Partnership Agreement Republic of Croatia 2014HR16M8PA001.1.3
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Partnership Agreement Republic of Croatia 2014HR16M8PA001.1.3 SECTION 1A 1. ARRANGEMENTS TO ENSURE ALIGNMENT WITH THE UNION STRATEGY OF SMART, SUSTAINABLE AND INCLUSIVE GROWTH AS WELL AS THE FUND SPECIFIC MISSIONS PURSUANT TO THEIR TREATY-BASED OBJECTIVES, INCLUDING ECONOMIC, SOCIAL AND TERRITORIAL COHESION 1.1. An analysis of disparities, development needs, and growth potentials with reference to the thematic objectives and the territorial challenges and taking account of the National Reform Programme, where appropriate, and relevant country-specific recommendations adopted in accordance with Article 121(2) TFEU and relevant Council recommendations adopted in accordance with Article 148(4) TFEU 1.1.1 Macroeconomic situation The declining trend of economic activity in Croatia continued in 2013 for the 5th year in a row. According to preliminary data of the Croatian Bureau of Statistics (CBS), 2013 ended with a drop in economic activity of 1.0% in comparison to 2012, which represents a cumulative drop of 11.9% in comparison to 2008. The main macroeconomic indicators of the Croatian economy in the period 2008 to 2012 are given in Table 1 in Annex 1 of this Partnership Agreement (PA). The most significant contribution to the real fall of the gross domestic product (GDP) from the expenditure side in 2013 came from a 1.8% drop in exports of goods and services, and a 1.0% decline in household consumption. All other components from the expenditure side of GDP recorded a real year-on-year decline, with the exception of government consumption (which grew slightly by 0.5%). The drop in household consumption in 2013 was the consequence of the exceptionally negative trends on the labour market and continued deleveraging of the household sector. After 4 consecutive years of strong declines, the further 1.0% reduction of gross fixed capital formation is the result of reduced private sector investments (though this was somewhat weaker than in the preceding year), and also of unimplemented investment projects of public enterprises, particularly at the end of the year. After positive contribution in 2012, a negligible negative contribution of net exports to economic growth was recorded in 2013 as the imports of goods and services, with a drop of 1.7%, recorded only marginally weaker real drop than the exports of goods and services. According to preliminary national accounts data, goods exports expressed in HRK at the 2013 level fell by 4.1%, while goods imports were reduced by 1.5%. This strong real reduction in goods exports under conditions of strengthened foreign demand suggests a pronounced loss of the share of Croatian companies on export markets. The deficit of foreign trade in goods was increased by 2.7% in comparison to 2012. The calculation of GDP according to the production approach suggests that in 2013, the real reduction of gross value-added was mostly due to the decrease of value-added in manufacturing (3.7%) and construction (4.3%), activities characterised by the most pronounced reductions in value-added since the start of the recession period (source of all data: CBS). EN 1 EN The average annual inflation rate of consumer prices was decelerated to 2.2% in 2013. The weak economic activity and absence of domestic cost-related pressures for several years has acted to slow inflation. Unfavourable conditions on the labour market resulted in lowered nominal unit labour costs in 2013, calculated with regard to EU Labour Force Survey data (or data from administrative sources). The slowing of inflation during 2013 was due partly to short-term factors, particularly the favourable effect of the base period (tied to the increase in VAT and certain administratively regulated prices in the first half of 2012) and positive shock on the supply side, i.e. the drop in prices of food raw materials on the world market resulting from the good harvest. This led to a reduction of prices in domestic food products. Favourable weather conditions in the country (relatively warm winter) influenced the annual drop in the prices of fruits and vegetables. Increased competition, after the remaining protective tariffs were abolished following Croatia’s accession to the EU, stimulated a reduction in food product prices. Inflation pressures from the world crude oil market were also reduced. An appreciation of the average nominal effective exchange rate of the HRK also favourably affected import prices. 1.1.2 Fiscal consolidation efforts Croatia faces the challenge of pursuing fiscal consolidation without harming competitiveness and prospects of economic recovery. The mid-term fiscal policy measures are directed at fiscal consolidation aimed at implementing the EU Council recommendations, for the purpose of resolving the excessive deficit. Namely, in January 2014, the EU Council, at the recommendation of the EC, gave its recommendation that Croatia resolve its excessive deficit in such a way that it is brought to less than 3% GDP in 2016, and the general government debt put on the path to a falling under 60% GDP two years later. The Council requested that Croatia implement a reduction to the structural deficit of 0.5% GDP already in 2014, which is the smallest possible correction envisaged by the Pact on Stability and Growth. In 2015 and 2016, further corrections of the structural deficit of 0.9% and 0.7% GDP were requested. In light of this, Croatia adopted consolidation measures in the amount of 2.3% GDP in 2014, and an additional 1% GDP in was requested for 2015 and 2016. In line with the above, Croatia needs to achieve the target nominal general government budget deficit at the level of 4.6% GDP in 2014, 3.5% GDP in 2015 and 2.7% GDP in 2016. With its economic policies, the Croatian Government started already in 2012 the fiscal consolidation and the implementation of reforms. In 2012 and 2013, measures such as reduced compensation of employees, subsidies and material expenses, reduced tax burden on the economy, improved efficiency of collection of revenues, repaired losses and privatisation of the shipyards, restructuring of state-owned enterprises, and remediation of institutions in the healthcare system were introduced. The result of these measures was reduction of the deficit in 2012 and 2013, although the expenditure side of the budget increased due to costs of the EU membership. In preparing the budget for 2014, the Government has started the development of measures to reduce the budget deficit so that it is adopted the measures to reduce the deficit (in September 2013), the Project Implementation Plan for the long-term reform measures of fiscal consolidation for 2014-2016 (in December 2013) and the Investment Plan for 2014 (in December 2013). Following the EU Council recommendations of July 2014, the Government also adopted an Implementation Plan for the Country-specific Recommendations (CSR) in July 2014. EN 2 EN In line with the CSRs, fiscal consolidation measures in 2014/2015 are geared towards enhancing the quality of public finances (i.e. further strengthening of the fiscal framework, improvement of budgetary planning and forecasts, alignment of projections and statistics with ESA standards, review of budgetary expenditure, improving the efficiency of the Tax Administration, etc.), also with a view to achieving efficiencies in the social security, pension and healthcare systems. As part of the measures to address fiscal imbalances, in line with the CSRs, Croatia will implement measures towards more sustainable pensions and healthcare. With respect to pension reform, Croatia has taken measures for improving the sustainability and adequacy of the pension system (i.e. since 2010 the statutory retirement age, the early retirement age and the qualifying period for women have been gradually increased). In order to tackle the problem of early retirement, as per CSR, Croatia is planning to amend the legal framework of the compulsory capitalized contribution system, amend the existing system of the social insurance period with increased duration, improve the professional rehabilitation system and standardize the expert evaluation criteria. Further steps for the adjustment of the statutory retirement age will be detailed based on the results of the Pension Adequacy Report and Pension Sustainability Report. Further integration of pensions based on special regulations in the general pension system and stricter controls over the disability pensions are also on the agenda. Croatia has a universal healthcare system. The health sector shows relatively good health outcomes, however it puts significant pressure on public expenditure. In 2012, Croatia spent 7.8% of its GDP on healthcare, among the highest for new EU members. Like most other European countries, Croatia is expecting profound changes in its population structure over the next 50 years as the elderly population grows and the need for health services and long-term care services will rise. A challenge is to provide better health services and improve efficiency while reducing public spending on health and at the same time to increase transparency in the healthcare spending and strengthen control mechanisms. With respect to increasing the cost-effectiveness of the healthcare sector, also as per CSR, analysis of healthcare system expenditures (debts) and the existing financial control mechanisms, reorganisation of the hospital system, new models of referral to the secondary/tertiary healthcare, analysis of the present state and the possibilities of financial separation between the Croatian Institute for Health Insurance and the state treasury, public tender for the determination of referent medicine prices and further development of e-Health are envisioned. ESI Funds will support some of these measures (e.g. development of statistics and solid accounting systems aligned with EU standards, improvement of fiscal framework, cost- effectiveness of healthcare, etc.). Consolidation measures should be designed to safeguard growth-enhancing expenditures and investments and allow sufficient fiscal space for co-funding of projects in line with the Europe 2020 Strategy supported by the ESI Funds.