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Budget review Croatia

Second meeting of Senior Budget Officialsfrom Central, Eastern, and South-Eastern

European Countries

Ljubljana 16-17 February 2006

Daniel Bergvall

Budgeting and Public Expenditures Division

OECD

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Introduction

Small unitary country (4.5 million inhabitants) Two layers of sub-national government Focus on modernisation of public

administration and budget process aiming at EU-membership

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Compared to EU-15, relatively good growth in recent years

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 EU 15 3.0 3.8 1.9 1.1 1.1 2.3 1.4 2.0 2.2 Croatia -0.9 2.9 4.4 5.2 4.3 3.8 3.9 4.0 4.4 4.3

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Large government sector, and high, but decreasing deficits

40

42

44

46

48

50

52

54

56

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Revenues Expenditures

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Government sector largely central government

0% 20% 40% 60% 80% 100%

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Plan 2005

Central Government Budget Extrabudgatary funds Budgets of LGU

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Recent major structural reforms

Overall aim…

…both for institutional reform and fiscal policy are reforms aimed at EU-accession

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Recent major structural reforms

Budget act of 2003 Improving tax collection through

establishment of the Financial Police Law on Civil Servants and Public Employees Introduction of Single Treasury Account

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Major features of recent budgets

Fiscal consolidation – reducing deficits and clearing arrears

Bringing extrabudgetary funds on budget Control of contingent liabilities Privatization

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Budget formulation - TimetableDue Dates Activities

End April Medium term economic and fiscal outlook prepared by Ministry of Finance and presented to government.

15 May Government enacts budget guidelines

End May On the basis of the guidelines, the Ministry of Finance issues instructions to budget users and extra-budgetary users of the state budget, and to local and regional self-government units, for the development of budget proposals.

End June Budget users deliver their financial plan proposals to the responsible ministry.

July - October The Ministry of Finance reviews the proposals, and reconciles them with the estimated revenues and receipts. Detailed negotiations between Ministry of Finance and the line ministries.

15 October The Ministry of Finance prepares the draft State budget and draft consolidated budget and delivers it to the government.

End October Government deliberation and decision over final budget proposal, on the basis of proposals from the Ministry of Finance and line ministries.

15 November The government or the local executive authority delivers the budget proposal and the consolidated budget to the Sabor (parliament) or the local representative council for adoption.

End December The Sabor or the representative council passes the budget. The approved budget is published in the Narodne Novine (National Official Gazette).

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Budget formulation Fiscal year is the calendar year Budget on cash basis Yearly ‘Law on budget execution’ Detailed budget (approximately 7000 line items) Flexibility in spending – reallocation between

expenditure items Large but decreasing number of extra budgetary funds Expenditure and revenue strategy – Keep deficit within

acceptable boundaries (below 3 % of GDP)

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Medium term fiscal framework

No explicit fiscal rule

Instead an expenditure and revenue strategy that aims at keeping the deficit within acceptable boundaries

Reduce deficit in medium term (by 0.5 % of GDP per year) to below 3 % of GDP

Year to year budget Multi year line item estimates from 2005

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Parliaments role in the budget process

According to the Budget act, amendments and supplements to the proposed budget may NOT alter the deficit in the budget proposed by the government

Many proposals for amendments – few are ultimately included

Late tabling of budget - little time for Parliament to discuss and act on the budget proposal

Members of the Finance and budget committee include non-parliamentarians

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Budget execution

Basic principles for budget execution in the Budget Act and the annual Law on budget execution

Single treasury account introduced in 2001 Preventive cash control main tool for keeping

expenditures in line with the budget Service delivery centralized FINA

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FINA – The Financial Agency

Heritage from former Yugoslavia Formally a government agency Handles all transactions (expenditures and revenues)

for the government Also used by the private sector (clearing house for

banks, postal transfer system and general bank services)

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Accounting and Auditing Supreme audit institution is the State Audit Office Annual audit plan has to be adopted by Parliament The definition of audit in the State Audit Act covers financial as well

as performance audits Audit of government privatisation has taken a substantial part of SAO

capacity in recent years About 600 audits per year are done The Finance and Budget committee of the Parliament spends little

time on audit reports Internal audit has been introduced very recently and is not yet

operational