Public Investment Drives Growth, But Will It Sustain?

Public investment has driven growth, but what if it is not well-placed? We may breathe a sigh of relief as Croatia has no deficit, and if Europe does not care, our domestic politicians will care even less. This is not because there are no criticisms.

However, the European Commission's recommendations no longer include calls for the introduction of property taxes, a first since 2014. Brussels no longer views it as crucial, and while Europe may not care, our domestic politicians will care even less. Our politicians can breathe a sigh of relief as there will be no property tax.

Of course, the EU still emphasizes that this would be a measure that could help ease the burden on labor. However, European bureaucrats will not get overly excited about how we have created an investment climate in Croatia.

Criticisms have been silenced, and this is partly due to the EU's implementation of pension reform. However, a reduction in criticism should not be seen as a call for a relaxation of standards. Croatia remains a country with an excessively high share of public consumption in its GDP, which stifles investment. This is also reflected in the low level of investment in the private sector.

Entrepreneurs have invested less than 4% of their total income in long-term assets because, despite the growth, they still lack confidence that their invested capital will be returned. They mostly invest in real estate and hotels because this is a "safe" option. Investments in other sectors, particularly in production, are perceived as a significant risk, primarily due to administrative barriers and costs that not only increase investment costs but also reduce potential profits.

That we have a problem with investments is not just seen by the EU, which suggests easing procedures for investment. The EU also emphasizes the need for greater investments in green energy and railways, as well as the easier implementation of research and development projects.

The new financial perspective will see the most money being invested in innovation and new research. In this context, the EU's recommendation should be taken seriously to avoid missing out on available EU funds. It is worth reconsidering the focus on green energy at the expense of energy sources that Croatia has in abundance or significant investments in railway routes. This should be evaluated at the national level, by carefully assessing the efficiency and sustainability of such projects.

The public investment that has accelerated GDP growth to 3.9% was a positive development, but if it is not well-placed, growth will slow down, and unfortunately, the new World Bank forecast of Croatia's slowed growth to 2.5% will prove to be accurate.

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