Title: Labor taxes and fiscal policy in Croatia Sandra valjek, The Institute of Economics, Zagreb Conferenc
1Labor 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
2Outline
- 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?
3Persistent 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
4Total 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
5Structure 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
6Tax 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
7Tax 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
8Achievements 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
9Fiscal 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
10Demographic projections underlying assumptions
- Table 3 Medium demographic projection variant,
underlying assumptions
Source UN, 2003.
11Demographic projections main trends
Table 4 Medium demographic projection variant,
total population and demographic dependency ratios
Source UN, 2003 authors calculation.
12Fiscal effects of demographic changes public
pension expenditures
Figure 3 Projected public pension expenditures
(as of GDP)
Source authors estimates.
13Fiscal 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.
14What 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