Fiscal Policies, Inequality, and Poverty in Croatia

In a fiscally expansionary context, policy makers in Croatia must keep in mind the redistributive role of fiscal policies, particularly their impact on inequality and poverty. This paper uses both household survey data and national accounts to estimate how in 2018 the Croatian fiscal system affected income distribution and poverty. Moreover, it assesses the individual and the combined effects of interventions like direct and indirect taxes and social spending. The analysis found that in 2018 the fiscal system helped to reduce inequality but also increased poverty. All fiscal interventions except indirect taxes (VAT and excises) reduced inequality. However, indirect taxes not only widened the income gap between rich and poor but also increased poverty—only direct transfers had poverty-reducing effects. Direct taxes (personal income tax [PIT] and property taxes) had no impact on poverty in 2018. A series of reforms introduced between 2018 and 2021 helped reduce poverty slightly, mainly because the VAT on some food items was lowered. However, these reforms pushed up inequality, mostly because PIT reforms reduced the tax burden for those with high incomes.