The three biggest economic and development challenges faced by the new Croatian government are fiscal consolidation, structural reforms and maximising the benefits of the country's accession to the European Union, the World Bank Director for Central Europe and the Baltic Countries, Peter Harrold, told a press briefing in Zagreb on Thursday.
Fiscal consolidation should primarily be directed at cutting expenditure to finance growth and protect vulnerable groups, structural reforms must include moves that will ensure higher competitiveness, and preparations for EU membership should include increasing the capacity to absorb as much money from EU structural funds as possible.
When asked to comment on the government's plan to cut budget expenditure, Harrold said that the move would lead towards fiscal sustainability, while the continuation of the present model, which relied on borrowing for the purpose of financing public expenditure, would be very delicate. He said that a huge challenge faced by the government was harmonising the policy of expenditure reduction with stimulation of spending as one of the generators of growth.
It seems that citizens realised before the government that it was necessary to make savings and they are doing it, and they have also considerably cut borrowing for consumption purposes, Harrold said. He said he noticed greater optimism in Croatia than last year.
However, cutting spending at a time when exports are not so great may slow the economy, so Croatia needs investments that should not be slowed by excessive administration. Increased investment could kick-start growth and turn the negative GDP rates into positive ones, he added.
When asked to predict Croatia's credit rating, Harrold said that it was important to keep the present rating, adding that he hoped that the budget would be a strong enough message to avert the possibility of a downgrade.
When asked in what direction the Croatian labour reform should go, Harrold recalled that the previous government had wanted to relax the legislation, which prompted citizens to sign a trade union petition for a referendum. He said that many collective agreements were expiring this year and recalled that the government had announced serious negotiations on new ones.
Everybody understands the need for flexible labour legislation, but the cost of labour may also be reduced by improving productivity, cutting labour taxes and shifting a portion of the tax burden from labour to consumption, which can help employment, Harrold said.
