In its regular Thursday session, the Government adopted the new National Program of Reforms for 2018, and a Convergence Plan for the next three years. The plan stresses three key areas: strengthening competitiveness, linking education and the labor market, and sustainability of public finances. The Program and the Plan need to be sent to the European Commission by the end of April.

The Program envisages 59 measures in 11 reform areas. PM Plenković thinks the moment for reform is particularly favorable because the ministers know the priorities and the 2018 is not an election year.

The program of convergence includes the GDP projections of 2.8% for this year, 2.7% for 2019 and 2.5% for 2020 and 2021 each. The Government thinks these estimates are conservative, but they stressed that the conservative approach to public finances was well received by investors. And both 2016 and 2017 have, according to the government, exceeded expectations. (C. we find this statement to be at odds with statements on projected vs. achieved GDP growth for 2017)

The general budget also includes a projected deficit of 0.5% of the GDP, after in 2017 the government made more money than it spent for the first time ever. The surplus was 0.8% of the GDP or Kn 2.7 billion. A deficit of 0.4% is projected for 2019, then a zero deficit for 2020, and then a 0.5% surplus in 2021. Overall deficit should decline further to 75.1% of the GDP in 2018, then down to 72.2% in 2019, and then further down to 66% by 2021.

Public debt should decrease from 78% today to 66% of the GDP in 2021. The 12% decrease is expected to be based on general growth and consolidation and “activation” of state property. The Government also expects the interest rate expenditure to go down. In 2015, interest payments amounted to 3.3% of the GDP, in 2017 this went down to 2.7%, and the mid-term projections expect them to decline to under 2% of the GDP.

The Program envisages “further alleviation of tax burden” by another Kn 2 billion per year. It is not yet clear how this would be done, and the current papers do not mention real estate tax, but there seems to be a mention of a reduction of the general rate of the VAT.

Reform measures include a new Digital Transformation Strategy, increase of spending in Research and Development to 1.4% of the GDP by 2020 (mainly through tax breaks), and further reduction of red tape by some 30% of measured cost, as well as  reduction of non-tax expenditures by some 10% of total burden.

Around 100 measures are expected to increase general productivity by some 5% by 2019. The Government also plans to introduce electronic business registry which should enable new business registration in three days or less, as well as introduction of e-invoices in public tenders. A new law should regulate civil service salaries, including a new system of steps and degrees.

The Program includes restructuring of the transport sector, including roads and railroads, and finding a strategic partner for the (ailing) Croatia Airlines, as well as improved regulation of maritime domain and tourist zoning. Regarding railroads, a wide-ranging program of improvements for HŽ Infrastruktura and HŽ Cargo is under preparation, with World Bank assistance.

Changes are also planned to the retirement system, introducing measures to converge retirement age for both men and women at 67 years of age, penalization for early retirement, and expansion of retirees who are entitled to work and still get their pension. The Government is also planning amendments to the system of voluntary and mandatory individual retirement accounts and laws regulating the funds.

The network of regular municipal courts should be reduced from 46 to 34 courts, and there is a plan to reduce the number of backlogged cases older than 10 years by 20%. And more integration of hospitals is envisaged through new contracts (six contracts were signed so far with 12 hospitals, and 5 more contracts are expected this year). Finally, new demographic support measures will include raising the income census for child benefit payments from the current 50% of budget salary base, to 70% of the same base. This should allow more families to get child related benefits and support payments.