Sustainability And Character Of Fiscal Policy In The Republic Of Croatia

With Croatia's accession to the European Union and the Eurozone, the role and importance of fiscal policy has increased considerably, which resulted in the loss of monetary sovereignty. The aim of this paper is to analyse the influence of international integration and the political-economic environment on the character and sustainability of fiscal policy in Croatia. The analysis was conducted by estimating the fiscal response function. The research results show that fiscal policy is sustainable only in basic models in which the response of the primary fiscal balance to changes in government debt and the GDP gap is observed. However, augmented models that take into account international integration and the political-economic environment suggest that fiscal policy is not sustainable. Control variables include accession to the European Union, the excessive deficit procedure and the degree of uncertainty. The period of membership in the European Union is associated with higher primary budget balances, as economic policy makers have had to manage public finances more responsibly. The global financial crisis has significantly reduced the level of the primary budget balance. Fiscal policy has a counter-cyclical character in all models. The main contribution of the paper is to demonstrate the importance of international integration and the political-economic environment for the sustainability of fiscal policy.