Nataša Srdoč , Photo by Archives AIPP

INTERVIEW

Croatia can become the tiger of SE Europe

Adriatic Institute for Public Policy was founded in 2004 in Rijeka, as a free market think-tank that promotes just, free and more prosperous Croatia and the whole Adriatic region. Since then they become the most influential think-tank in Croatia.

They organize the annual International Leaders Summit on Economic Growth in Croatia, Slovenia and Brussels, with attendance and support of world renowned and leading economists, business leaders and free market reformers that are also members of the Executive Advisory Board of the Institute. The Honorary President of the Board is Edwin Meese III, former minister of justice of USA, during the mandate of the President Ronald Reagan, and the members are, amongst others, dr. Andrei Illarionov, former economic advisor of the Russian President Vladimir Putin, Mart Laar, former PM of Estonia, as well as prominent entrepreneurs of Croatian diaspora in USA, such as Matt Sertich, Mike Bubalo, Mara Letica i Anthony Maglica.

In collaboration with the American conservative public policy research institute, The Heritage Foundation and The Wall Street Journal, every year the Adriatic Institute releases the Index of economic freedom, and Croatia's drop in ranking on this index has particularly raised the dust this year. The President of the Adriatic Institute has become known for her sharp comments and criticism in which she advocates the rule of law and economic freedom in Croatia.

How would you rate the measures that Jadranka Kosor’s government took in order to deal with the budget deficit by the increase of tax base - imposing a temporary emergency income tax, and raising value added tax?

There was not supposed to be any budget deficit at all. It is unsustainable and irresponsible to plan having government expenditures that are higher than the state income. Moreover, Croatian government has been doing this for years, and the state debt has been enlarged and transferred for repayment to future generations. Adriatic institute has been warning Croatian government for years, that the state finances are unsustainable under these conditions. Instead of tax increase, the government should have significantly decreased the state expenditures. And the government still has the opportunity to do that.

There are a lot of countries that have introduced the legal obligation of a balanced budget (0% deficit) amongst them are New Zealand and Estonia. Possible imbalance is resolved with decrease in state expenditures.

Compared to other countries, how heavy is Croatian citizen's tax burden?

Croatian citizen has the heaviest tax burden in comparison with citizens of other countries in Europe, USA, New Zealand and Australia, and for several years now. According to recent research of tax freedom for 2009, the tax burden was 46% of GDP, which means that a Croatian citizen, who is a taxpayer, has been working 168 days a year for the state. It was not until the 18th June this year that he started to make money for himself.

Since the economic decline is bigger than it was estimated to be, and at the same time the taxes are increased, the new calculation will be even less favourable for Croatian citizens.

Croatia has the opposite measures to those that you have suggested, to eliminate subsidies to agriculture and shipbuilding, and thus decrease the VAT to 15%. What will the increase of VAT lead to, and what would the decrease have led to?

The Croatian government has been recycling the taxpayers' money – it collects significant tax revenues with high tax burden, first of all to satisfy the needs of its own inefficient state administration, and after that different organized interest groups that take taxpayers’ money from the government (through subsidies and like). This way, the government is buying its ruling position with the taxpayers' money.

Croatian VAT of 23 %, which is almost a quarter of every HRK that is spent, is a high burden for citizens of Croatia, and it decreases their purchasing power. High VAT is discouraging demand in Croatia and making the country a non-competitive tourist destination. Croatia has the highest VAT in the South East Europe region. Although the EU has set the lower limit of VAT to 15%, with VAT 23% Croatia is at the infamous 25th place amongst 27 countries of EU. Only two countries in the EU have a higher VAT than Croatia: Denmark (25%) and Sweden (25%).

The VAT increase will result in the increase of prices, and in current economic crisis this will cause further decrease of household consumption. This can lead to even higher decrease of GDP and tax revenues. Besides, the higher the tax rates, the more “cost-effective” tax avoidance becomes.

In comparison with the anti-recession measures of other countries, how do you rate our measures?

In the year of global economic crisis, responsible governments of many countries have tried to mitigate negative consequences of the reduced economic activity, higher unemployment rates and reduced living standard of citizens:
Great Britain has reduced VAT rate from 17.5% to 15%;
Estonia has revised the budget, and reduced government expenditures by 10%;
Belgium has reduced VAT rate on the expenses of building new residential buildings from 21% to 6%;
Belgium has also enabled the deferral of VAT during three consecutive quarters in 2009 for the companies that are going through financial problems;
Finland has reduced VAT for all food from 17% to 12%;
France has reduced VAT for catering industry from 19.6% to 5.5% in order to increase employment and reduce consumer prices;

This brings us to the conclusion that the anti-recession measures in named countries are focused on the reduction of tax burden on citizens, while Croatian government is going in the opposite direction – by the increase of tax rates it adds to the decrease of purchasing power and living standards of Croatian citizens, and it also causes a further reduction in tax revenues, which is an opposite effect of its measures. Croatian citizens have every right to be resentful of government measures.

Do you agree with the neoliberal analysts who claim that Croatian Economy is a hostage of permanent concessions made to strong unions because of the elections?

The highest employment, that is, the lowest unemployment rates and higher economic growth are achieved in countries that do not have restrictions in labour legislation, where entrepreneurs tend to employ new workers because they can adapt to future difficult or easier market conditions thorough release or employment. The lack of minimal wage enables nonqualified workers to work (below minimal wage), because if the minimal wage was predefined they would be out of work. I believe that an individual and an entrepreneur can make an agreement abut the salary, without the union’s interventions.

The experience of the USA has shown that the automotive industry, whose employees are under almost complete control of unions, has become too expensive in comparison with the competition, which has, among other things, led to the bankruptcy of GM.

PM Jadranka Kosor has invited the professional and general public to send her their suggestions. Which measures would you suggest to our PM Jadranka Kosor?
 
The measures that I would suggest to PM are as follows:

1. Invite the judges and court prosecutors from countries with strong rule of law tradition that would conduct the confiscation of public employees and government officials’ assets for which they can not prove that they have acquired on the basis of income, inheritance or marriage. This property would then be included in the value of the budget!
2. Introduce complete transparency and accountability of government – to show all state expenditures per recipient, amount, purpose, introduce this information on the Internet and enable search by the same criteria.
3. Balance the budget (0% deficit) through significant reduction of state expenditures.
4. Abolish state investments in infrastructure constructions and finance infrastructure facilities by providing concessions to private companies through international public tenders.
5. Fully privatize all state-owned companies.
6. Eliminate subsidies to agriculture, shipbuilding and other entities operating in the market.
7. Introduce 15% Flat tax for income, profit and VAT.
8. Free labour legislation of all restrictions in terms of release or employment of workers and abolish the minimum wage.
9. Reform the public administration, certain services performed by the state should be transferred to the private sector, reduce the number of employees, professionalize the staff.
10. Implement health reform.
11. Implement pension reform.
12. Reduce the contributions and tax burden from employees' gross salaries.

Do you think that there is enough political will in Croatia to implement the necessary structural changes in the economy or is a call to the IMF necessary?

In these circumstances, with the lack of discipline of the Croatian government to reduce state expenditures, the IMF is the best solution for the implementation of structural reforms.

Where you see Croatia in 10 years time? Will it still be in a recession?

Croatia could become the "tiger economy" of South East Europe. Primarily it has to establish the rule of law, independent judiciary and protection of property rights of Croatian citizens, as the prerequisites of functional market economy. Also, it has to implement structural reforms and limit the role of the state in the economy. This will depend on the moral values and skills of the following Croatian government. If the future government continues with the current trend of irresponsibility, Croatian citizens will become the poorest citizens of Europe.

Written by Snježana Ivić