Economic Council of the President of the Republic Cautions that Abolishing Municipal Taxes Could Lead to Higher Costs for Local Services thus Reducing Residents’ Income

“The Economic Council of the President of the Republic analysed the announced tax reform. The Government has three goals: increase the standard of living, preserve economic growth and strengthen the fiscal autonomy of municipalities and cities, however the Economic Council has doubts as to how these goals could be achieved. Furthermore, the Economic Council recognises the importance of election cycles in Government decisions, but cautions that short-term political dynamics should not influence long-term relations in the economy between the state, the employers and the employees. Given the trends of profits and wages in 2022, it would economically be prudent to leave wage increases to employers in 2023, because spillover effects on the general price level would be amortised precisely by higher profits from the preceding year. The idea to abolish municipal taxes is economically unclear as is the idea to encourage competition among local self-government units”, stated Velibor Mačkić, Special Adviser to the President of the Republic for the Economy, following the 6th session of the Economic Council of the President of the Republic held today in the Office of the President of the Republic.

The President of the Republic Zoran Milanović also attended the Economic Council session.

Talking about the Economic Council’s conclusions regarding the announced tax reform, Special Adviser Mačkić added: “If you try to simultaneously strengthen the fiscal autonomy of municipalities and cities, then one asks what about taxation on tourism revenues and property tax, which, along with municipal taxes, is a means of achieving the invoked fiscal autonomy? Because of the unclear effects of abolishing municipal taxes on the decisions of local governments, e.g. possible higher costs for local services, it is possible that the residents’ disposable income will diminish bringing into question the first and second goals”.

The Economic Council also has qualms about how the announced tax reform could weaken the already serious disharmony between pension contributions and the amount of future pensions. “The proposal brings into question the possibility of increasing contributions for the second pillar of the pension scheme in the future period. We caution that this is a basis for increasing the pension of current pensioners, and more important, a basis of the idea of the 2002 pension reform”, Mačkić noted.

In relation to the last session of the Economic Council of the President of the Republic held in December 2022, new expectations and projections predict a real GDP growth rate for 2023 of approx. two percent, with an expected inflation rate of over seven percent.

Attending the session in addition to President Milanović and the Special Adviser of the President for the Economy Velibor Mačkić, who is at the same time Chair of the Economic Council, were the following members: Đula Borozan, Boris Cota, Bruno Ćorić, Saša Drezgić, Ana Grdović Gnip, Igor Matutinović, Tomislav Hernaus, Marina Tkalec and the Assistant Adviser for the Economy Martina Ciglević.

PHOTO: Office of the President of the Republic of Croatia / Ana Marija Katić