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Fiscal Policy and European Semester in Croatia: Why Should We Focus on Public Debt?

In this chapter we analyze the mid-term fiscal developments in Croatia through the lens of the European Semester-related indicators, procedures and policies. We show that despite the more favorable fiscal position public debt in Croatia is still excessive when compared to SGP and Fiscal Compact rules, the level of economic development and debt levels in CEE peer countries. This is especially worrying as our empirical results confirmed the thesis that public debt level significantly affects and reduces the effectiveness of fiscal policy, the main economic policy instrument in Croatia. An extended SVAR model with public debt, compared to the baseline model, clearly shows the reduction of impact and cumulative government spending multipliers. Thus policy-makers should not only focus their efforts on further and stronger reduction of public debt only to comply with EU economic governance rules but also to mitigate the negative effects of debt burden on the effectiveness of fiscal policy in Croatia.

fiscal policy ; European semester ; Croatia

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