OECD: Croatia has made fantastic progress, but further reforms are needed

At the presentation of the second economic review for the Republic of Croatia it was emphasized that Croatia has made fantastic progress in the process of joining the Organization for Economic Co-operation and Development (OECD), but it must continue with reforms, including in terms of housing affordability, as well as improving the pension and healthcare systems and the labor market. 

The OECD has published the second economic review for the Republic of Croatia, which represents a very important step in the process of Croatia's accession to the OECD, which is expected this year.

The conclusions of the report were presented at a thematic session of the Government, chaired by Prime Minister Andrej Plenković, by OECD Secretary-General Mathias Cormann, who said that the process of joining the OECD represents a transformational journey that helps candidate countries implement reforms, align with international practices and standards, and lay the foundation for long-term growth and increasing standards.

He pointed out that Croatia has shown fantastic progress in the accession process, which is the result of the strong commitment of the Government, for which he thanked Prime Minister Plenković.

The OECD said in the report that Croatia needs to maintain the momentum of structural reforms in order to continue strong economic convergence, emphasizing that, thanks to strong and resilient economic growth, it is catching up with the average living standard of OECD countries. Thus, Croatia's GDP per capita now amounts to 81 percent of the OECD average, while ten years ago it was only 62 percent.

In addition to reforms, fiscal reserves should also be built through a more restrictive fiscal policy, so that it can adequately face future challenges, including demographics and the green transition, the OECD said.

The OECD forecasts that the Croatian economy grew by 3.2 percent in 2025, and although it should slow down, growth should remain robust this year and next, with forecast rates of 2.7 percent in 2026 and 2.4 percent in 2027.

When it comes to key recommendations, the OECD believes that, in order to ensure medium-term fiscal sustainability, it is necessary to broaden the tax base and strengthen the efficiency of the tax system in order to generate the necessary revenues. Among other things, they suggest reducing the items to which the reduced VAT rate applies, whereby the additional revenues could be used to lower the general rate.

They also suggest the abolition of energy subsidy measures and food price restrictions, while protecting vulnerable households through targeted support. "We need more effective measures that specifically target households," said Cormann.

The sharp increase in residential real estate prices threatens affordability

In the report, special emphasis is placed on increasing the affordability of housing, which, according to the OECD, requires an improved distribution of the housing stock.

"The strong demand for apartments amid limited supply, due to both the large number of empty apartments and the growth of short-term rentals, has led to a sharp increase in residential real estate prices, which threatens affordability," they warn.

At the same time, the OECD emphasizes the need for further property tax reform, with the message that real estate taxation could be optimized. Thus, in the report, they suggest expanding the real estate tax to all owners of houses and apartments, whereby the basis of taxation should be the market value of the real estate, not the area.

They also emphasize the need to strengthen the private long-term rental market and social and affordable rental apartments, which would support labor force mobility and the most vulnerable households.

They also wrote that an improved land use policy and construction process would help match the supply of apartments with demand in areas where it is most needed, while also mentioning the complete digitization of building permit issuance procedures.

Croatia's population is shrinking and aging rapidly, which has a negative impact on potential growth and public spending. In order for Croatia to respond to these trends, the OECD emphasizes the need for reforms in the pension and health systems, the long-term care system, as well as the labor market, in order to extend working lives, improve health outcomes, and increase the share of the working population.

Raise the legal retirement age, tax alcohol and cigarettes more heavily ...

They believe that the legal retirement age and the minimum number of years of contributions for receiving an early pension should be increased.

"Limiting the possibility of early retirement and increasing the retirement age would extend working lives and improve the adequacy of pensions in a sustainable way," they wrote.

According to UN projections, they note, the working population will decrease by about 25 percent by 2050.

Improving health outcomes, through strengthening prevention and providing high-quality primary and hospital care, is one of the important prerequisites for extending working life, the OECD points out, and they also propose stronger taxation of alcohol, sweetened beverages and increased excise taxes on tobacco products.

In addition to focusing on the elderly, to mitigate the trend of declining working population, it is necessary to increase the labor participation of young people, mothers with small children, and there are also policies to attract foreign workers and the Croatian diaspora.

They advocate for increasing the efficiency of the public sector, in terms of increasing the quality of public services, while also mentioning the possibility of potential savings in public spending that would not undermine the final outcomes.

They also say that the sale of state-owned enterprises should continue, as well as clearly defining the reasons for state ownership of companies, limiting inappropriate political influence, and ensuring that the roles of the government as owner and regulator of the markets in which state-owned enterprises operate are clearly separated.

Cormann said that the laws passed last year were a very important step in improving governance and outcomes when it comes to state-owned enterprises.

Continued efforts are needed to fight corruption

The OECD also emphasizes the need to transition to a climate-resilient economy with zero emissions of harmful gases, which requires a comprehensive package of policies, with the aim of gradually abandoning the use of fossil fuels, while encouraging renewable energy sources, increasing the energy efficiency of buildings, and reducing dependence on car use.

They say that the procedures for issuing permits for renewable energy sources should be accelerated by increasing administrative capacity, simplifying the procedure for issuing them, or launching a "one-stop shop" system.

They also suggest redirecting investments from road infrastructure to sustainable modes of transport such as public transport, cycling and walking.

They also stressed the need for continued efforts to fight corruption, as despite progress, many citizens and companies consider corruption to be a widespread problem.

They also mentioned the recently adopted Lobbying Act, writing that it should be accompanied by better monitoring and enforcement of rules after the termination of the employment relationship of officials, in order to avoid situations of conflict of interest.

Source: HRT