Abstract
The global economic crisis had a signifi cant

impact on the fi scal stance of local government
units. The literature discusses this issue by ex-
plaining that fi nancial crises change budget de-
cisions of central state authorities towards the
fi nancing of those priorities which could improve
the economic situation at national level. The
impact of the change in national government’s
decisions infl uences local government units
differently depending on the level of their fi scal
autonomy. Investments at the local level are
below pre-crisis levels in most European Union
countries. This article analyzes the impact of the
fi nancial crisis on the fi scal imbalance showing
that there is a lack of fi nancial resources for in-
vestments. Due to fi scal constraints and annual
borrowing limits of regional and local public ad-
ministration authorities, the affordability of proj-
ects and investments is limited. Furthermore, the
article analyzes the obstacles to investments at
local level in Croatia, a country belonging to the
group of European Union Member States which
was hit hardest by the crisis and experienced
a larger drop in investments. The results of the
survey conducted among members of regional
assemblies have been analyzed with respect to
the level of local development and other factors
enabling to identify more precisely the obstacles
to investment.

Keywords: local government units, eco-
nomic crisis, fi scal imbalance, development in-
dex, investment.

THE IMPACT OF THE ECONOMIC
CRISIS AND OBSTACLES TO
INVESTMENTS AT LOCAL LEVEL

Sunčana SLIJEPČEVIĆ

Sunčana SLIJEPČEVIĆ
PhD, Senior Research Associate, Department for Regional
Development, Institute of Economics, Zagreb, Croatia
Tel.: 00385-1-2362.234
E-mail: sslijepcevic@eizg.hr

Transylvanian Review
of Administrative Sciences,
No. 55 E/2018 pp. 62-79

DOI:10.24193/tras.55E.5
Published First Online: 2018/10/23

1. Introduction

The purpose of this paper is to analyze the impact of the economic crisis on the
fi scal stance of local government units and their possibilities to manage the local de-
velopment policy and fi nance capital projects. The economic crisis that began in 2007
in the U.S. has been considered within the economic literature as the worst economic
crisis since the 1930’s and the literature suggests that, due to its depth and prolonged
duration, its consequences could be felt for ten years (Levine, Justice and Scorsone,
2013). The global fi nancial crisis has seriously deteriorated the fi scal position of gov-
ernments in countries all over the world despite the level of their development. The
general government defi cit rose due to the lower collection of revenues, as well as the
rising expenses for additional social spending which are needed to alleviate the cri-
sis’ eff ects (United Cities and Local Governments, 2009). Local economies were faced
with rising unemployment, debt fi nancing problems, business closures and bank-
ruptcies, investment decrease, drop of property values, reduction of demand and
others (OECD, 2009; Guidoum and Soto, 2010). Croatia entered the crisis in the period
of unsustainable economic growth dependent on strong domestic demand, current
account defi cit, and credit growth (Bakker and Klingen, 2012). High vulnerability and
rather low external competitiveness of the economy further narrowed the maneuver-
ing space to reduce the impact of the crisis (Bakker and Klingen, 2012). The case of
Croatia’s deep and prolonged economic decline in the period 2008-2014 has shown
that EU membership did not reduce exposure to recession, neither has it buff ered the
negative eff ects in the early membership phase.

The countries and, within them, diff erent levels of government had at their dispos-
al diff erent approaches to fi ght crises. Clark’s (2009) analysis of 41 local economies’ re-
sponses on crises shows that they have conducted diff erent types of measures. How-
ever, measures aimed at mitigating the eff ects of the recession at local level could not
prevent consequences on unemployment (OECD, 2009) and, consequently, on reve-
nues from income taxes (Jonas, 2012; Guidoum and Soto, 2010). Although most of the
transition countries conducted reforms of transfer of expenditure authorities to local
government, decentralization reforms where mostly proceeded by the method of trial
and error and, in some cases, with the lack of appropriate transfer of responsibilities,
which caused that some local public services sometimes remained the responsibil-
ity of the central government and vice versa (International Monetary Fund, 1998).
Croatia, a country where the process of decentralization started in 2001, is not an ex-
ception. Jurlina Alibegović, Slijepčević and Kordej-De Villa (2013) stress that the de-
centralization reform in Croatia, in its fi rst phase, was directed both to administrative
and fi scal areas, but that the transfer of responsibilities was not accompanied by the
adequate transfer of fi nancial resources. Despite that, a signifi cant part of public ser-
vices remained under the control of local government units, while fi nancial resources
remained mostly under the control of the central government. Therefore, they could
be easily aff ected by central state decisions. A similar problem of mismatch between
local government responsibilities and fi nancial resources has been noticed in some

other European countries such as Germany, Sweden, and Austria (Pucher, Martinos
and Schausberger, 2016). Eyraud and Moreno Badia (2013) analyzed the local gov-
ernment budgets in EU15 countries in the period 2001-2011 and concluded that in
the fi rst two years of the crisis (2008-2009) increases in local government expenses
were fi nanced from transfers from the central government, while in the subsequent
two years (2010-2011) there was no further increase in central government transfers,
but also in local government expenses. Their analysis also showed that in EU15 local
government own revenues dropped during the crisis. Jonas (2012) discussed the fi s-
cal impact of the 2007-2008 recessions on state and local governments in the United
States and showed the high volatility of revenues from income taxes. He noticed that
the fi scal response to recession depended on fi scal rules on borrowings.

Reviving investments became the top European Union priority and local gov-
ernment has an important role in it (Committ ee of the Regions, 2016). The level of
investment in two-thirds of the European Union Member States, including Croatia,
remained below pre-crisis level (European Commission, 2016; Committ ee of the Re-
gions, 2016; Pucher, Martinos and Schausberger, 2016). The purpose of this paper is
to examine the impact of the fi nancial crisis on the fi scal stance of local government
units in Croatia and their possibilities to fi nance capital projects which are necessary
for local economic development. Researches about the regional impact of crises are
rare. Since there has been noticed an alarming drop of public investment at local level
in the European Union (Pucher, Martinos and Schausberger, 2016) and the European
Commission (2016) stresses that the Member States should put eff orts into identifying
and removing obstacles to investment at regional and local level, the article analyzes
obstacles to investment at the local level from regional councilors’ perspectives in
the country belonging to the group of European Union Member States which was hit
hardest by the crisis and experienced a larger drop in investments. The paper focuses
on members of regional assemblies due to the fact that they have an important role
in fostering public investments, creating a proper environment for fostering private
investments and ensuring sustainable development at local level.

The article consists of four parts. After the fi rst introductory part, follows an anal-
ysis of fi scal stance of local government units in Croatia in the pre-recession and re-
cession periods. In this part, the fi scal imbalance is analyzed in connection with the
level of local units’ development as measured by the development index. The analy-
sis of regional councilors’ att itudes toward possibilities and barriers to fi nance capital
projects are provided in part three of this article. Part four summarizes the results and
presents the main conclusions.

2. Fiscal stance of Croatian local government units

Even though the level of decentralization in Croatia is lower than in most of the
other European Union countries, the very long recession, which started in the fall of
2008, had a signifi cant impact on the local government. Most of the local government
units in Croatia, in the pre-crisis period, enjoyed a relatively favorable fi scal stance,

even though it has to be emphasized that it was mostly based on central government
transfers to local government and not on own resources. In Croatia, local units use,
for fi nancing their tasks and investments, tax and non-tax revenues, grants (mostly
from the state budget) and capital revenues. However, local government units can
infl uence only the tax on the use of public areas and, partially, the non-tax revenues
which are in fact revenues whose purpose is prescribed through special regulations,
while they do not have infl uence on most of the other revenues (Jurlina Alibegović,
Slijepčević and Kordej-De Villa, 2013; Slijepčević, 2014). Municipalities, towns, and
counties can independently control the rate of certain types of revenues, but within
the limits prescribed by the central government. They therefore have very limited
local autonomy and, in spite of the decentralization process, the revenue side of the
budget is still largely centralized and depends on decisions of the central govern-
ment. The limitations of such policy could be especially perceived during recession.

The total budget of 576 local and regional self-government units has been decreas-
ing since 2008. During the recession budgets of all levels of local units decreased, but
mostly those of the cities and municipalities. In 2016, budgets of cities and municipal-
ities were still below the 2008 level, while a slight improvement of counties revenues
could be observed (Figure 1). Total sub-national revenues were 7.6% lower in 2016
than in 2008.

Figure 1: Change of the sub-national government budget in the recession period (2016/2008)

Source: Author’s calculation based on the Ministry of Finance data

In this article fi scal imbalance is measured by two indicators. The fi rst one is share
of total local government units’ revenues in total expenses. The second is share of lo-
cal government units’ revenues without grants in total expenses. Figure 2 shows that
the level of fi scal imbalance continues to be higher than in the most favorable year
of the pre-recession period (2007). Local government units’ were confronted with
the highest fi scal imbalance in 2009 when total revenues without grant covered only

78% of total expenses. In 2016, local government units’ own resources were still lower
than in 2008.

Figure 2: Local government fi scal imbalance

Source: Author’s calculation based on the Ministry of Finance data

The fi nancial crisis had a signifi cant impact on the level and structure of local gov-
ernment budgets and infl uenced both sides of the budget (revenues and expenses),
but also deteriorated the level of development of local government units.

The level of local development can be measured with the offi cial local develop-
ment index according to the Regulation on the Development Index from 2010. The
local development index is calculated as a weighted average deviation from the na-
tional average of fi ve socio-economic indicators. Those indicators are: unemployment
rate (30% weight), income per capita (25% weight), local government revenues with-
out grants, shared tax revenues from central government and surtax on income tax
per capita (15% weight), population (15% weight) and educational att ainment rate
(15% weight). The local government index is calculated on the basis of data from the
last three years or from census data. According to the level of development, counties
could be distributed in the diff erent groups based on the deviation of their develop-
ment from the national average (Table 1).

Table 1: Categorization of counties according to the development index

Level of development index Number of counties in category, 2013
Less than 75% of national average 12
Between 75 and 100% of national average 3
Between 100 and 125 % of national average 3
Above 125% of national average 3

Source: Ministry of Regional Development and EU Funds (2017)

According to the NUTS system of classifi cation, Croatia consists of the two NUTS2
units: (i) Adriatic Croatia, which consists of 7 counties, and (ii) Continental Croatia,
which consists of 14 counties. The next two Figures present data about the impact
of the fi nancial crisis on local government units’ resources and local development.
Data imply that the development level in almost all local government units in Adri-
atic Croatia increased, while own resources in most of them decreased during the
recession. The situation is even worse in Continental Croatia where both the level of
development and fi scal capacity decreased during the recession in all counties, except
in Karlovac and Zagreb counties, where the development index improved.

Figure 3: Impact of the fi nancial crisis on own resources and local development

Source: Author’s calculation based on the Ministry of Finance and
Ministry of Regional Development and EU Funds (2017) data

Although one of the main goals of European regional policy is to decrease the
regional disparities, the long-term fi nancial crisis and the diff erent consequences that
it had on local government units in Croatia further widened the gap. The recession
caused deepening of the imbalance in local government fi nances, as well as widening
of the diff erence in their development dynamics (Slijepčević, 2014). Đokić, Fröhlich
and Rašić Bakarić (2015) used panel growth regressions to investigate the infl uence
of the economic crisis on regional disparities in Croatia and showed that average re-
gional disparities increased during the 2008 recession.

The literature shows that the impact of the fi nancial crisis on local government de-
pends on many factors. Roitman (2009) claims that the impact of fi nancial crises de-

pends on the level of decentralization and that it is stronger in countries with lower
level of decentralization. Davies, Kah and Woods (2010) claim that the crisis aff ected
all regions to some extent, but it depended on the structure of economic activity. Their
analysis shows that the crisis had the strongest impact on the structurally weaker re-
gions and manufacturing regions. The impact of the crisis on the regional develop-
ment policy was diff erent across European countries depending on the response of na-
tional and regional authorities to the crisis. In some countries regional policy was used
to respond to the crisis, while in others the crisis had led to cutt ing some components
of infrastructure spending, which could have a negative eff ect on local economic de-
velopment. Eyraud and Moreno Badia (2013) used econometric models on the period
1995-2011 to analyze to what extent subnational governments contributed to fi scal vul-
nerabilities in the EU15 countries. The result of their analysis showed that expenditure
decentralization fi nanced through transfers or borrowing, as it was mostly performed
in the EU15 countries, lead to weaker fi scal outcomes. They state that a number of
researches showed that local governments’ propensity to spend intergovernmental
transfers is signifi cantly larger than the propensity to spend own resources.

The economic crisis put additional pressures on local governments. European
Union countries which were harder hit by the crisis (Greece, Croatia, Italy, Latvia,
Cyprus, Portugal, Spain, Finland, Slovenia, Denmark, Estonia, Hungary and Ireland)
were mostly those who were experiencing larger decrease in investments (Committ ee
of the Regions, 2016). So the purpose of this article is also to investigate more deeply
the major problems for reviving investments in one country which was hit harder by
the crisis (Croatia) due to the fact that its counties and local units within them require
additional att ention and help for recovering. The Council of European Municipalities
and Regions (2015) warns that the European Union’s fi nancial rules (such as the rule
of the Stability and Growth Pact, the Treaty on Stability, Coordination and Gover-
nance etc.), which have been introduced or modifi ed since the beginning of the reces-
sion, strongly infl uence local governments and their budgets and thus they limit local
authorities in undertaking investments.

3. Methodology and results

3.1. Methodology and sample

The previous sections of the article showed that the long recession had a signifi -
cant impact of deepening the fi scal gap at local level. The purpose of this section is
to examine the local councilors’ opinions about the local government’s budget and
diff erent options for fi nancing projects.

Even though the process of decentralization in Croatia has begun more than 15
years ago, the degree of centralization has remained rather high. Local units perform
mostly tasks related to environmental protection, housing and community improve-
ment, recreation, culture and religion, and, to a lesser extent, other tasks (Bajo, 2014).
Counties are responsible for the functions of regional character, which include per-

forming certain tasks in the areas of education, health care, spatial planning, econom-
ic development, traffi c and transport infrastructure, public roads maintenance, plan-
ning and development of the network of educational, medical, social and cultural
institutions, issuing of building and location permits and other documents in relation
to construction in the county area excluding the area of the big city and others. Re-
gional assemblies in Croatia are each a regional self-government body which adopts
the statute, decisions and acts within the scope of the county, carries out other tasks
in accordance with the law and acts as a representative body of the citizens. The ef-
fi cient performance of its tasks encourages local and regional development. Within
their tasks regional assemblies also decide about cooperation with other local units
in the Republic of Croatia and other countries, execute the budget, regulate county
tax rates, establish public institutions, companies and other legal persons to conduct
economic, social and other operations of interest to the county.

Research on the obstacles for investments at local level is based on the survey con-
ducted among members of regional assemblies1 in Croatia during 2013. The ques-
tionnaire was developed in two steps. In the fi rst step, the larger international ques-
tionnaire for councilors at regional level was developed by the group of researchers
as part of the project ‘Policy Making at the Second Tier of Local Government in Eu-
rope. What is happening in Provinces, Counties, Départements and Landkreise in the
on-going re-scaling of statehood?2. In the second step, additional questions necessary
to get insight into their opinions about barriers to capital investments were formu-
lated and added to the survey conducted in Croatia. The survey covered all Croatian
counties. Councilors from all counties, except from the City of Zagreb, which has the
status of town and county, answered the survey. The response rate was 36.9%. The
sample characteristics are shown in Table 2.

The questionnaire consists of 7 questions in the form of a statement where the
answers were measured by 5-point Likert-scale, ranging from 1 (strongly disagree) to
5 (completely agree). The goal of these statements is to identify regional councilors’
att itudes on the main obstacles for fi nancing capital projects in Croatia and diff er-
ences in their opinions. The analysis has been conducted using SPSS and Statistica
softwares.

1 Local representative bodies are regional assemblies and the Zagreb City Assembly, as well as the
municipal and city councils (Budgetary Act, 2008, 2012 and 2015).

2 A group of scholars, including the author of this paper, has developed a comprehensive survey
consisting of around 270 questions, aimed at enabling the researchers involved in the survey to
analyze the position of the second tier of local government in European countries from a com-
parative perspective. The survey has been conducted in Belgium, Croatia, the Czech Republic,
England, France, Germany, Greece, Hungary, Italy, Norway, Poland, Romania, Spain and Swe-
den to investigate the att itudes of councillors at the second level of local government about de-
mocracy, public participation, administrative reforms etc. The original international survey has
been expanded by further questions added only to the Croatian survey in order to analyze more
deeply councillors’ att itudes towards local economic development in Croatia.

Table 2: Sample characteristics

Sample characteristics
Number of analyzed regional councilors 345
Share of analyzed counties in the total
number of counties in Croatia

95.2 %

Share of regional councilors – respondents
in the total number of regional councilors

36.9 %

Structure of regional councilors –
respondents by NUTS2

Adriatic Croatia: 31.0%
Continental Croatia: 69.0%

Structure of regional councilors –
respondents by region

Central Croatia: 24.3%
East Croatia: 28.1
South Croatia: 17.1%
Istria and Primorje: 17.4%
South Croatia: 13.0%

Gender structure of regional councilors –
respondents

Female: 23.5 %
Male: 71.3 %
Not answered: 5.2%

Structure of regional councilors –
respondents according to the education level

Elementary school: 0.9%
Secondary school: 37.4 %
University or higher education: 57.7 %
Not answered: 4.0 %

Age structure of regional councilors –
respondents

Below 40 years: 12.9%
40-49 years: 19.6%
Above 50 years: 60.8%
Not answered: 6.7%

Political orientation of regional councilors –
respondents

Left-wing: 24.9%
Center: 36.3%
Right-wing: 28.9%
Not answered: 9.9%

Structure of regional councilors –
respondents by development of their county

Development index below 75% of national average: 70.8%
Development index between 75 and 100% of national average: 5.6%
Development index between 100 and 125% of national average: 14.9%
Development index above 125 % of national average: 8.8%

Source: Author’s analysis

3.2. Survey results

The analysis of survey results consists of several steps. The fi rst step in the analysis
was to assess which are the main obstacles for fi nancing capital projects from regional
councilors’ perspective. The goal of the second step is to identify diff erences in their
opinions and att itudes with respect to the diff erent characteristics of the county (level

of development of the county, NUTS2 classifi cation, etc.) or respondent (gender, age
and others). Diff erences in regional councilors’ att itudes towards diff erent obstacles
were analyzed using the ANOVA and t-test.

Table 3: Regional councilors’ attitudes toward obstacles for investments

Obstacles for investments: Completely and strongly agree
Disagree and
fully disagree

Lack of their own revenues; 67.54% 15.79%
Purpose of using non-tax revenues
prescribed by regulations;

48.67% 21.24%

Weak tax collections; 53.67% 20.82%
Non-existence of necessary data and information
about how to apply for European Union funds;

45.56% 29.29%

Local government units’ borrowing restrictions
which are prescribed by regulations;

35.21% 35.21%

Lack of transparent and sustainable system
of getting grants from central government;

61.29% 8.50%

Large competition between local government units
when they apply for borrowing approval.

27.08% 38.10%

Source: Author’s analysis

The results show that most of the regional councilors fi nd that counties are not
able to fi nance capital projects from their own resources. The overall picture shows
that most of the local units in European Union countries have a small share of own
tax revenues in their total revenues, while the majority of resources comes as trans-
fers from the central state authorities or from revenues on which local government
has no infl uence (base or rate). Thus, it could be a large problem for local government
units in other European Union countries as well. European Commission (2013), in the
analysis of fi scal relations across government levels in the European Union during
the economic crisis, stresses that a signifi cant part of the deterioration in the fi scal
position during the crisis occurred at the local level. However, they noticed that some
local government units conducted the policy of waiting that the central governments
cover the funding gap that occurred during the crisis because of the decrease of local
government revenues. Besides increasing fi scal autonomy at the local level, the Eu-
ropean Commission (2013) fi nds that it is equally important to introduce the perfor-
mance-based transfer system.

More than 50% of regional councilors fi nd that a transparent and sustainable sys-
tem of gett ing grants from the central government is a necessary precondition for
expense planning and planning borrowing on fi nancial markets. In Croatia, a system
of fi nancing community needs has been designed in such a way that grants are used
solely as funds to support local government units with poor fi scal capacity3. In add-

3 Every year the Law on the Execution of the State Budget prescribes the criteria for allocating
grants to the local government units.

BE HR CZ FR DE GR HU IT NO PL RO ES SE

Note: BE – Belgium, HR – Croatia, CZ – Czech Republic, FR – France, DE – Germany, GR – Greece, HU – Hun-
gary, IT – Italy, NO – Norway, PL – Poland, RO – Romania, ES – Spain, SE – Sweden, UK – United Kingdom.

Figure 4: Own tax revenues of sub-central government as % of the total local government revenue

Source: Eurostat and the survey

tion, equalization grants for decentralized functions are ensured from the state bud-
get to cover public expenses in the area of primary and secondary education, social
welfare and health care4.

As shown in the previous section, the fi nancial crisis had a signifi cant impact on
local government budgets. Thus, it is not surprising that a weak tax collection rate has
been seen, by 54% of regional councilors, as a signifi cant obstacle for planning capital
projects and borrowing. Apart from the aforementioned taxes and grants, local gov-
ernment units have introduced numerous other revenues on the basis of laws and/
or decisions of representative bodies, such as charges and fees, which are contained
and stated in the non-tax revenues of their budget. The non-tax revenue is the auton-
omous revenue of sub-national government for which the purpose is set in advance.
Sub-national government units independently set the rate of the non-tax revenue and
independently carry out the collection of this revenue. The main non-tax revenue
consists of municipal utility charges and contributions. These funds are used for the

4 Grant revenues from the state budget allocated to the counties, cities and municipalities which
belong to the fi rst and second category of special state concern. Grant revenues from the state
budget allocated to the cities and municipalities for the personal income tax returns in the area
of special state concern and in the hill and mountain areas. Grant revenues from the state bud-
get allocated to the cities and municipalities for the profi t tax returns in the area of special state
concern and in the hill and mountain regions. Grant revenues from the state budget of other
public bodies allocated to the cities and municipalities for the local development projects. Grant
revenues from the state budget as equalisation fund allocated to the cities, municipalities and
counties for fi nancing decentralized functions.

construction and maintenance of the utility infrastructure. This regulated purpose of
using non-tax revenues is also seen as the large barrier for implementing capital proj-
ects in Croatia (by 49% of respondents).

General principles on local and regional government borrowing and borrowing
restrictions prescribed by the Budgetary act has been seen as the least signifi cant bar-
rier for fi nancing capital projects in Croatia. Local and regional self-government units
may incur debt in two ways: borrowing by taking a loan or issuing securities (munic-
ipal bonds). All borrowing, guarantees and obligations, cannot exceed the maximum
rate prescribed by law and presented in Table 4. A lack of transparency in fulfi lling
the criteria that must be met for gett ing the approval from the Government of the
Republic of Croatia for issuing private or public debt by local units is the problem
noticed within the literature dealing with public sector investment (e.g., Grubišić
Šeba, Jurlina Alibegović and Slijepčević, 2014). Approvals for borrowings have been
issued in the order of their submission until reaching the legally prescribed limits on
borrowing. This means that approvals are granted according to the principle of the
fi rst-comer and not based on the quality of the project and this could be a barrier for
fi nancing capital investment projects.

Table 4: Conditions for local government borrowing

Year Annual debt service limit(annual commitment) Additional restrictions

1998-2017 20% of realized revenues

Did not exist until 2002. From 2003 the boundary is prescribed on an
annual basis. From 2007 to 2012 was set at 2.3% of realized current
revenues in the previous fi scal year of all Croatian local authorities. From
2013 it was increased to 2.5% and in 2017 to 3.0% of outturn of current
revenues in the previous fi scal year of all sub-national government units.

Source: Author’s compilation according to the data published in the Offi cial Gazette

The goal of the second part of the analysis was to test the existence or non-exis-
tence of diff erences between the diff erent groups of respondents. The survey data
was analyzed using one-way analysis of variance (ANOVA) and t-statistics. One-way
ANOVA was used to test the existence of diff erences in respondents’ answers based
on their age and political orientation, as well as the regional diff erences. In additional
to the usual division of the country in two NUTS2 regions, to analyze more deeply
cross-regional diff erences, the country was divided into fi ve regions (Central, North,
South, East Croatia, and Istria and Primorje). The literature suggests that such a divi-
sion into fi ve spatial entities for the purpose of such analysis is justifi ed (Rajh, Budak
and Anić, 2016). T-test was used to test the diff erences in the average scores between
two groups of respondents (based on gender, level of development of their county
and NUTS2). ANOVA and t-test results are presented in Table 5.

Table 5: Analysis of differences

Means St.Dev. N ANOVA/t-test
Dependent variable: Lack of their own revenues
Independent variable: Age
Less than 40 years old 3.7 1.2 44

F=1.97
p=0.14

40-49 years old 3.9 1.4 67
Over 50 years old 4.1 1.2 208
Dependent variable: Lack of their own revenues
Independent variable: Development index
DI 1 4.1 1.2 261 t=1.70

p=0.09DI 2 3.8 1.3 81
Dependent variable: Purpose of using non-tax revenues prescribed by regulations
Independent variable: Region
Central Croatia 3.6 1.2 82

F=2.34
p=0.05

East Croatia 3.5 1.2 97
North Croatia 3.1 1.1 57
Istria and Primorje 3.6 1.2 60
South Croatia 3.6 1.2 43
Dependent variable: Purpose of using non-tax revenues prescribed by regulations
Independent variable: Gender
Male 3.6 1.2 244 t=1.62

p=0.10Female 3.3 1.2 80
Dependent variable: Weak tax collections
Independent variable: Development index
DI 1 3.7 1.2 260 t=0.12

p=0.12DI 2 3.4 1.2 81
Dependent variable: Weak tax collections
Independent variable: Region
Central Croatia 3.8 1.1 83

F=1.85
p=0.12

East Croatia 3.7 1.2 97
North Croatia 3.4 1.2 57
Istria and Primorje 3.6 1.3 60
South Croatia 3.3 1.2 44
Dependent variable: Lack of necessary data and information about how to apply for European Union funds
Independent variable: Political orientation
Left 3.5 1.3 84

F=8.10
p=0.00

Centre 3.0 1.2 124
Right 3.7 1.3 99
Dependent variable: Non-existence of necessary data and information about how to apply for European Union funds
Independent variable: NUTS2
Continental Croatia 3.5 1.3 234 t=1.72

p=0.08Adriatic Croatia 3.2 1.4 104
Dependent variable: Local government units borrowing restrictions which are prescribed by regulations
Independent variable: Region
Central Croatia 3.2 1.2 83

F=2.91
p=0.02

East Croatia 3.2 1.3 96
North Croatia 2.6 1.3 57
Istria and Primorje 3.3 1.4 59
South Croatia 3.0 1.3 43

Means St.Dev. N ANOVA/t-test
Dependent variable: Local government units borrowing restrictions which are prescribed by regulations
Independent variable: Age
Less than 40 years old 3.4 1.0 44

F=2.16
p=0.11

40-49 years old 3.2 1.3 67
Over 50 years old 3.0 1.3 205
Dependent variable: Lack of transparent and sustainable system of getting grants from central government
Independent variable: Region
Central Croatia 4.0 1.0 82

F=1.88
p=0.12

East Croatia 4.1 1.0 97
North Croatia 3.7 1.1 58
Istria and Primorje 3.8 1.1 60
South Croatia 3.7 1.1 44
Dependent variable: Lack of transparent and sustainable system of getting grants from central government
Independent variable: NUTS2
Continental Croatia 4.0 1.0 235 t=1.75

p=0.08Adriatic Croatia 3.7 1.1 106

Source: Author’s calculations

The results show that the lack of own revenues for fi nancing capital projects is con-
sidered a larger problem by regional councilors from less developed counties (coun-
ties whose value of development index is lower than the national average). Younger
regional councilors (less than 40 years old) fi nd the lack of local government unit
revenues to be larger barrier for capital investment than respondents older than 40
years. In addition, younger regional councilors consider that local government units’
borrowing restrictions prescribed by regulations are larger barriers for investments
than respondents older than 40 years.

The results show that regional councilors from diff erent regions have diff erent
opinions about the prescribed purpose of using non-tax revenues. Councilors from
North Croatia consider that the prescribed purpose of using non-tax revenues by reg-
ulations is a less important issue when considering the sources for fi nancing capital
investments than the other councilors.

Most of regional councilors fi nd the lack of a transparent and sustainable system
of gett ing grants from the central government as a barrier for capital investment.
However, councilors from Continental Croatia fi nd it a bigger barrier for investment.
Also, the same opinions have councilors from Central and East Croatia.

The results confi rm that weak tax collection is a bigger problem for fi nancing long-
term investments in less developed local government units. The analysis also shows
statistically signifi cant diff erences in answers of respondents from diff erent regions
about tax collection. Respondents from Central and East Croatia consider poor tax
collection as a barrier for fi nancing investments. This is in line with expectations, as
local units with lower budgets are largely dependent on grants from the central gov-
ernment. On the other side, as noticed in Jurlina Alibegović, Slijepčević and Kordej-
De Villa (2014) local government units in Croatia are highly dependent on income

tax imposed by a rate defi ned by the central government and on which they can-
not have an infl uence. From 2016, according to the Law on Financing of Local and
Regional Self-Government Units (Offi cial Gazett e 117/93, 69/97, 33/00, 73/00, 127/00,
59/01, 107/01, 117/01, 150/02, 147/03, 132/06, 73/08, 25/12, 147/14 and 100/15) income
tax revenues are distributed among local units as follows: municipalities and cities re-
ceive 60% of income tax revenues generated in their area and counties receive 16.5%.
In addition, the income tax is distributed in a manner that distinguishes whether
the municipality, city or county fi nances or not decentralized functions in selected
public services including education, health care, social welfare and fi re-fi ghting. The
maximum amount for decentralized functions amounts to 6% (1.9% for primary and
1.3% for secondary education, 0.8% for social welfare, 1% for health care and 1% for
fi re-fi ghting). Local government units can also receive equalization grant for decen-
tralized functions (165 of personal income tax) and grants for co-fi nancing projects
fi nanced from European funds (1.5% of personal income tax).

Knowledge and data exchange and the sharing of best practices have been wide-
ly recognized as the important factors for increasing the absorption capacity of EU
funds and almost half of councilors in Croatia recognized it as the problem. Right
wing regional councilors fi nd that this is a larger problem than the others. Also the
results of the survey show that it is a larger problem for councilors from Continental
than from Adriatic Croatia.

4. Conclusions

Global fi nancial crises deteriorate the fi scal position at central and local level across
European countries. Local government units’ fi scal autonomy is rather low and the
decentralization process in many countries has been stopped due to recession. Over-
lapping of spending functions across diff erent levels of government and mismatch
between local government responsibilities and allocated fi nancial resources further
aggravated the situation at local level.

The analysis in this paper aims to investigate the impact of recession on the level
of local economic development and obstacles for investments in the post-crisis peri-
od. The survey has been conducted in Croatia, the European Union country which
has been hit hard by long recession. This is the country whose local government units
were faced with similar consequences of the crisis as the other European countries.
Due to the crisis, the diff erences in local government units’ levels of development
have widened and the level of fi scal imbalance became worse than in the pre-cri-
sis period in Croatia. The fi nancial pressure on the local level of government has in-
creased. Such a situation in Croatia is similar to that in other EU countries. Pucher,
Martinos and Schausberger (2016) stress the signifi cant drop in public investments
at the local and regional level across the European Union and that both private and
public investments remained at pre-crisis levels in most of the European Union coun-
tries, including Croatia. Countries which are hit harder by the crisis are those who
were experiencing larger decrease in investments (Committ ee of the Regions, 2016).

As stressed by Council of European Municipalities and Regions (2015), underinvest-
ment in the long-term has a devastating impact on the sustainable development at the
local and regional level.

The goals of the regional policy in Europe are aimed at reducing regional dispari-
ties and this need is even more pronounced after the crisis. The budgets of many local
units are small, and the level of fi scal autonomy is such that it does not allow them to
cover the operational expenses and investments. Given that the divergence between
local government units further deepened, less developed local units are now in an
even harder position than in the pre-crisis period. The results of the survey conduct-
ed among regional councilors show that there are two major obstacles to investment:
the lack of own revenues and the lack of a transparent and sustainable system of
gett ing grants from the central government. Both of these obstacles are consequenc-
es of the way decentralization has been implemented in Croatia. Fiscal decentraliza-
tion has been implemented only partially and with the maintenance of a high level
of central government control over tax revenues. The disadvantages were especially
evident during the crisis, when the central government measures had mitigated the
decline of central government revenue. Local units, on the other hand, had very limit-
ed maneuvering space to do the same and thus local budgets shrank. Administrative
decentralization should be accompanied by fi scal decentralization that would allow
local units to realize larger own revenues. This kind of decentralization has led to the
deepening of diff erences between local units, as well as their slow recovery, as could
be seen in Figure 3.

Investigating the variance in att itudes with respect to diff erences between the sev-
eral groups of respondents enables to bett er identify the obstacles for investments
from diff erent angles. The results show that less developed local government units
have larger problems with lack of own resources and weak tax collection than others.
Also, in the policy att empt to revive investments at the local level, more focus should
be placed on introducing a more transparent and sustainable system of gett ing grants
from the central government and on increasing knowledge and exchange of data and
information about how to apply for European Union funds for fi nancing investments,
especially in local government units in Continental Croatia.

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