The climate-fiscal timebomb: Croatia

Fiscal outlook

Croatia recorded a 1.9% deficit and a debt-to-GDP ratio of 57.4% in 2024.

Deficit measures the level of borrowing in a given year. Debt-to-GDP compares the total public debt to the size of the economy. Both are currently used to determine how much borrowing a member state is allowed to undertake. However, neither measure in itself determines a government’s capacity to sustain higher levels of public investment. Fiscal sustainability depends on growth, the multiplier effects of investment, interest rates, inflation, the structure of the economy and external risks such as climate change. NEF advocates moving away from strict numerical debt targets.

Rising climate costs

Croatia is warming at a rate 20% faster than the global average, yet it ranks second lowest within the EU in terms of climate change preparedness. This high level of vulnerability is reflected in substantial economic losses. The estimated damage from weather and climate extremes between 1980 and 2023 is around €154m, exceeding 0.25% of GDP annually. Yet only 2% of the damage is covered. The sectors that are most critical for the country’s GDP and employment, such as tourism, construction, and healthcare, are also the most vulnerable to the effects of climate change. For instance, tourism accounts for around 20% of Croatia’s GDP, which is highly sensitive to changing weather patterns, with the country experiencing over 1,000 more wildfires in 2024 compared to the previous year.

What NEF’s modelling shows

Organisation for Economic Co-operation and Development (OECD) projections show Croatia’s GDP declining by 13% by 2050 and 18% by 2070 under current policies. Our modelling shows the following:

• Under current policies (BAU – business as usual), Croatia’s debt is 60 pps higher than the baseline in 2050 and 205 pps higher in 2070.

• With early EU mitigation and sufficient adaptation spending, debt is 101 pps higher in 2050 and 193 pps in 2070.

• Delayed EU investments and insufficient adaptation results in higher debt levels of 73 pps in 2050 and 142 pps in 2070.

• EU early action combined with global cooperation results in 26 pps higher debt levels than the climate-agnostic baseline in 2050 and 33 pps higher levels in 2070.

• Progressive taxation, such as a wealth tax, combined with EU early action would increase debt by 79 pps in 2050 and by 146 pps in 2070 compared to the climate-agnostic baseline.

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