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Achievements and unfinished agenda of the fiscal equalization system in Croatia
Marko Primorac
Marko Primorac
Affiliation: CESifo Research Network, Munich, Germany University of Zagreb, Faculty of Economics & Business, Zagreb, Croatia
 0000-0003-1629-3170
Jorge Martínez-Vázquez 
Jorge Martínez-Vázquez
Affiliation: International Center for Public Policy (Georgia State University), Atlanta, GA 3030 Governance and Economics Research Network (GEN), Campus Universitario As Lagoas s/n, Ourense, Spain Georgia State University, Atlanta, Georgia, USA
0000-0003-2230-9204
Correspondence
jorgemartinez@gsu.edu
Article | Year: 2022 | Pages: 533 - 567 | Volume: 46 | Issue: 4 Received: March 16, 2022 | Accepted: May 31, 2022 | Published online: December 7, 2022
|
FULL ARTICLE
FIGURES & DATA
REFERENCES
CROSSMARK POLICY
METRICS
LICENCING
PDF
Source: Authors’ calculation, based on the data from the Report on revenues and expenditures,
receipts and expenses (Form PR-RAS) for the years 2000-2020.
Source: Authors’ calculation, based on the data from the Report on revenues and expenditures,
receipts and expenses (Form PR-RAS) for the years 2000-2020.
|
Period
(d/m/yyy)
|
Central government
|
County
|
City/
municipality
|
Decentralized functions
|
Equalization fund for decentralized
functions
|
EU projects
|
|
1/1/1994-1/4/2000
|
70
|
5
|
25
|
|
|
|
|
1/4/2000-1/7/2001
|
60
|
8
|
32
|
|
|
|
|
1/7/2001-1/1/2002
|
29.2
|
8
|
32
|
9.8
|
21
|
|
|
1/1/2002-1/1/2003
|
29.6
|
8
|
32
|
9.4
|
21
|
|
|
1/1/2003-1/1/2007
|
25.6
|
10
|
34
|
9.4
|
21
|
|
|
1/1/2007-1/7/2008
|
|
15
|
52
|
12
|
21
|
|
|
1/7/2008-1/3/2012
|
|
15.5
|
55
|
12
|
17.5
|
|
|
1/3/2012-1/1/2015
|
|
16.0
|
56.5
|
12
|
15.5
|
|
|
1/1/2015-1/1/2018
|
|
16.5
|
60
|
6
|
16
|
1.5*
|
|
1/1/2018-1/1/2021
|
|
17
|
60
|
6
|
17**
|
|
|
1/1/2021-
|
|
20
|
74
|
6
|
|
|
Source: Law on Financing of Local and Regional Self-Government Units (OG 117/93, 33/00, 59/01, 107/01, 117/01, 150/02, 147/03, 132/06, 73/08, 25/12, 147/14, 100/15, 115/16 and 127/17, 138/20).
Source: Authors’ calculation based on the data from the Report on revenues and expenditures,
receipts and expenses (Form PR-RAS) for the years 2017 and 2018.
|
|
Own revenues
|
(1) +
Shared revenues
|
(2) +
Equalization transfers
|
(3) +
Other transfers
|
Expenditures
|
|
|
(1)
|
(2)
|
(3)
|
(4)
|
(5)
|
|
Counties
|
|
Min, HRK
|
156.8
|
352.5
|
503.5
|
999.8
|
1,049.4
|
|
Max, HRK
|
489.2
|
956.2
|
956.2
|
2,941.7
|
2,757.0
|
|
Range (max-min), HRK
|
332.4
|
603.7
|
452.7
|
1,941.8
|
1,707.6
|
|
Average, HRK
|
323.4
|
595.6
|
660.2
|
1,392.8
|
1,382.2
|
|
Median, HRK
|
329.2
|
569.5
|
628.2
|
1,275.6
|
1,288.2
|
|
Standard deviation, HRK
|
83.8
|
156.9
|
113.3
|
421.4
|
376.9
|
|
Coefficient of variation (%)
|
25.9
|
26.3
|
17.2
|
30.3
|
27.3
|
|
Gini coefficient
|
0.142
|
0.138
|
0.088
|
0.126
|
0.114
|
|
Cities
|
|
Min, HRK
|
469.5
|
972.0
|
2,364.8
|
2,405.4
|
2,029.9
|
|
Max, HRK
|
9,538.8
|
10,912.2
|
11,042.2
|
12,031.3
|
14,053.9
|
|
Range (max-min), HRK
|
9,069.3
|
9,940.2
|
8,677.4
|
9,625.9
|
12,023.9
|
|
Average, HRK
|
2,440.0
|
3,803.1
|
4,571.0
|
5,401.4
|
5,316.2
|
|
Median, HRK
|
1,584.4
|
2,887.4
|
3,817.9
|
4,821.5
|
4,695.0
|
|
Standard deviation, HRK
|
2,096.6
|
2,469.5
|
2,115.6
|
2,213.5
|
2,502.8
|
|
Coefficient of variation (%)
|
85.9
|
64.9
|
46.3
|
41.0
|
47.1
|
|
Gini coefficient
|
0.429
|
0.336
|
0.233
|
0.218
|
0.247
|
|
Municipalities
|
|
Min, HRK
|
104.5
|
464.5
|
1,543.7
|
1,726.0
|
1,495.4
|
|
Max, HRK
|
13,934.2
|
15,855.1
|
15,855.1
|
26,749.9
|
29,477.4
|
|
Range (max-min), HRK
|
13,829.7
|
15,390.6
|
14,311.4
|
25,023.9
|
27,981.9
|
|
Average, HRK
|
1,955.0
|
2,815.3
|
3,738.7
|
4,839.9
|
4,741.0
|
|
Median, HRK
|
991.5
|
1,792.0
|
2,872.4
|
3,847.6
|
3,758.1
|
|
Standard deviation, HRK
|
2,313.3
|
2,616.7
|
2,310.6
|
2,995.4
|
3,167.8
|
|
Coefficient of variation (%)
|
118.3
|
92.9
|
61.8
|
61.9
|
66.8
|
|
Gini coefficient
|
0.523
|
0.425
|
0.277
|
0.281
|
0.303
|
Note: GPS: general public services, DEF: defense, POS: public order and safety, EA: economic
affairs, ENV: environment, HC: housing and community, HLT: health, RCR: recreation, culture,
and religion, EDU: education, SP: social protection. Source: Authors’ calculation, based on the data from the Report on revenues and expenditures,
receipts and expenses (Form PR-RAS) for the years 2000-2020.
|
Max
|
Min
|
Average
|
Median
|
St. dev.
|
Coefficient of variation (%)
|
|
Local Government
Units (cities and municipalities)
|
|
GPS
|
15,242.7
|
0.0
|
1,180.8
|
935.8
|
1,066.2
|
90.3
|
|
DEF
|
211.5
|
0.0
|
2.5
|
0.0
|
12.9
|
507.9
|
|
POS
|
2,056.4
|
0.0
|
125.6
|
90.5
|
140.7
|
112.0
|
|
EA
|
28,563.0
|
0.0
|
936.0
|
615.1
|
1,551.9
|
165.8
|
|
ENV
|
4,575.0
|
0.0
|
234.1
|
85.1
|
447.5
|
191.2
|
|
HC
|
9,449.6
|
0.0
|
1,184.4
|
885.2
|
1,172.9
|
99.0
|
|
HLT
|
408.4
|
0.0
|
18.4
|
2.5
|
36.0
|
195.0
|
|
RCR
|
6,007.4
|
0.0
|
381.3
|
246.3
|
529.4
|
138.8
|
|
EDU
|
6,431.5
|
0.0
|
281.4
|
184.8
|
425.0
|
151.0
|
|
SP
|
10,840.2
|
0.0
|
221.1
|
134.8
|
500.0
|
226.1
|
|
Total
|
29,477.4
|
1,465.9
|
4,565.6
|
3,699.2
|
2,944.1
|
64.5
|
|
Regional
Government Units (counties)
|
|
GPS
|
353.7
|
125.7
|
207.9
|
186.4
|
65.6
|
31.6
|
|
DEF
|
1.0
|
0.0
|
0.1
|
0.0
|
0.3
|
261.9
|
|
POS
|
147.0
|
3.5
|
17.5
|
9.4
|
30.9
|
176.1
|
|
EA
|
1,503.5
|
61.4
|
238.7
|
127.8
|
339.9
|
142.4
|
|
ENV
|
41.5
|
0.0
|
13.5
|
12.4
|
11.4
|
84.4
|
|
HC
|
105.7
|
0.0
|
22.9
|
13.1
|
29.0
|
126.7
|
|
HLT
|
145.1
|
5.5
|
39.9
|
30.8
|
36.3
|
90.9
|
|
RCR
|
122.5
|
8.7
|
47.0
|
38.3
|
30.3
|
64.4
|
|
EDU
|
397.9
|
32.6
|
197.6
|
204.2
|
99.7
|
50.4
|
|
SP
|
74.5
|
29.2
|
47.5
|
43.7
|
13.9
|
29.3
|
|
Total
|
2,061.2
|
511.1
|
832.6
|
793.3
|
337.4
|
40.5
|
Note: GPS: general public services, DEF: defense, POS: public order and safety, EA: economic affairs, ENV: environment, HC: housing and community, HLT: health, RCR: recreation, culture and religion, EDU: education, and SP: social protection. Source: Authors’ calculation, based on the data from the Report on Revenues and Expenditures, Receipts and Expenses (Form PR-RAS) for 2018.
|
General public services
|
Health
|
Primary education
|
Secondary education
|
Social
protection
|
|
Share in total
|
26.1
|
4.1
|
8.0
|
8.5
|
6.1
|
|
Cumulative share
|
26.1
|
30.2
|
38.2
|
46.7
|
52.8
|
Source: Authors’ calculation, based on the data from the Report on expenditure according to functional classification (Form RAS-functional) for 2018.
|
General public services
|
Health
|
Primary
education
|
Secondary education
|
Social
protection
|
|
Max
|
353.7
|
145.1
|
143.9
|
220.5
|
74.5
|
|
Min
|
125.7
|
5.5
|
0.0
|
0.0
|
29.2
|
|
Average
|
207.9
|
39.9
|
49.5
|
71.8
|
47.5
|
|
Median
|
186.4
|
30.8
|
38.2
|
68.7
|
43.7
|
|
Standard deviation
|
65.6
|
36.3
|
45.2
|
69.2
|
13.9
|
|
Coefficient of variation (%)
|
31.6
|
90.9
|
91.2
|
96.3
|
29.3
|
|
Gini coefficient
|
0.168
|
0.431
|
0.497
|
0.521
|
0.158
|
|
Cities
|
Municipalities
|
|
Share in total
|
Cumulative share
|
Share in total
|
Cumulative share
|
|
General public services
|
23.6
|
23.6
|
25.1
|
25.1
|
|
Firefighting
|
1.5
|
25.1
|
2.7
|
27.9
|
|
Road traffic
|
6.9
|
31.9
|
9.2
|
37.1
|
|
Waste management
|
2.7
|
34.7
|
2.1
|
39.2
|
|
Community development
|
10.6
|
45.2
|
11.8
|
51.0
|
|
Street lights
|
2.3
|
47.6
|
3.7
|
54.6
|
|
Health
|
1.3
|
48.9
|
0.5
|
55.1
|
|
Recreation and sport
|
6.4
|
55.3
|
2.7
|
57.8
|
|
Culture
|
3.3
|
58.6
|
2.6
|
60.3
|
|
Preschool education
|
2.1
|
60.7
|
4.1
|
64.4
|
|
Primary education
|
4.9
|
65.6
|
1.4
|
65.9
|
|
Secondary education
|
2.1
|
67.7
|
0.4
|
66.2
|
|
Social protection
|
5.6
|
73.3
|
5.0
|
71.2
|
|
Max
|
Min
|
Average
|
Median
|
Standard deviation
|
Coefficient of variation
|
Gini
coefficient
|
|
GPS
|
10,370.13
|
186.41
|
1,082.54
|
863.68
|
1,000.31
|
0.92
|
0.32
|
|
FF
|
418.61
|
0.00
|
95.07
|
62.15
|
92.42
|
0.97
|
0.48
|
|
RT
|
2,393.84
|
0.00
|
401.28
|
322.04
|
454.64
|
1.13
|
0.56
|
|
WM
|
2,089.36
|
0.00
|
143.20
|
42.02
|
307.99
|
2.15
|
0.74
|
|
CD
|
4,480.03
|
0.00
|
519.55
|
234.97
|
693.88
|
1.34
|
0.63
|
|
SL
|
1,592.96
|
0.00
|
154.64
|
128.14
|
168.39
|
1.09
|
0.44
|
|
HLT
|
204.83
|
0.00
|
24.95
|
8.10
|
36.80
|
1.48
|
0.68
|
|
RS
|
1,353.31
|
0.00
|
236.25
|
162.10
|
242.09
|
1.02
|
0.45
|
|
CL
|
2,996.58
|
0.00
|
154.27
|
80.68
|
294.79
|
1.91
|
0.63
|
|
PREE
|
1,065.91
|
0.00
|
84.52
|
50.38
|
122.88
|
1.45
|
0.62
|
|
PRIE
|
3,059.82
|
0.00
|
109.67
|
32.60
|
321.14
|
2.93
|
0.77
|
|
SECE
|
506.40
|
0.00
|
11.96
|
0.00
|
47.76
|
3.99
|
0.85
|
|
SP
|
866.56
|
0.00
|
199.61
|
154.68
|
145.30
|
0.73
|
0.36
|
Source: Authors’ calculation, based on the data from the Report on expenditure according to functional classification (Form RAS-functional) for 2018.
|
Max
|
Min
|
Average
|
Median
|
Standard deviation
|
Coefficient of variation
|
Gini
coefficient
|
|
GPS
|
15,242.75
|
0.00
|
1,210.30
|
978.76
|
1,085.52
|
0.90
|
0.36
|
|
FF
|
2,038.27
|
0.00
|
124.80
|
91.22
|
143.52
|
1.15
|
0.47
|
|
RT
|
9,148.88
|
0.00
|
476.06
|
226.20
|
821.28
|
1.73
|
0.67
|
|
WM
|
2,013.74
|
0.00
|
89.65
|
5.07
|
248.62
|
2.77
|
0.85
|
|
CD
|
8,889.66
|
0.00
|
533.39
|
152.55
|
995.92
|
1.87
|
0.73
|
|
SL
|
3,061.17
|
0.00
|
174.92
|
107.95
|
240.40
|
1.37
|
0.57
|
|
HLT
|
408.36
|
0.00
|
16.21
|
0.00
|
35.00
|
2.16
|
0.77
|
|
RS
|
1,645.77
|
0.00
|
109.01
|
62.58
|
165.75
|
1.52
|
0.59
|
|
CL
|
5,968.96
|
0.00
|
124.16
|
36.00
|
439.87
|
3.54
|
0.77
|
|
PREE
|
3,199.89
|
0.00
|
172.37
|
81.84
|
264.46
|
1.53
|
0.64
|
|
PRIE
|
1,366.24
|
0.00
|
48.63
|
24.35
|
98.95
|
2.03
|
0.67
|
|
SECE
|
314.24
|
0.00
|
15.57
|
0.00
|
33.66
|
2.16
|
0.81
|
|
SP
|
10,840.23
|
0.00
|
226.21
|
126.43
|
563.77
|
2.49
|
0.54
|
Source: Authors’ calculation, based on the data from the Report on expenditure according to functional classification (Form RAS-functional) for 2018.
Note: Dec +: LGUs that took over the decentralized functions, Dec –: LGUs that did not take
over the decentralized functions. Source: Authors’ calculation, based on the data from the Report on expenditure according to
functional classification (Form RAS-functional) for 2018.
|
Function
|
Decentralized to
|
|
Primary
education
|
20 counties and the City of Zagreb, as well as 35 other cities with
stronger fiscal capacities
|
|
Secondary
education
|
20 counties and the City of Zagreb
|
|
Social
care–social welfare centers
|
20 counties and the City of Zagreb
|
|
Homes for the elderly and infirm
|
17 counties and the City of Zagreb*
|
|
Health
care
|
20 counties and the City of Zagreb
|
|
Firefighting–public
fire departments
|
76 public fire departments co-owned by LGUs
|
Note: * In three counties (Virovitičko-podravska, Zagrebačka and Krapinsko-zagorska) there are no homes for the elderly and infirm founded by the state nor the LRGUs. Source: Decisions on minimum financial standards for individual public functions (OG 128/19).
Source: Annual regulations on the financing of decentralized functions and the calculation of the
amount of equalization grants for decentralized functions of LRGUs from 2014 to 2020.
Source: Ministry of Finance – Analytical report of the Budget from 2017 to 2020.
|
Decentralized function
|
Tier of government
|
Gini coefficient
before equalization
|
Gini coefficient
after equalization
|
|
Firefighting
|
Local
|
0.284
|
0.454
|
|
Primary education
|
Local
|
0.186
|
0.185
|
|
Primary education
|
Regional
|
0.329
|
0.148
|
|
Secondary education
|
Regional
|
0.230
|
0.097
|
|
Social welfare centers
|
Regional
|
0.233
|
0.202
|
|
Nursing homes
|
Regional
|
0.219
|
0.262
|
|
Health care
|
Regional
|
0.230
|
0.184
|
|
Decentralized function
|
Tier of
government
|
Minimum
standard
|
Collected from
the PIT
|
Equalization grant for dec. functions
|
|
Firefighting
|
Local
|
314.9
|
97.2
|
223.8
|
|
Primary education
|
Local
|
353.3
|
162.8
|
190.5
|
|
Primary education
|
Regional
|
649.8
|
158.9
|
491.0
|
|
Secondary education
|
Regional
|
438.1
|
161.4
|
276.6
|
|
Social welfare centers
|
Regional
|
96.1
|
30.4
|
65.8
|
|
Nursing homes
|
Regional
|
164.5
|
67.1
|
111.3
|
|
Health care
|
Regional
|
387.9
|
125.7
|
267.0
|
|
Total
|
2,404.6
|
803.5
|
1,626.0
|
Figure 1LRGU revenue sources from 2000 to 2020 (in % of GDP) DISPLAY Figure
Figure 2LRGU tax revenue from 2000 to 2020 (in % of GDP) DISPLAY Figure
Table 1General PIT sharing scheme (in %) DISPLAY Table
Figure 3Gini coefficients of the distribution of PIT and surtax and fiscal equalization funds per capita in 2017 and 2018 DISPLAY Figure
Figure 4Lorenz curves of disparities in per capita fiscal capacities in 2018 DISPLAY Figure
Table 2Comparative effects on per capita fiscal disparities in 2018 DISPLAY Table
Figure 5Gini coefficients of the distribution of current own revenues and fiscal equalization funds per capita from 2018 to 2020 DISPLAY Figure
Figure 6LRGUs’ functional expenditure from 2000 to 2020 (in % of GDP) DISPLAY Figure
Table 3Summary statistics of LRGUs’ functional expenditure components per capita in 2018 (in HRK) DISPLAY Table
Table 4Expenditure for selected functions for counties in 2018 (as a % of total) DISPLAY Table
Table 5Summary statistics of per capita expenditure for selected functions of counties in 2018 (in HRK) DISPLAY Table
Table 6Expenditure for selected functions of LGUs in 2018 (as a % of total) DISPLAY Table
Table 7Summary statistics of per capita expenditure for selected functions of cities in 2018 (in HRK) DISPLAY Table
Table 8Summary statistics of per capita expenditure for selected functions of municipalities in 2018 (in HRK) DISPLAY Table
Figure 7Gini coefficients of per capita expenditure for primary education and firefighting of cities and municipalities in 2018 DISPLAY Figure
Table 9Decentralization of particular public functions in 2020 DISPLAY Table
Figure 8Expected expenditure for decentralized functions from 2014 to 2022 (in % of GDP) DISPLAY Figure
Figure 9Equalization grants for decentralized functions from 2017 to 2020 (in % of GDP) DISPLAY Figure
Table 10Effectiveness of the fiscal needs equalization system for newly decentralized functions in 2018 DISPLAY Table
Table 11Minimum financial standards and equalization grants for newly decentralized functions in 2018 (in HRK million) DISPLAY Table
This paper partially builds on the results of the project “Fiscal decentralization in Croatia” (World Bank,  2021)
and more specifically on the main results related to issues of fiscal equalization. However, issues like the existing inequalities in fiscal expenditure needs have been newly added. The authors would like to thank the two
anonymous reviewers for their very useful comments and suggestions. The findings, interpretations, and conclusions expressed in this article are entirely those of the author(s). They
do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments
they represent. Opinions and views in this article do not represent the official position of the Ministry of
Finance of the Republic of Croatia, Inter-American Development Bank, European Bank for Reconstruction
and Development, European Investment Bank, and World Bank.
1 For details see Primorac ( 2014 and 2015).
2 There are also other significant domestic contributions dealing with similar topics, such as Jurlina Alibegović, Slijepčević and Kordelj-De Villa ( 2013), Hodžić and Muharemović ( 2019), Jurlina Alibegović, Hodžić and Bečić ( 2019), Bronić ( 2020), Hodžić and Paleka (ref9880#2020), as well as Škarica ( 2021).
3 A more detailed description of this system is provided in section 5, as much of it is still in operation.
4 Even though the equalization system proposed by Primorac ( 2014) relied exclusively on mitigating differences in fiscal capacities, it also called for further research with the aim of examining the opportunities and constraints of expanding the system to the equalization of fiscal or expenditure needs.
5 The minimum financial standards and the financing of decentralized functions are further discussed in section 5.
6 Until 2018, funds within this category were used to finance equalization grants for decentralized functions. However, since 2018 the central government has taken over the equalization funding for decentralized functions leaving this share of PIT for funding the newly-established fiscal equalization scheme.
7 Own revenue refers to the revenue from county, city or municipal taxes, administrative fees, user charges, revenue from own property, fines and other own revenue sources.
8 More than one quarter of all LRGUs’ current revenue in 2018 is related to Zagreb. All municipalities and counties combined together generated in the same year slightly more current revenue than Zagreb alone. The divergence of Zagreb’s fiscal capacity (from that of other LRGUs) is significant also in per capita terms. Finally, the unique possibility to introduce surtax of up to 18% (the maximum rate for other cities is 15%) makes Zagreb an outlier in every sense. If Zagreb were included in the calculation of the reference value it would skew the average upwards so most of cities would turn out to be below average.
9 Importantly, there is no Robin Hood (or “fraternal” funding) element in the current fiscal equalization system. LRGUs that are not eligible to receive equalization transfers do not have to contribute any of their “surplus” to the pool of equalization funds.
10 Table of LRGUs’ share for fiscal equalization in 2020 is available here.
11 Shared revenues refer here to the PIT revenue (both the PIT revenue collected according to a uniform sharing scheme and the additional part of the PIT revenue for the optional decentralized functions taken over).
12 Note that even those LGUs that did not formally take over the decentralized functions (primary education and firefighting) still show expenditures according to the functional classification for these functions. These expenditures are much lower than for those LGUs that took over the decentralized functions and can include, for example, expenditure for voluntary fire brigades, student transportation, smart boards, computers, and other supplies.
13 See Annex for a more detailed presentation of the criteria used for determining the minimum financial standards for each of the decentralized functions.
14 Balance sheet rights are the funds required to ensure minimum financial standards for a particular decentralized function according to decisions on minimum financial standards.
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December, 2022
IV/2022 |
