Discretionary Measures and Automatic Stabilizers in the Croatian Fiscal Policy

Abstract

The role of fiscal policy as a tool to stabilize business cycle fluctuations has been at the center of recent public debates. If governments allow automatic fiscal stabilizers to work fully in a downswing but fail to resist the temptation to spend cyclical revenue increases during an upswing, the stabilizers may lead to bias toward budget positions. This paper assesses to what extent some items of the Croatian central government budget operate to smooth the business cycle. For disentangling automatic stabilizers from discretionary measures, this research relies on the European Commission methodology. Results show that the structural budget balance was on average 1.74% of GDP in deficit in the period between 1995 and 2009. Automatic stabilisation in Croatia is relatively weak and supplemented by discretionary measures, which led to “destabilizing” the economic activity in a pro-cyclical manner in Croatia in several observed periods.