Croatia Experts Pre-Budget Consultations Through the Commission on Fiscal Policy

Branch of Government:
Legislative

Open Budget Survey / Public Participation in the Budget Process Score (Out of 100): 2015: 38 – 2017: 26 – 2019: 22

Stage in Fiscal Policy Cycle

Formulation

Summary

The Commission on Fiscal Policy is an independent body, situated in Parliament, that fulfils the functions of an independent fiscal council. The Commission is led by the Chair of the Parliamentary Committee on Finance and State Budget, and its members are all external experts.[ref] The Commission’s main function is to monitor the implementation of the fiscal rules set out in the Fiscal Responsibility Act, including reviewing the macroeconomic and fiscal forecasts on which budgets are based. It reports to government on its reviews of budgets and budget implementation, and its reports are published. On occasion, it holds hearings with expert witnesses on bills that come before the Commission.

The Commission was preceded by the Fiscal Policy Committee introduced by the Fiscal Responsibility Act 2010, which was active from 2011 to 2014 and hosted by the Ministry of Finance. On March 25, 2011, the Government established the Fiscal Policy Committee “as a professional and independent body with an aim of improving the public finance system.”[ref]. Its main tasks were to monitor, examine and assess the application of fiscal rules established by the Fiscal Responsibility Act, though it was chaired by the Minister of Finance (with no voting rights) and its administrative tasks were performed by the Ministry of Finance.

This mechanism illustrates the principles of openness, accessibility, transparency, reciprocity, and complementarity.

Basic Facts

This practice takes place during the budget formulation phase within the Legislature. Legislature is the lead institution and this form of public participation takes place at the national level.

Pursuant to the Decision on the Establishment of The Commission on Fiscal Policy, it has become a special working body of the Croatian Parliament, replacing the previous Fiscal Policy Committee and its tasks.

Why

The Commission has a number of official duties:

  • Examining and assessing the application of fiscal rules established by the Fiscal Responsibility Act throughout the budget cycle, such as the proposal of the state budget, its amendments and supplements, the semi-annual and annual report on the state budget execution, and the proposals of documents to be adopted by the government that relate to the process of developing the state budget.
  • The Commission also compares the macro-economic and budgetary projections with the latest projections of the European Commission in the documents adopted or proposed by the Croatian government as they relate to the process of drafting the state budget and the budget of local and regional self-government units.

In addition, the Commission assesses departures from the fiscal rules proposed by the government in the event of economic shocks, as allowed for in the Fiscal Responsibility Act. Currently, the Finance and Central Budget Committee provides technical support to the Commission in the form of a secretary. The Commission does not have its own budget. Reports and analyses are undertaken by the Commission members themselves. On one occasion, the Commission has engaged an external member to make a report on the fulfilment of fiscal rules.[ref]

Authorizing Environment

The Croatian Parliament adopted the Decision on the Establishment of the Commission on Fiscal Policy (Official Gazette, no. 156/13)[ref] to strengthen the independence of the Fiscal Policy Committee, in accordance with the provisions of Council Directive 2011/85/EU on requirements for budgetary frameworks of the member states. It also sought to strengthen the role of the Fiscal Policy Committee as supervisor over the implementation of the Fiscal Responsibility Act.

As an independent fiscal institution, the Fiscal Policy Committee was primarily financed by public funds, and should have been functionally independent vis-à-vis fiscal authorities, but the fact that it was presided by the Minister of Finance derogated its independence.[ref]

On 7 March 2014, the Commission on Fiscal Policy adopted the Rules of Procedure for the Work of the Commission on Fiscal Policy, according to which the President of the Commission for Fiscal Policy is the Chairperson of the Finance and Central Budget Committee of the Croatian Parliament. The Chairperson is in charge of organizing and managing the work of the Commission. Administrative and other professional tasks for the Commission are performed by the Secretary of the Commission (previously also performed by the Ministry of Finance).

As Commission member Vjekoslav Bratic noted, there is an ongoing debate about whether a new Fiscal Responsibility Act is to be prepared or the existing one will be amended in order to strengthen the role and the independence of the Commission on Fiscal Policy.[ref]

According to the National Reform Plan from April 2016, the Government of Croatia is planning the new Fiscal Responsibility Act in line with the proposals of the European Commission. In other words, the Act shall be amended in the area of strengthening the independence of the Commission on Fiscal Policy and ensuring the full compliance and consistency of national fiscal rules with the relevant EU framework. This framework requires that the Commission be a permanent, independent and autonomous state body with permanent staff and a legal prohibition on any form of influence on its work that could jeopardize its independence and autonomy in decision-making.[ref]

Who and How

The Commission currently consists of a President and six members elected for a term of five years from the following state owned/funded, non-profit institutions:

  • One representative from the State Audit Office, the supreme audit institution of Croatia.
  • One representative from the Institute of Economics (Zagreb), a public research institute with an objective to conduct and further develop economic research.
  • One representative from the Institute for Public Finance, a public research institute, which performs applied and theoretical research in the field of public sector economics.
  • One representative from the Croatian National Bank (the Central Bank).
  • One representative from the Faculties of Law at specific universities.
  • One Representative from the Faculties of Economics and Business at specific universities.

In addition, a representative of the Central Bureau of Statistics will be included.[ref]

Members of Faculties of Economics and Business and Faculties of Law take turns on the Commission. In each term, one representative of different Faculties of Economics and Business and Faculties of Law of the Universities of Zagreb, Split, Osijek and Rijeka, are to be appointed.

Members are proposed by their institutions and are appointed for a term of five years by the Croatian Parliament. They should be persons with distinguished scientific and professional reputation, appropriate qualifications and level of education, expert knowledge and professional experience in fiscal policy, macroeconomics, economic policy and accounting.

Sessions of the Commission are convened by the Chairperson at least once every three months and whenever necessary. In addition, each Member of the Commission may request the Chairperson to convene a meeting, rendering in writing the reasons. Currently, members of the Commission mutually agree on the agenda and propose specific agenda items. Decisions of the Commission are taken by a majority of the votes. Other persons, without voting rights, may participate in the work of the Commission as well subject to Commission’s approval. Indeed, outside experts, such as representatives of the National Bank has participated presenting, for example, the effects of interest payments on the public debt.[ref]

The Commission can hear outside experts. As a Member of the Commission notes, experts from the Croatian National Bank have presented a report on the Croatian public debt to the Commission.[ref] So far, the use of experts has not been extensive. The Ministry of Finance and, to a lesser extent, the Croatian National Bank and the Croatian Bureau of Statistics have provided all the necessary data and analysis.  The Commission’s establishment, however, has led to a more pronounced use of professional staff and outside experts.[ref]

The Commission’s sessions are mostly closed to the public, but they are recorded and reports are available on the Croatian Parliament web site (see: http://www.sabor.hr/positions0001).

Results and Impact

In 2014, the Commission took five positions on various budget documents.[ref] In 2015 and 2016 (to date), the Commission has come out with one position paper each year. Altogether the Commission has thus taken eight positions and it has held 13 sessions. In its fifth position paper, on the application of the fiscal rules for 2014, the Commission analysed Croatia’s fiscal performance against the fiscal rules in the Fiscal Responsibility Act (FRA) and the EU Directive. The Commission’s report raised serious concerns about the government’s lack of adherence to the fiscal rules, and drew attention to the serious risk Croatia’s growing public debt is creating for fiscal sustainability. The Commission’s sixth position paper came out in September 2015. The report is three pages long, and covers the proposed amendments to the state budget and the financial plans of extra-budgetary users for 2015.

Commission members have noted that their views have little effect on the final decision and their recommendations and suggestions are rarely adopted in the final version of the law, even though their views are submitted to the Government and are also publicly available on the Croatian Parliament’s website.[ref] As the Ministry of Finance’s Spokesperson notes, the Commission has exerted significant pressure towards the Ministry to comply with the fiscal rules set by national regulation and through its public statements, it has also provided strong support towards fiscal consolidation.[ref]

Lessons Learned

The independence and professionalization of the Commission and its recent reorganization are expected to increase the effectiveness of the Commission itself in the coming years. As one of the members notes, it is critical for the Commission to have the sufficient resources and technical assistance.[ref] Key challenges for the Commission include deriving adequate procedures capable of imposing more pressure on the Ministry of Finance, and selecting highly skilled professionals, who could independently analyze and evaluate compliance with EU fiscal rules.[ref]

The Fiscal Policy Committee, the Commission’s predecessor, was perceived as not sufficiently independent from government since it was under the umbrella of the Ministry of Finance. Full functional independence, achieved by removing the organization from the government’s wings to the Parliament, continues to be perceived as necessary to increase the credibility of the new body.

Another lesson has been that external pressure, such as in this case legal requirements arising from Croatia’s EU membership, can play a powerful role in promoting transparency and expert-based participation.

The Commission should publicly advertise for public submissions to it, which could be made both in writing as well as in person. The reports of the Commission should include all public submissions and feedback on how these submissions have been incorporated in the final report. In addition, the government should be required to respond in writing to the Commission’s reports.

Principles of Public Participation in Fiscal Policy

Openness: The role of the Commission is open since its purpose, scope, constraints, intended outcomes, process and timelines are set out in legislation.

Accessibility: The reports of the Commission are written by experts and as a result require a level of understanding beyond that of the general public. This principle could, however, be realized if more resources were dedicated to producing friendlier, more accessible versions of the reports.

Transparency: The Commission provides relevant information about the government’s adherence to legislated fiscal rules and the quality of macroeconomic and fiscal forecasts.  However, the Commission could serve this principle better if its sessions were open to the public and if the government was required to respond formally to the Commission’s reports.

Reciprocity: All entities involved are open about their mission and about the interests they are seeking to advance.

– Complementarity: By engaging external experts in scrutiny of key aspects of fiscal policy, the Commission complements the usual oversight function of parliament.

Country Context

Type of Government

Croatia is a democratic, parliamentary, unitary republic with a population of 4.3 million. The legislative authority is vested in the unicameral Parliament, which is directly elected and representative. The executive authority is vested in the directly elected President and the Government. Croatia has an independent, three-tier judiciary system, based on the civil law jurisdiction.[ref]

The Constitution was adopted on 22 December 1990, came into effect on 8 October 1991, and was amended in 2000 when the political regime was changed from semi-presidential to a parliamentary regime.[ref] In 2001, the Constitution was further amended by changing from a bicameral (two chamber) to a unicameral Parliament. In 2013, Croatia joined the European Union.[ref] Croatia is classified as a transition country (European Bank for Reconstruction and Development, 2014) and as an emerging and developing economy (International Monetary Fund, 2014).

Civic Space

During the socialist, authoritarian regime that lasted from 1945 to 1990, the civic space in Croatia was very much restricted and civil society organizations were underdeveloped. Following independence from the former Yugoslavia in 1991 and the War of Independence between 1991 and 1995, civil society organizations were focused mostly on humanitarian and welfare activities.[ref]

In 1998, a Government Office for Cooperation with NGOs was established, with the objective of fostering favourable conditions for cooperation and partnership between CSOs and the government through a variety of means, such as making recommendations for financing the activity of CSOs. Since 2003, the country has a Freedom of Information Act.[ref] In 2010, the Constitution was amended to include access to information as a constitutional right, which opened up the civic space to participation to a larger extent. According to a 2015 study by Ott and Bronic, a little less than a third of the citizenry is actively involved with CSOs and most involvements are with religious, trade, or sports associations.[ref] As the authors of GIFT’s case study on Croatia and public participation in the budget note, outside of the capital city, Zagreb, CSOs are not very well formed or particularly active.[ref]

In 2008, the Council for Civil Society Development was formed, which is an advisory body for the Government, aiming to improve cooperation between the government and CSOs. It is also the body that implements the National Strategy for Creating an Enabling Environment for Civil Society Development, the first of which was adopted in 2006 for five years, and provided basic guidelines to improve the legal, financial and institutional system of support for civil society.[ref]

Croatia joined the Open Government Partnership in 2011, and it has signed the 1998 Aarhus Convention on Access to Information, Public Participation in Decision-Making and Access to Justice in Environmental Matters, and ratified it in 2007.  Much of the reform process around fiscal transparency and openness has been driven by the country’s accession to the EU, but observers have noted that some of these efforts lacked effective implementation following their adoption.[ref]

According to Freedom House’s Freedom in the World Report from 2016, the country is characterized as free.

Open Budget Survey 2015

According to Open Budget Survey 2015, the Government of Croatia provides the public with limited budget information. It scored 53 out of 100 in the Open Budget Index (down from 61 in 2012). The Survey noted that the Croatian government is “weak in providing the public with opportunities to engage in the budget process.”   The Government of Croatia is also weak in providing the public with opportunities to engage in the budget process. The score for Public Participation in the budget process is 38. Budget oversight by the supreme audit institution is adequate and it scored 92 out of 100. However, budget oversight by legislature is weak and it scored 27 out of 100. [ref]