Croatia's growth in 2016 is expected to be lower than this year, primarily because of lower state spending due to fiscal consolidation, a top economic institute said on Friday contrary to official expectations of an accelerated growth. The Zagreb Economic Institute, partly funded by the government, said it expected this year's growth at 1.5 percent and then 1.3 percent in 2016.
This week the central bank forecast this year's growth at 1.7 percent inching up to 1.8 percent in 2016. "Due to fiscal consolidation, state spending will contract, which will be just partly compensated by higher consumer spending and investments," said Marina Tkalec from the institute.
The government would probably need to reduce the public sector wage bill and streamline welfare benefits and subsidies as taxation pressure on businesses and labour is already quite high, as it seeks to get its finances under control. Its key problem is low growth combined with high debt levels. The public debt is nearing 90 percent of gross domestic product and without accelerated growth to at least 3 percent annually in the coming years the country could face difficulties in repaying its obligations. Before this year Croatia, the newest European Union member, lost some 13.1 percent of its overall output in six consecutive recession years since 2008.
Brussels wants Zagreb to reduce the budget gap to below three percent of GDP in 2017 from the current level of close to 5.0 percent. "The fiscal consolidation is present, but is going on slower than what the European Commission would like to see. I think we can hardly cut the gap to below 3 percent before 2018," Tkalec said. Croatia is in the process of forming a new cabinet after last month's inconclusive election.