CROATIA

The parliament adopted the current Constitution of Croatia on 22 December 1990 and declared its independence from Yugoslavia in June 1991, establishing the Republic of Croatia as a “unitary and indivisible democratic and social state”. Croatia is a parliamentary republic with a unicameral Parliament (Sabor), composed of 151 representatives elected by popular vote to serve a four-year term. Initially, the Parliament was a bicameral institution, which comprised a “House of Regional Representatives”, but this chamber was abolished in 2001. Today, the Parliament’s Committee for Local and Regional Self-Government continued to play a role representing subnational governments. The President is elected through direct democratic elections for a term of five years, and acts as Chief of State. The Government is headed by a Prime Minister, who is appointed on the basis of a decision of the Croatian Parliament. The decision to appoint the Prime Minister is taken by the President of the Republic and must be co-signed by the Speaker of the Croatian Parliament.

Croatia is a unitary country with two subnational government levels: counties and local governments (municipalities and towns). The principle of local government and subsidiarity is recognised in articles 4 and 133 of the Constitution, which states that “citizens shall be guaranteed the right to local and regional self-government”.

Following the establishment of the administrative territorial division of the country through the 1992 Act on Territories of Counties, Towns and Municipalities (later amended several times), a major phase of decentralisation took place in 2001-2002. The Organic Law on Local and Regional Self-Government and the Law on Local and Regional Self-Government Financing (LLGF) were adopted in 2001. The new legal framework initially transferred a set of responsibilities (particularly primary and secondary education, healthcare and social welfare) to counties and to the 32 towns with the strongest fiscal capacity. It was then gradually extended to other units on an individual basis. Amendments to the Law on Local and Regional Self-Government in 2005 and the Physical Planning and Building Act in 2007 transferred new functions to counties and major cities related to spatial planning and issuance of building permits. In 2009, amendments were made to the Law Concerning the Financing of Local and Regional Self-Government Units to introduce shared taxes and financial equalisation.

The Law on Regional Development was adopted in 2009 (and amended in 2014), introducing a competitiveness index that serves as a basis for the financial equalisation system. In 2010, the government adopted guidelines for decentralisation and territorial reform. The document, accompanied by an action plan, had three main objectives: functional decentralisation, fiscal decentralisation, and territorial decentralisation. However, no package of essential reforms has been implemented yet. The 2006 Law on Territories of Counties, Town and Municipalities was amended in September 2015 to introduce a mechanism for voluntary mergers of local self-government units.

At regional level, counties are governed by assemblies that are composed of members elected by direct universal suffrage for a four-year term. Counties are also governed by prefects (župan) who constitute the counties’ executive branch. At the local level, municipalities and towns each have their own local councils, with members elected by direct universal suffrage for four-year terms. In addition, they have mayors who constitute their jurisdictions’ executive bodies. In 2007, the last reform on SNG introduced the direct election of mayors (for municipalities and cities) and county governors (for counties). Indeed, the Law on Elections of Municipality Heads, Mayors, County Governors and the Mayor of the City of Zagreb took effect with the 2009 elections.

There used to be a state territorial administration, represented by a State Administration Office at the county level, which performs the tasks of the central government and whose Head is appointed by the central government. In 2019, the central government planned to dissolve the Ministry of Public Administration (MPA), which occupied the main role in implementing PDAS, front-line offices and transferring their competencies to the counties. This structural change was not foreseen in existing strategic documents, but was heavily advocated by county governors. It came into effect at the beginning of 2020. All 20 state administrative offices (SAO) were abolished, while their staff and competencies were taken over by county administration. In the City of Zagreb, the mayor is responsible for central government administration.

TERRITORIAL ORGANISATION
LOCAL LEVEL	INTERMEDIATE LEVEL	REGIONAL LEVEL	TOTAL NUMBER OF SNGs (2021)
428 municipalities (općina) 127 towns (grad)		20 counties (županije) + Capital city (grad)
Average municipal size: 7 292 inh.
555		21	576

OVERALL DESCRIPTION: Croatia’s subnational level is composed of counties (županija) at the regional level and towns (grad) and municipalities (općina) at the local level.

REGIONAL LEVEL: Re-established in 1992, counties are regional self-government units with a large degree of autonomy. The number of regions includes the City of Zagreb, which has a special status including the competences of both a town and a county (separate from the surrounding Zagreb County). There are significant socio-economic disparities across regions. While the average county size is around 204 000 inhabitants, the least populated county (Lika-Senj) has 51 000 inhabitants while the city of Zagreb has almost 800 000 inhabitants. In 2018, the City of Zagreb and four counties (Međimurje, Istria, Dubrovnik-Neretva and Zagreb) accounted for half of national GDP, whereas most counties from Adriatic Croatia were lagging behind. Counties are gathered into two spatial units for statistical purposes: Adriatic Croatia (7 counties) and Continental Croatia (14 counties).

LOCAL LEVEL: The municipal level comprises 127 towns (grad) and 428 municipalities (općina), a number which has more significantly grown since 1990. “Town” status is given to municipalities with more than 10 000 inhabitants. The average town size is 27 251 inhabitants. In 2005, a specific category was created for “large towns” with more than 35 000 inhabitants (currently 16), with a wider scope of competences. Municipalities are smaller and mainly rural. Overall, Croatian towns and municipalities have around 7 300 inhabitants on average (with a median size of 2 750 inhabitants), although approximately 74% of municipalities have less than 5 000 inhabitants, and even 36% less than 2 000 inhabitants. There are also 6 756 settlements, which are sub-divisions that can be established by municipalities and towns, with their own councils. The City of Zagreb has a two-tier sub-municipal organisation with 17 urban quarters and 218 neighbourhood boards. Its status is guaranteed by a separate piece of legislation, i.e. the Act of the City of Zagreb.

HORIZONTAL COOPERATION: Inter-municipal cooperation is mostly limited to joint-ownership of municipal companies and other institutions for local service delivery (i.e. fire brigades). Specifically, municipalities almost exclusively cooperate in the sphere of private law, through joint companies or institutions, and by concluding contracts on the delivery of municipal services (mostly waste management). Cooperation between counties and between small towns and municipalities is rare, but, in the latter case, more frequent between larger, more developed local governments, especially on strategic planning of economic development, to improve their ability to attract EU funds.

In 2015, a new piece of legislation on voluntary mergers of local government units was introduced to streamline territorial divisions and improve the delivery of public services. However, no financial incentives were included in the measure and no mergers took place in 2017. To limit the effects of municipal fragmentation, the Public Administration Development Strategy 2015-2020 (PADS) also mentions inter-municipal co-operation as part of local government co-operation, but no specific framework has been implemented yet.

The distribution of responsibilities is determined by the Organic Law on Local and Regional Self-Government as well as by the Act on the State Administration System (as amended in 2007) concerning state-delegated functions.

Counties have both exclusive and delegated competences, which must be transferred by law. They include the granting of building permits, social protection, education and fire safety. At local level, towns and municipalities perform tasks of local significance, which directly address the needs of citizens and which are not assigned to state bodies by the Constitution or by the law. However, the assignments of responsibilities are asymmetric according to the type of municipality. Most responsibilities transferred since 2001 have been made to towns with the strongest fiscal capacity. Overall, many smaller local government units have limited powers due to their relative lack of capacity. The distribution of responsibilities across levels of government is considered complex because of this asymmetric process and overlapping responsibilities between the central and subnational levels of government.

Main responsibility sectors and sub-sectors
SECTORS AND SUB-SECTORS	Regional level	Local level
1. General public services (administration)	Regional administration; Issuance of construction and renting permits (except in large towns)	Municipal administration; Construction and renting permits (only for large towns)
2. Public order and safety		Fire protection and civil protection
3. Economic affairs / transports	Economic development; Transport and traffic infrastructures; Maintenance of county and local roads	Maintenance of municipal roads (towns); Traffic management; Local transport
4. Environment protection		Protection and improvement of natural environment
5. Housing and community amenities	Regional and urban planning	Spatial and urban planning; Utility services; Organisation of settlements and housing
6. Health	Healthcare (including hospitals)	Primary health protection
7. Culture & Recreation	Social and cultural institutions	Culture; Sports
8. Education	Secondary and primary education	Primary education
9. Social Welfare	Social welfare (cash benefits); Child care	Social welfare; Child care

Scope of fiscal data: counties, municipalities, towns, Capital City of Zagreb, hospitals, schools and kindergartens, as well as county road authorities.

SNA 2008

Availability of fiscal data: High

Quality/reliability of fiscal data: High

GENERAL INTRODUCTION: The 2001 Law on Local and Regional Self-Government Financing (LLGF) and the amended Budget Acts regulate the local finance system and budgets. They define sources for financing for the counties, the towns and municipalities, including the various types of taxation, non-tax revenues and the equalisation fund distributed among the different levels and non-tax income. They state that SNGs’ own revenues should be proportional to their tasks, and they should be able to use them freely. The LLGF was amended in December 2017, with the aim to simplify the financing system and to increase transparency. It introduced a new system of fiscal equalisation, through a new revenue-sharing model across subnational governments.

Subnational government expenditure by economic classification
2020	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total expenditure	4 415	14.2%	26.1%	100%
Inc. current expenditure	3 287	11.3%	24.1%	79.3%
Compensation of employees	1 846	6.3%	47.6%	44.5%
Intermediate consumption	1 059	3.6%	43.3%	22.6%
Social expenditure	160	0.6%	3.2%	3.9%
Subsidies and current transfers	216	0.7%	12.6%	5.2%
Financial charges	6	0.0%	1%	0.1%
Others	0	0.0%	0.0%	0.0%
Incl. capital expenditure	858	2.9%	37.5%	20.7%
Capital transfers	91	0.3%	15.5%	2.2%
Direct investment (or GFCF)	767	2.6%	45.1%	18.5%

EXPENDITURE: Despite the decentralisation process, subnational government spending as a percentage of both GDP and public expenditure is lower than the EU27 average (18.3% of GDP and 34.3% of public expenditure in 2020) and the OECD average (17.1% of GDP and 36.6% of public expenditure). Municipalities and towns are responsible for the bulk of spending at the subnational level. SNG staff expenditure accounted for a significant share of SNG expenditure (44.5% vs 32.1% in the EU27) and total public staff expenditure (47.6% vs 53.6% in the EU27). The increase in the number of municipalities and towns and decentralised tasks has also resulted in an increase in subnational government staff (it increased by almost 7% between 2010 and 2015). New fiscal rules set limits on the salaries of local officials. Overall, per capita spending is the highest in the smallest municipalities, where administrative expenditure is the highest line item.

DIRECT INVESTMENT: Direct investment largely increased from 34.4% of public investment in 2016 to 45.1% in 2020, which remains below the OECD average (54.6%) but above the EU27 average (54.4%). As a share of GDP, direct investment in Croatia in higher than the OECD and EU27 averages (1.9% and 1.8% respectively).

Public-private partnerships (PPP) represent a relatively new opportunity for securing the necessary funds to construct important urban facilities for subnational governments, in particular, school buildings, health, culture, local security, but also street lighting, water supply and sanitation, waste management, public transport, parking, etc. Between 2016 and 2020, PPPs (announced and contracted) at the subnational level have represented HRK 299,999,679 in investment in infrastructure. All projects between 2016 and 2020, according to the Ministry of Economy and Sustainable Development, have been carried out by municipalities. In general, the projects aim at the maintenance and modernisation of public lighting, and the construction of medical, sports and cultural infrastructure.

Subnational government expenditure by functional classification
2019	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total expenditure by economic function	3 902	12.6%	-	100%
1. General public services	284	0.9%	5.0%	7.3%
2. Defence	0.5	0.0%	0.2%	0.0%
3. Security and public order	63	0.2%	9.7%	1.6%
4. Economic affairs/transports	748	2.4%	30.1%	19.2%
5. Environmental protection	81	0.2%	39.9%	2.1%
6. Housing and community amenities	319	1.0%	52.1%	8.2%
7. Health	778	2.5%	40.7%	19.9%
8. Recreation, culture and religion	273	0.9%	58.9%	7.0%
9. Education	1113	3.6%	76.6%	28.5%
10. Social protection	242	0.8%	5.5%	6.2%

Education represents the majority of subnational government spending, corresponding to 3.6% of GDP in 2019 and 28.5% of total SNG spending (18.5% on average in the EU27). Although subnational governments do not cover teacher and staff wages (which are funded by central authorities), they are responsible for construction, maintenance, school equipment, etc. The second most important source of expenditure corresponds to healthcare, which represents 2.5% of GDP and almost 20% of the total expenditure of SNGs, above the EU27 average (14.5% on average in 2019). In this area, subnational governments are responsible for the structural upkeep of facilities and equipment in health institutions owned by the municipalities, as well as the modernisation of health institutions. Municipalities and towns are responsible for the bulk of spending in primary education, housing, transport and roads and recreational activities, whereas counties spend more on other educational areas and healthcare.

Subnational government revenue by category
2020	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total revenue	3 858	13.2%	28.1%	100%
Tax revenue	1 318	4.5%	17.9%	34.2%
Grants and subsidies	2 105	7.2%	-	54.6%
Tariffs and fees	375	1.3%	-	9.7%
Income from assets	60	0.2%	-	1.6%
Other revenues	0	0%	-	0%

OVERALL DESCRIPTION: The subnational financing system relies on both intergovernmental transfers and tax revenue. The central government has an exclusive right to determine county taxes. Municipal taxes must be within restrictions set by the central government. The only tax that local authorities can set independently is the tax on public land use, which is payable by legal or natural persons using public areas, in the amount, the manner and under the conditions determined by the municipality or city concerned.

The percentage of transfers in total subnational government revenue increased from 48.8% in 2016 to 54.6% in 2020. Despite public finance reforms made before 2013, aimed at reducing the dependency on transfers from the central government, subnational revenue autonomy remains low, as transfers represent the majority of subnational government revenue, above the EU27 average (46.6%). Since a tax reform in 2020, tax revenue is allocated 74% to municipalities and 20% to counties with the remainder for decentralised functions and fiscal equalisation.

TAX REVENUE: Subnational governments account for 17.9% of public tax revenue and 4.5% of GDP, which are slightly lower than the EU averages (respectively 27.1% and 7.2% in 2020). Tax revenue comprise both shared taxes and own-source tax.

68.8% of SNG tax revenue come from the PIT. The PIT is both a shared tax and an own-source tax. As a surtax, it corresponds to a surcharge of up to 18% of the PIT owed by taxpayers to the national government. The windfall only benefits towns and municipalities. Municipalities determine the rates of the surcharge within the limits set by the central government. The current maximum rates have been reduced for Zagreb City since 2015 and are now 10% for municipalities, 12% for towns up to the 30 000 citizens and 15% for cities with more than 30 000 citizens, and up to 18% for the City of Zagreb (30% before the reform). As a shared tax, since the recent 2021 tax reform, towns and municipalities receive 74%% of the PIT collected in their jurisdiction, whereas 20% go to counties. The City of Zagreb receives 76.5%.

The second source of shared tax revenue is the tax on real estate transactions. Since 2017, 100% of the tax is assigned to local governments. In 2019, its tax rate, determined at the national level, was reduced, from 4% to 3%. These parameters were not changed in the latest 2020 tax reform, which adjusted legislation to mandatory European Union Directives (ATAD I and ATAD II) and Council Directive 2018/822 of 2018.

Other own-source local taxes are the “communal fee”, the consumption tax, tax on vacation homes, and the tax on public area use. The “company name” tax was abolished in 2017. The “communal fee” is a quasi-property tax. It represented 15.8% of SNG tax revenue in 2020. Municipalities set the base of the fee and decide on the frequency of collection. As part of the tax reform adopted in 2016, it was stipulated introduction of the property tax in January 2018 but that was abolished, and the property tax was not introduced. The property tax was supposed to replace the communal fee, the holiday house tax and the memorial rent. Counties’ own-source taxes include the tax on inheritance and gifts, motor vehicles, boats and vessels, and gambling machines. County tax rates are set by the state government only. In contrast, the rates on municipal, town and city taxes are set by the municipal authority, within a range that is controlled by the central government.

The 2020 tax reform included changes to the financing of subnational governments, increasing their share in tax revenue distribution while the Fiscal Equalisation Fund (FEF) will be taken over by the central government’s budget. The tax reform also included changes to income tax, profit tax, VAT and fiscalisation in cash transactions. Income tax brackets decreased from 24% to 20% and from 36% to 30%, which means that local government received about EUR 264 million less in revenue. However, the government will compensate subnational governments by increasing the share of municipalities and towns in tax distribution - from 60% to 74% for municipalities and towns and from 17% to 20% for counties, while the share for decentralised functions will remain at 6%.

GRANTS AND SUBSIDIES: The intergovernmental grant system comprises two main equalisation grants.

The FEF is a non-earmarked fund, introduced in 2017, that amounted to EUR 283 million in 2021 (7.5% of total local government revenue). This fund aims at equalising revenue disparities, mostly due to the PIT revenue, across subnational governments. It is redistributed according to local governments’ individual shares set annually in the budget, calculated based on 5-year per capita PIT revenue and target revenue. The central government has set “minimum financial standards” for the provision of public services devolved to SNGs. These standards are based on a set of indicators that define the minimum expenditure at the local government level in each individual decentralised activity.

6% of the PIT is earmarked for specific decentralised functions (primary and secondary education, social care, health care and firefighting). It is redistributed through the Equalisation Fund for Decentralised Functions (EFDF). This earmarked grant, determined annually by line ministries, amounted to approximately EUR 116 million in 2020.

OTHER REVENUE: Subnational governments receive revenue generated from fines, administrative charges and fees for the use of public, municipal or town land. They are in charge of setting rates and collection. Additionally, there are “shared fees”, such as a fee on the use of mineral and thermal water resources (50% is directed to the local budget) and a fee on the use of drinking water (30% goes to the local and 70% to the central budget). Tariffs and fees accounted for 9.7% of subnational government revenue in 2020 (10.3% in the EU27).

Revenues from the sale and rental of municipal assets are a significant part of municipal revenue. Subnational governments also receive revenues from financial assets (profits of municipal-owned companies). They are usually used for the construction and maintenance of utilities infrastructure. They account for a relatively high level of revenues, compared to the EU27 average (1.2%).

Subnational government fiscal rules and debt
	Dollars PPP / inh.	% GDP	% general government debt	% SNG debt	% SNG financial debt
Total outstanding debt	1928	6.6%	6.2%	100%	-
Financial debt	738	2.5%	2.9%	38.3%	100.0%
Currency and deposits	0	-	-	0.0%	0.0%
Bonds / debt securities	0	-	-	0.0%	0.0%
Loans	738	-	-	38.3%	100.0%
Insurance pensions	0	-	-	0.0%	-
Other accounts payable	1190	-	-	61.7%	-

FISCAL RULES: The first Croatian law on fiscal responsibility was adopted in 2010, and it was amended upon Croatia's admission to the European Union in mid-2013. It sets limits on national and SNG spending, strengthens the legal and functional accountability of budgetary resources, and introduces stronger controls for financial reporting. A new draft act was enacted in 2018, adjusted to the obligations stemming from the Stability and Growth Pact.

DEBT: Counties and local governments can borrow to finance capital investment (golden rule), with previous approval by the central government. In addition, there are two main prudential rules: a general limit on the aggregate borrowing of all SNGs (2.3% of current revenues of the previous year) and an individual limit (20% of current revenues of the previous year). These percentages are determined annually by the Act on the State Budget Execution. These limits do not include municipal utility companies and/or guarantees issued by local governments. Even after an increase between 2016 (3.1% of GDP) and 2020 (6.2% of GDP), SNG debt in Croatia is relatively low, both as a share of GDP and of public debt, and well below the EU27 average (13.9% of GDP and 15.4% of public debt). In 2020, only 38.3% was financial debt and almost 61.7% were “other accounts payable”. In 2020, all financial debt is made up of loans.

TERRITORIAL MANAGEMENT OF THE CRISIS: Prompted by the spread of COVID-19 pandemic, the central government started taking preparatory measures in January 2020. On 13 February, the Government established the national Civil Protection Headquarters (CPH) to coordinate all services involved in prevention of the pandemic in Croatia. On March 5^th, the Minister of Health declared the danger of the COVID-19 epidemic in the whole Republic of Croatia. The CPH and the Ministry of Health introduced several packages of measures, mostly related to crossing the state borders, international travels, and rules of procedure for healthcare professionals. They were followed by a more comprehensive set of measures that included suspension of social gatherings for more than 5 persons and most public activities, such as cultural activities, work of cafes, bars and restaurants (except delivery). Fearing that existing hospital capacities might not be enough, the CPH authorised setting up provisional hospitals in sports halls and large military tents

The joint health and security sector represented by the national headquarters and regional civil protection headquarters, along with the Croatian Institute of Public Health, met daily, assessed the situation, published all important news, constantly communicated with different types of public and made decisions on further action – and ensured that the crisis did not escalate at any time, that there was not large number of infected and dead people.

Although management of the pandemic was mainly top-down – from the national to regional and other local levels – there were also examples of bottom-up initiatives. For instance, quarantines were introduced at the initiative of some local communities, such as Murter and Betina. Depending on the local circumstances, subnational governments asked from the national CPH to strengthen or relax various measures in their county and most of their proposals were approved.

EMERGENCY MEASURES TO COPE WITH THE CRISIS AT THE DIFFERENT LEVELS OF GOVERNMENT: Subnational governments directly affected by reduction in revenue due to the pandemic were supported by the central government, which included interest-free loans to address the different inflows and liabilities. The loan funds were used exclusively to finance expenses necessary to perform subnational governments’ functions (including the Croatian Pension Insurance Institute and the Croatian Health Insurance Institute). Also, on request, twice a month the Ministry of Finance would remit loans up to the deferred or exempted tax and/or instalment payment..

Finally, The Croatian Small Business Agency (HAMAG-BICRO) made loans to support working capital of small businesses, benefiting around 900 businesses, representing a sum of EUR 95 million. The Croatian Bank for Reconstruction and Development (HBOR) allowed for moratoriums and loan extensions on debts, as well as new liquidity loans to assure basic expenses of businesses.

IMPACTS OF THE CRISIS ON SUBNATIONAL GOVERNMENT FINANCE: The fiscal situation of subnational governments was significantly degraded by the pandemic. In the aggregate, spending increased 4% while revenues remained stable in real terms between 2019 and 2020. In particular, in terms of spending, a significant increase is observed in compensation of employees (+6%), social expenditure (+ 4) and subsidies (+13%). Capital spending also increased considerably (+11%), mainly driven by municipal investment which increased by 13%. A drop in spending is observed only in intermediate consumption (-7%) and financial charges (-18%), but they represent a minor part of total SNG spending.

On the revenue side, a strong drop is observed in all components between 2019 and 2020 (tax revenue -7%, tariffs and fees -19% and property revenue -17%), except for grants and subsidies (from the central government) which grew 10% and safeguarded subnational resources to face the pandemic. The fall in tourism tax and repercussions on the price of property impacted own subnational government revenues, explaining the large dependence on central governments transfers. In addition to the pandemic, two earthquakes struck the Croatian capital Zagreb in 2020, causing several billions euros in damage. In parallel, subnational governments largely increased their debt levels in 2020 (+15%), driven almost exclusively by loans (+36%), which represent the entire SNG financial debt, and other accounts payable (+5%).

ECONOMIC AND SOCIAL STIMULUS PLANS: The main Croatian fiscal stimulus plan corresponds to the one designed within the framework of the European policy of economic recovery after the pandemic, namely the Next Generation EU and the Recovery and Resilience Facility (RRF) instruments. The reforms and investments in the plan attempt to make Croatia more sustainable, resilient and better prepared for the green and digital transitions. To this end, the plan consists of 146 investments and 76 reforms. They will be supported by EUR 6.3 billion in grants. 40.3% of the plan will support climate objectives and 20.4% of the plan will foster the digital transition over 2020-2026. The reforms address bottlenecks to lasting and sustainable growth, while investments are targeted to accelerate the transition towards a more sustainable, low-carbon and climate-resilient economy, to support post-earthquake and post-pandemic recovery, to maximize the benefits of the digital transformation and to ensure social cohesion.

Within this framework, several SNGs are preparing to make green investments that strengthen the ecological transition. In particular, the plan will finance the post-earthquake reconstruction and energy upgrade of buildings damaged in 2020. 45,000 meters of private and 274 000 meters of public buildings will be renovated in the areas of the City of Zagreb, Krapina-Zagorje County, Zagreb County, Sisak-Moslavina County and Karlovac County. Besides increasing their seismic resilience, all buildings will achieve at least 30% energy savings compared to pre-renovation state and therefore contribute to a cleaner and safer environment.