1.1 Territorial Organisation, Scope of the Public Sector and Distribution of Public Revenues
1.1.1 Territorial Organisation
The Republic of Croatia is a South Eastern European country which gained independence and international recognition after separating from former Yugoslavia in the last decade of the twentieth-century. Since 1 July 2013, Croatia has been a full member of the European Union.
According to the 2011 population census, the Republic of Croatia has a population of 4,264,889, living in 6756 cities or towns and municipalities. It has a total surface area of 88,073 km2, out of which 56,594 km2 are on land, while territorial and internal waters cover 31,479 km2. This makes Croatia one of the more sparsely populated European countries, with an average of 75.8 inhabitants per km2. Croatia’s large territorial waters are due to the fact that the country has more than 6200 kilometres of coastline, including more than 1200 islands. In addition, its oddly shaped territory is framed by no less than 2370 km of land borders, which is also uncommon for such a relatively small country (Central Bureau of Statistics 2014: 44, 111).
One of the most important events for Croatia in the process of gaining independence was the adoption of the Constitution of the Republic of Croatia, passed in the Parliament on 12 December 1990. This constitutional act is the basis of Croatian territorial organisation and has been in effect ever since. In 1992, Croatia adopted the Act on the Areas of Counties, Cities and Municipalities in the Republic of Croatia 1 (Official Gazette of the Republic of Croatia, 86/2006), and corrections and amendments for the period 2008–2015,2 based on which the organisational structure was organised at two levels: the central level (central government) and levels of local and regional self-government .
According to the aforementioned Act on the Areas of Counties, Cities and Municipalities in the Republic of Croatia, the Republic of Croatia is divided into 20 counties and the City of Zagreb which has the status of both a county and a city. There is also a level of local government consisting of 556 units: 128 cities/towns and 428 municipalities. The Act on Local and Regional Self-Government (Official Gazette of the Republic of Croatia, 19/2013) determines the scope and structure of local and regional self-governments , their bodies, control over their acts and work, and other important issues.
Local governments , cities and municipalities perform tasks related to: improving settlements and housing, physical and urban planning, utility services, child care, social welfare, primary healthcare, preschool and primary education, culture, physical education and sport, consumer protection, protection and improvement of the natural environment, fire and civil protection, transport on their territory, and other tasks in line with relevant acts. In addition, large cities have the obligation to maintain public roads, to issue construction and location permits, along with other documents related to construction, the implementation of physical planning documents, and other activities in line with relevant acts.
Units of regional self-government and counties perform tasks of regional importance and, by aiming for balanced development, attempt to align the interests of counties with the interests of the municipalities and cities/towns that belong to them. These tasks relate in particular to education, healthcare, physical and urban planning, economic development, transport and transport infrastructure, the maintenance of public roads, the planning and development of educational, health, social and cultural institution networks, the issuance of construction and location permits, along with other documents concerning construction, the implementation of spatial planning documents for county areas outside large towns, and other activities in line with relevant legislation.
1.1.2 Central, Local and Regional Government Financing
The territorial and administrative autonomy of local and regional self-government units is accompanied by a level of financial independence as well. The Act on the Financing of Local and Regional Self-Government Units (Official Gazette of the Republic of Croatia, 117/1993, 69/1997, 33/2000, 73/2000, 127/2000, 59/2001, 107/2001, 117/2001, 150/2002, 147/2003, 132/2006, 73/2008, 25/2012, 147/2014, 100/2015) regulates the financial issues of the governmental activities of counties, municipalities and cities/towns (hereinafter: local government units). This act defines the financial relations between central government and local government units regarding the distribution of joint tax revenues and the rights of local units related to the collection of tax and non-tax revenues within their jurisdiction.
The Croatian system of public finance is highly centralised. Most public needs are financed through the state budget , which in turn constitutes the vast majority of total public expenditure . For example, according to data on the execution of state and local unit budgets in 2015, local government units accounted for only 16.1% of total budgetary spending, while the central government spent the remaining 83.9% (Ministry of Finance 2017).
The financing of local government units has developed in two phases: the first phase, starting in 1992 and lasting until 2001, and the second phase from 2001 until today. During the first phase, local government units had a specific position as a consequence of the armed conflict which took place then. This meant that certain local units were granted the status of Areas of Special State Concern (Official Gazette of the Republic of Croatia, 86/2008, 57/2011, 51/2013, 148/2013, 76/2014, 147/2014, 18/2015), which brought privileges in the distribution of funds and a specifically developed system of state support.
Decentralisation began in early 2001, following an analysis of the fiscal capacity of municipalities, cities/towns and counties with regard to primary and secondary education, healthcare and social welfare institutions, and network funding. It was decided to decentralise the public services of primary and secondary education, healthcare, social welfare and firefighting, with the transfer of jurisdiction, powers and responsibilities from central government to the level of counties, the City of Zagreb and a number of other cities (larger towns and county centres). This decentralisation process is prescribed by special acts, as well as in annual regulations of the government of the Republic of Croatia, which regulate the minimum standards for the financing of decentralised services.
In order to secure funds for the newly acquired expenditures of these decentralised functions, an additional portion of income tax was transferred to local units. The portion of income tax intended for local units has been gradually increased since 2001. Furthermore, an equalisation fund was established for those units of local government which were regarded as not being able to cover the expenditures of these decentralised functions, even with the added portion of tax incomes. These units have had the right for the difference to be covered by the equalisation fund which forms part of the state budget . Therefore, responsibility for the execution of decentralised functions has been and still is divided between central and local levels.
1.1.3 Scope of the Public Sector
In order to adequately track public finances and the expenditure of the central state and units of regional and local government , appropriate statistics and accounting systems had to be put in place. The scope of the public sector in the Republic of Croatia is primarily prescribed by the Budget Act (Official Gazette of the Republic of Croatia, 87/2008, 136/2012, 15/2015). According to this Act, the public sector consists of the central state budget , the budgets of local and regional self-government units and extra-budgetary users of local and regional self-government units . The central budget is the state budget that includes both budgetary and extra-budgetary users of the state budget, while the budgets of local and regional self-government units encompass only budget users. Budget users are state bodies and institutions, minority self-government councils and local self-government units whose personnel and material expenditure is secured in the budget. Extra-budgetary users are extra-budgetary funds, companies and other legal persons in which the state, local government units, or both hold enough shares to have managerial rights. These definitions, however, did not allow for a correct and unambiguous assessment to establish which legal entities are or are not budgetary users , which is essential to determine the scope of the public sector for state statistical needs. This was solved with the introduction of the Register of Budgetary Users and Extra-budgetary Users which unambiguously and consistently classified all budgetary users and extra-budgetary users of the state budget and budgetary users and extra-budgetary users of the budgets of local and regional government units. Identification of state budget and local and regional self-government budgetary users, as well as extra-budgetary users, lies under the jurisdiction of the Ministry of Finance , along with the criteria of keeping the registry of budgetary users, prescribed annually by the Ordinance on Defining Budgetary and Extra-budgetary Users of the State Budget , Budgetary and Extra-budgetary Users of the Budget of Local and Regional Government Units and the Means of Conducting the Registry of Budgetary and Extra-budgetary Users (Official Gazette of the Republic of Croatia, 128/2009, 142/2014).
The methodological framework used in setting the criteria for the introduction of the registry was the one defined in GFS 2001 and ESA 95, with ESA 2010 being introduced in 2014. According to these criteria, budgetary users of the state budget are:
- 1.Those founded by the Republic of Croatia;
- 2.Those who acquire revenues from the state budget and/or by public authorit...