy
2
Outline
  • 1. Persistent macroeconomic problems in Croatia
  • 2. Tax structure and labor taxation
  • - tax revenues in Croatia (size and structure)
  • - labor taxation (tax wedge)
  • 3. Achievements in labor taxation and fiscal
    policy
  • - decrease in labor taxation
  • - pension reform
  • 4. Fiscal challenges
  • - need for fiscal adjustment
  • - high social security expenditures
  • - unpleasant demographics
  • 5. What else should be undertaken?

3
Persistent macroeconomic problems in Croatia
  • Sluggish growth (war, reconstruction, transition,
    restructuring)
  • High tax burden
  • Large state sector and huge government
    consumption - persistent fiscal imbalance
  • High rate of unemployment and low participation
    rate
  • Lack of competitiveness current account
    deficits and growing external debt
  • Low inflow of FDI-s

4
Total tax revenue in Croatiacompared to the EU
and CEE countries
Figure 1 Total tax revenue as percentage of GDP,
general government, 1995 - 2002
Source OECD, IMF, Ministry of Finance of Croatia
and Slovenia, authors calculations
Note Poland, Hungary, Czech Republic, Slovakia
and Slovenia
5
Structure of tax revenues in Croatia
Table 1 Tax structure as percentage of total tax
receipts, general government, 1994 - 2003
Source Ministry of Finance, authors calculations
6
Tax wedge in Croatia compared to the OECD
countries
Table 2 Tax wedge as percentage of labor cost of
worker in manufacturing, 2002
Source OECD Taxing Wages (2003), The Institute
of Economics, Zagreb
7
Tax wedge and the rate of unemployment
  • Figure 2 Tax wedge and the ILO rate of
    unemployment in Croatia, 1994 - 2004

Source Croatian Bureau of Statistics, The
Institute of Economics, Zagreb
8
Achievements in labor taxation and fiscal policy
  • Several tax reforms and minor tax changes brought
    about the reduction of tax wedge, but total tax
    receipts remain sufficiently high
  • Tax reforms consisted of lowering social security
    benefits to some extent, but even more in
    reduction of labor tax burden
  • Tax burden reduced especially for the poor, among
    which there is a largest proportion of long-term
    unemployed
  • In the same time, the state relied more heavily
    on less distortionary taxes on goods and services
    tax structure in Croatia differs very much from
    those in EU 15
  • The problem of employment in the informal sector
    addressed by imposing social security benefits on
    earnings based on independent work contracts
  • The Government opted for a second-best
    solution
  • On the expenditure side, pension reform
    introducing fully-funded three-pillar pension
    system remains the most important fiscal success
    story in past ten years

9
Fiscal challenges
  • However, there are still many unresolved fiscal
    issues
  • High deficits (5 percent of GDP or more) call for
    urgent fiscal adjustment
  • Deficits are caused by enormous government
    consumption
  • Expenditures on social security (healthcare,
    pension) extremely high
  • Ageing population does not make the problem any
    easier

10
Demographic projections underlying assumptions
  • Table 3 Medium demographic projection variant,
    underlying assumptions

Source UN, 2003.
11
Demographic projections main trends
Table 4 Medium demographic projection variant,
total population and demographic dependency ratios
Source UN, 2003 authors calculation.
12
Fiscal effects of demographic changes public
pension expenditures
Figure 3 Projected public pension expenditures
(as of GDP)
Source authors estimates.
13
Fiscal effects of demographic changes
expenditures on health and long-term care
Figure 4 Projected public expenditures on health
and long-term care (as of GDP)
Source authors estimates.
14
What elso should be undertaken?
  • Improvement in budget balance as soon as possible
    is essential
  • This should be broght about by the reduction in
    government expenditures (on wages, subsidies
    etc.)
  • Healthcare expenditures as a share of GDP should
    be reduced and better control over public
    expenditures on health should be achieved
  • Labor market shoud be made more flexible since
    neither the labor costs nor the unemployment
    benefits cannot explain stagnant job creation in
    Croatia
  • More robust economic growth would surely have
    positive effects on job creation
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