Footnote:
Croatia
Europe and Central Asia
English
en
Description:
The problems in Croatia's fiscal decentralization system have long been recognized. The fragmented territorial-administrative structure, fiscal decentralization efforts with insufficient fiscal autonomy, inconsistent public service standards, unbalanced sources of revenue, and doubts about the introduction of real estate taxes are just some of the concerns. However, there is often no consensus on the possible ways to address them. Compounding the problem is the fact that the recent and still ongoing tax reform, due to its tax relief element, has created the need to compensate subnational governments for the losses of revenues. The COVID-19 pandemic has increased the significance of these issues as the lockdown measures have had a strong negative impact on the existing revenue sources, such as personal income taxes (PITs), of many local and regional government units (LRGUs). At the same time, it may be that the current crisis has created the preconditions and opportunity needed for the government to finally implement reforms in support of fiscal decentralization and more effective financing of subnational governments, reforms that have long been postponed due to political reasons and a lack of popular support. These reforms include addressing the fragmentation of local governments, providing a clearer and more appropriate assignment of functional responsibilities, improving the fiscal equalization system by including the fiscal expenditure needs component, and introducing a working property tax. All of these ideas have long been debated, but there are many reasons to believe that the time is right for at least some of them to be implemented. This report provides a comprehensive overview of the major challenges and options for reform in several critical areas of Croatia's fiscal decentralization system, including: (i) the vertical structure of government, (ii) expenditure responsibilities, (iii) taxation and revenue autonomy, (iv) intergovernmental transfers, (v) borrowing and debt, and (vi) asset management