Central and Eastern European (CEE) countries have a hard time achieving tax-to-GDP ratios that even keep pace with the European Union (EU) average. Recent numbers underscore this widening fear. On the positive side, Croatia presents one of the best fiscal positions, with one of the lowest budget deficits in the area. Yet, other countries are doing much worse on the Maastricht requirements, with deficits over 3% of GDP. This difference begs the question, how economically sustainable are these countries as they implement their fiscal plans in the years ahead.
Croatia’s strong fiscal position makes it the brightest European star in the regional galaxy. It is home to one of the smallest fiscal holes in Central and Eastern Europe. The country has largely managed to maintain a low and controlled fiscal deficit. This distinction leaves it on very solid ground compared to its neighbors. Romania, Poland, and Slovakia have each logged massive deficits. These deficits are well above the Maastricht floor of 3% of GDP. This in turn can raise questions about their fiscal health and their future ability to grow economically.
Tax-to-GDP Ratios in the Region
The total taxation revenues to GDP ratio in the European Union stood at 40.4% in 2024. CEE countries are still lagging behind this EU average, signaling possible future challenges with revenue generation. Denmark has the highest tax-to-GDP ratio in the EU at 45.8%, followed by Austria at about 44%. Romania and Bulgaria have tax-to-GDP ratios of only 27% and 30%. These figures are orders of magnitude lower than their peers in the EU.
Croatia ranks somewhat below the EU average in its tax-to-GDP ratio. Croatia’s evident fiscal prudence lies in its successful control of its budget deficit. Nonetheless, given Ireland’s industrial structure, its overall level of tax revenue collection remains well below the EU average. Poland, in spite of its strong economic performance, paradoxically has a tax-to-GDP ratio that hovers just below the all-EU average. This alarming trend points to a regional inefficiency in the collection of property tax, all things considered.
Implications of Low Tax Revenues
In CEE countries, the effects of low tax revenues are deep-cutting. With Romania exhibiting one of the highest VAT gaps in Europe, it faces significant challenges in enhancing its tax collection strategy. This gap indicates potential inefficiencies in the VAT system. In the process, it creates the opportunity of revenue loss that could be used to improve public services and infrastructure repair and construction.
Countries such as Slovakia and Poland need to reduce their budget deficits and at the same time bail out their inefficient tax collection systems. If they don’t hold to these standards, their stated economic growth may be in jeopardy. This would further invite more aggressive oversight from EU institutions regarding their compliance with fiscal rules. Ongoing weak tax revenues will continue to limit these countries’ investments in critical areas. This applies to prosperity across the board, from education to healthcare to technological innovation.
Moving Forward
Amid CEE countries’ fiscal tightrope walks, this continuing call for comprehensive reforms in tax policy is a welcome sign of the times. From developing to advanced economies, countries need to work on boosting tax compliance and expanding their tax bases to build more sustainable economic growth. Croatia’s example should be an aspiration for other countries that are becoming more fiscally responsible.