Title page 1

Contents 5

Foreword 4

Basic statistics of Croatia, 2024 8

Executive summary 9

1. Ensuring resilient growth and fiscal sustainability 16

1.1. Economic growth is set to moderate amid high uncertainty 17

1.1.1. Economic growth is moderating but remains robust 17

1.1.2. Growth is set to moderate amid high uncertainty 19

1.1.3. Macroprudential policies have been tightened amid rapid credit growth 22

1.2. Addressing fiscal challenges 24

1.2.1. Ensuring fiscal prudence 24

1.2.2. Broadening tax bases and enhancing the efficiency of the tax system 28

1.2.3. Enhancing the targeting and efficiency of public spending 31

1.2.4. Strengthening the anti-corruption framework 36

References 41

2. Tackling housing challenges 44

2.1. Strong demand, high vacancies and holiday short-term rentals challenge the housing market 45

2.2. Increasing efficiency and fairness in the property tax system and further encouraging an efficient allocation of the housing stock 49

2.2.1. Improving the design of the recurrent property tax on immovable properties and expanding its coverage 50

2.2.2. Reducing distortions deriving from the property tax system 52

2.3. Developing the long-term rental market 53

2.3.1. Improving the attractiveness of the private rental market for landlords and tenants 54

2.3.2. Expanding housing support for vulnerable groups 54

2.4. Making supply more responsive to demand pressures 58

2.4.1. Enhancing land use policy and administrative procedures 58

2.4.2. Raising productivity to reduce construction costs 60

References 63

3. Towards a climate-resilient net-zero economy 66

3.1. Significant emission reductions are needed to reach net zero 67

3.2. Strengthening the role of market-based instruments 68

3.3. Decarbonising the power sector and accelerating renewable energy deployment 71

3.4. Curbing emissions from transport 74

3.5. Reducing emissions from buildings 76

3.6. Adapting to climate change 79

References 84

4. Addressing demographic challenges 88

4.1. Demographic challenges are severe 89

4.2. Preparing the pension system for future challenges 92

4.2.1. Improving pension adequacy in a sustainable way 97

4.2.2. Strengthening the role of second-pillar pensions 102

4.3. Improving health outcomes and the efficiency of healthcare spending 104

4.3.1. Population ageing intensifies pressures on the healthcare system 104

4.3.2. Strengthening prevention and promoting healthier lifestyles 106

4.3.3. Strengthening primary care through better workforce planning and incentives 109

4.3.4. Improving the quality and efficiency of hospitals 112

4.3.5. Expanding formal long-term care 115

4.4. Preparing for a smaller and ageing workforce 118

4.4.1. Unlocking the employment potential of older workers 120

4.4.2. Improving the VET system to facilitate the labour market integration of the young 125

4.4.3. Alleviating women's caregiving responsibilities to raise female employment 127

4.4.4. Enhancing the benefits of migration 130

References 136

Tables 5

Table 1. Real GDP growth is set to moderate 11

Table 1.1. GDP growth is set to moderate 21

Table 1.2. Events that could lead to major changes in the outlook 21

Table 1.3. Illustrative fiscal impact of recommended reform package 27

Table 1.4. Illustrative impact of reform package on GDP per capita 27

Table 1.5. Tasks and responsibilities of subnational governments 29

Table 1.6. Personal income tax rates 30

Table 1.7. Past recommendations on the tax system 32

Table 1.8. Past recommendations on public sector efficiency 37

Table 1.9. Past recommendations on anti-corruption and judicial efficiency 39

Table 1.10. Recommendations on macroeconomic policies 40

Table 2.1. Taxes on housing acquisition, holding and disposal in Croatia as of 2025 53

Table 2.2. Past recommendations on housing policy 61

Table 2.3. Policy recommendations for addressing housing market challenges 62

Table 3.1. Past recommendations on climate-change related policies 82

Table 3.2. Recommendations on decarbonising the economy 83

Table 4.1. Fiscal costs of the 2025 pension reform 97

Table 4.2. Linking the retirement age to gains in life expectancy increases replacement rates 99

Table 4.3. Past recommendations on pensions 104

Table 4.4. Likelihood of employment among older and younger workers 119

Table 4.5. Past recommendations on strengthening active labour market policies 123

Table 4.6. The leave policies for parents are in line with the OECD, but the childcare gap is high 128

Table 4.7. Past recommendations on ECEC 129

Table 4.8. Past recommendations on migration policy 130

Table 4.9. Policy recommendations to address demographic challenges 134

Figures 6

Figure 1. Convergence towards average OECD living standards continues 10

Figure 2. Many dwellings are vacant or used for short-term holiday rentals 12

Figure 3. Croatia faces a significant demographic challenge 13

Figure 1.1. Strong growth is driven by domestic demand 17

Figure 1.2. Convergence towards average OECD living standards continues 18

Figure 1.3. The labour market remains tight, and wage growth is strong 18

Figure 1.4. Inflation has slowed but remains elevated 19

Figure 1.5. Productivity growth has slowed and cost competitiveness has deteriorated 19

Figure 1.6. Exports of goods and services are mainly directed towards European countries 20

Figure 1.7. The banking sector appears resilient, but rapid credit growth poses risks 23

Figure 1.8. The fiscal stance has been expansionary 25

Figure 1.9. Stylised debt scenarios 26

Figure 1.10. Most revenues come from consumption taxes 28

Figure 1.11. Government support for business R&D is very low 31

Figure 1.12. Guaranteed minimum income benefits are lower than in most OECD countries 33

Figure 1.13. Public sector employment and the public sector wage bill are high 34

Figure 1.14. Public ownership of firms is widespread 35

Figure 1.15. Perceived corruption remains high 38

Figure 2.1. Real house prices and rents have increased rapidly in the last decade 45

Figure 2.2. Tourism inflows have been strong 45

Figure 2.3. The average housing stock per inhabitant is high, but many dwellings are vacant or used for short-term holiday rentals 46

Figure 2.4. Housing vacancies are high, even in highly populated municipalities and cities 46

Figure 2.5. The house price to income ratio is lower than in the OECD, but regional disparities are high 47

Figure 2.6. A large share of young adults live with their parents and overcrowding rates are high 48

Figure 2.7. High homeownership is associated with low residential mobility 48

Figure 2.8. Revenues from recurrent property taxes on immovable property have been low 50

Figure 2.9. The social rental housing sector is underdeveloped 55

Figure 2.10. Housing allowances reach only few vulnerable households 57

Figure 2.11. Building permits have increased but construction costs have surged 58

Figure 2.12. Productivity in the construction sector is low 61

Figure 3.1. Emissions have declined markedly but more needs to be done to reach targets 67

Figure 3.2. Croatia uses a diverse mix of policy instruments 69

Figure 3.3. Climate action increased, but market-based instruments could be ramped up 69

Figure 3.4. Carbon pricing is low and differs significantly across sectors 70

Figure 3.5. Renewables dominate electricity generation, but wind and solar need to expand 72

Figure 3.6. Permitting is slow 73

Figure 3.7. Sustainable transport modes are decreasing, requiring more support 75

Figure 3.8. Electric vehicle adoption and charging infrastructure remain limited 76

Figure 3.9. Despite some progress, climate action and energy efficiency in the building sector remain low 78

Figure 3.10. Economic losses from climate hazards are high and mostly uninsured 80

Figure 3.11. Exposure to river flooding and hot days are high and expected to increase 81

Figure 4.1. The population is shrinking and ageing rapidly 89

Figure 4.2. Emigration has been a major driver of the population decline 90

Figure 4.3. The shrinking and ageing population will weigh on GDP growth 91

Figure 4.4. Ageing-related expenditure is set to increase only moderately without reforms to increase pension adequacy and improve long-term care 91

Figure 4.5. The poverty rate of older people is high 92

Figure 4.6. The expected decline in disability pensions mitigates pension expenditure growth 95

Figure 4.7. The public pension system runs a sizeable deficit 95

Figure 4.8. Working lives are short 96

Figure 4.9. Theoretical future net replacement rates are close to the OECD average 97

Figure 4.10. Expected years in retirement are projected to increase strongly 98

Figure 4.11. Linking the retirement age to gains in life expectancy can bring significant savings 99

Figure 4.12. The early retirement age is low 100

Figure 4.13. There is scope to strengthen investment in higher yielding assets 103

Figure 4.14. Health outcomes are poor 105

Figure 4.15. Older Croatians face greater health challenges than European peers 105

Figure 4.16. Health spending is low but there is room to improve healthcare efficiency 106

Figure 4.17. Health risk factors among adults and adolescents are elevated 107

Figure 4.18. Taxes on cigarettes are relatively low 108

Figure 4.19. Spending on prevention is in line with the OECD 109

Figure 4.20. There are relatively fewer general practitioners and nurses in Croatia 110

Figure 4.21. Limited availability of GPs is associated with higher referrals to specialists 110

Figure 4.22. The salaries of general practitioners and nurses are relatively low 111

Figure 4.23. Pharmaceutical spending is relatively high 113

Figure 4.24. There are relatively more hospital beds per population 114

Figure 4.25. Long-term healthcare is underfunded 117

Figure 4.26. Employment rates for young and older people are low 118

Figure 4.27. Among older adults, disability represents a significant obstacle to labour market participation 120

Figure 4.28. Participation in adult learning is low, especially among older and low-skilled workers 122

Figure 4.29. Flexible working conditions are not widespread 124

Figure 4.30. A high share of VET graduates is not in education, employment, or training 125

Figure 4.31. ECEC participation has increased, but remains below OECD average for 3-5-year-olds 128

Figure 4.32. Immigration has increased sharply 130

Boxes 7

Box 1.1. Quantification of selected policy recommendations 27

Box 2.1. The National Housing Policy Plan until 2030 49

Box 2.2. Property tax administration in the Netherlands 51

Box 2.3. The POS programme for construction of affordable housing in Croatia 56

Box 2.4. Financing social and affordable rental housing in selected OECD countries 57

Box 2.5. Achieving full digitalisation in the building permits process: the case of Estonia 60

Box 2.6. Addressing high construction costs: the case of Germany 61

Box 4.1. Population projections for Croatia 90

Box 4.2. The Croatian pension system 93

Box 4.3. Recent pension reforms in Croatia 94

Box 4.4. The long-term care funding reform in Slovenia 118

Box 4.5. Determinants of employment of older and younger workers in Croatia 119

Box 4.6. Involvement of social partners in VET in Denmark 126

Box 4.7. Expanding the short cycle tertiary education programme: the case of Italy 127

Box 4.8. The Seasonal Agricultural Workers Programme in Canada 132

Box 4.9. Encouraging emigrants to return: the case of Ireland 133