Fiscal decentralization and impact on economic growth in the Republic of Croatia

Abstract

Fiscal decentralization is the transfer of responsibility between the provision of public services and sources of financing by the central government to lower levels of government, with the outcome depending on how the process itself is devised and implemented. Proper and balanced implementation of fiscal decentralization leads to economic growth, achieving economic goals that can bring economic benefits. In addition to economic benefits, decentralization could lead to greater accountability, transparency, and citizen engagement, which would also improve the level of democracy in society. Since 2002, the Republic of Croatia has secured a significant amount of financial resources through the system of tax revenue sharing and aid allocation, which has significantly improved the fiscal capacity of all local units. The impact of fiscal decentralization in the Republic of Croatia on economic growth was tested using a panel analysis. From the results obtained, there is a significant positive relationship between fiscal decentralization and economic activity, and based on the results obtained, it can be concluded that fiscal decentralization in the Republic of Croatia had a positive impact on economic growth. This also confirms the role of lower levels of government established to improve the quality of life of citizens by deciding on the provision of local public services close to where they are provided and close to the users, providing better education, social and health services and infrastructure, thus positively influencing economic growth. In further research, it is necessary to focus on the creation of a better system of financing lower levels of government and on the fiscal autonomy of local units in the Republic of Croatia, in order to make the impact of fiscal decentralization on economic growth even more evident and to have as much influence as possible on the even development of the Republic of Croatia.