OVERVIEW OF FISCAL DECENTRALISATION
Croatia has a three-tier government structure which consists of the central government, counties and the local government level (towns, cities and municipalities). For the purpose of this analysis, counties and the local government level form the sub-national government level.
Legal acts governing fiscal decentralisation
The Law on Local and Regional Self-Government Units sets the legal framework for the division of competences between the different government levels, while the Law on Local and Regional Self-Government Financing is the law of reference for the local government finance system.
Qualifying fiscal decentralisation
Sub-national government authorities in Croatia finance their revenues through own resources, shared taxes, grants from the state budget, equalisation grants, shared revenues and borrowing. Own resources include income from sub-national government property, from county, city, town or municipal taxes, and from fines, fees and charges. Shared revenues include fractions of income tax and the tax on real estate transactions. The sub-national level of government in Croatia is not autonomous with regard to the determination of the base and rates of taxes. The rates of shared taxes are set centrally by the state government, and while the rates of municipal, town and city taxes are set by the municipal or city authority, strict limits are imposed centrally through boundaries within which these rates must be fixed. Full autonomy is allowed only in setting the tax rate for the use of public surface.
In 2001, the Croatian government launched an ambitious long-term decentralisation plan involving delegating competences to sub-national governments and increasing their revenue autonomy. In 2018, sub-national expenditures in Croatia accounted for 26% of total general government expenditures.
Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.
Fiscal equalisation mechanisms
Grants from the state's budget are allocated yearly to sub-national governments with low fiscal capacity in accordance with the Law on Execution of the State Budget. Specific equalisation grants are transferred to ensure proper coverage of expenditures in the areas of primary and secondary education, social welfare and health care.
LEVEL OF FISCAL DECENTRALISATION
Revenue autonomy (own revenues relative to total resources available) at the local level in Croatia is below the EU average (51% versus 53% in 2018), which entails a rate of dependency on central government transfers that is higher than the EU average (49% versus 48% in 2018). Local own revenues represent 13% of total government revenues, which is similar to the EU average.
Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.
The composite ratio (18%), capturing aspects of fiscal decentralisation of both revenue and expenditure, matches the average composite ratio of EU member states generally, suggesting that sub-national governments in Croatia have a degree of fiscal decentralisation that is in line with the EU average. This has largely been the case over the past two decades.
Fiscal rules and borrowing capacity
Sub-national governments have access to debt markets (loans and municipal bonds) under the very strict conditions imposed by the State Law Budget. Every loan engaged in by sub-national governments needs to be approved by the Ministry of Finance. The maximum amount of these loans is determined at the central level. A general constraint for all local government units is that total local loans cannot exceed 2.3% of the revenue generated by all local government units in the previous year, while the total debt service of an individual sub-national government unit cannot exceed 20% of budget revenues from the previous year. Municipalities are, in principle, allowed to issue securities such as bonds, but the very strict criteria under which this is allowed and the limited development of Croatian capital markets have so far prevented the development of these instruments.
Deficit and debt at sub-national levels
In 2013, the consolidated gross debt of the Croatian local government sector amounted to 1.6% of GDP. This value had roughly doubled since the outbreak of the financial crisis. Nonetheless, this value has steadily fallen since, reaching 1.4% in 2018.
Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.
