The government had been preparing a measure to increase wages for months, but has, at least for now, abandoned it. It was not possible to obtain further clarification on the reasons for the withdrawal, and the Ministry of Finance responded that it is not currently discussing the amount of the basic personal allowance.
Finance Minister Tomislav Ćorić announced in June that a possible increase in the personal allowance would be discussed in the autumn, once the results of economic growth, inflation and other indicators for the first three quarters are known. In recent months, the Ministry of Finance, with the help of the Institute for Public Finance, has been working on simulations of a personal allowance increase. Minister Ćorić is currently preparing the budget for next year.
A section of the expert public has long warned about the importance of increasing the personal allowance, and employers have paid great attention to it in recent weeks. Employers emphasise that increasing the personal allowance is a key precondition for reducing the tax burden on the minimum wage, as well as other salaries. The personal allowance has been frozen at €600 for a long time, while wages have risen, and with them the tax bite.
According to an estimate by the Croatian Employers' Association (HUP), the personal allowance is currently €600. If it were to rise from €600 to €840, thereby freeing up around €60 for the minimum wage, local units would be left without revenue of €500m to €700m, or 15 to 20 per cent. The effect of abolishing tax on pensions was estimated at €180m to €200m, and total income tax revenue would fall by almost one per cent of GDP. HUP is aware that the proposed increase in the personal allowance would be a major step and that it would be difficult to implement in one go, but had hoped that the government could begin a gradual increase this year.
The deficit of the general budget, which includes the local state, is barely being kept below the threshold of three per cent of GDP. Economic growth will slow further, and all estimates indicate that inflation will also decline. With a lower nominal GDP growth rate, budgetary revenues will fall, while pressure to increase expenditure continues to rise. Expenditure on defence, interest and healthcare is growing significantly, and wages and pensions are large budgetary items for which it is always found at the end of the year that more money is needed than was forecast.
The agency Moody's recently issued an estimate that the share of interest in budgetary revenues will rise from three per cent in 2025 to 3.4 per cent in 2027 and 2028. Increasingly uncertain geopolitical conditions and rising borrowing costs in international markets represent a concern for everyone, especially for heavily indebted countries. As interest costs, defence expenditure and needs related to population ageing grow, it becomes increasingly difficult to finance new demands and maintain budgetary stability. France is a particularly uncomfortable warning, as rising yields on government bonds, high debt and the political inability to agree on a budget narrow the room for manoeuvre precisely at a time when pressures on public finances and citizen dissatisfaction have exploded.
Some analysts assume that an increase in the personal allowance could certainly take place in the pre-election year of 2027.
