Microsimulation model of taxes and social benefits (MSMTBs) calculates for each individual person from a set of microdata the corresponding amounts of taxes payable and social benefits receivable. MSMTBs allow ex ante review of the effects of changes in tax-benefit system. Therefore, they are particularly valuable in the reform analysis and planning. Unlike in other EU countries, where the use of MSMTBs is widespread, the development of MSMTBs in Croatia is still in its infancy. Therefore, the purpose of this project is to apply microsimulation models of Croatian taxes and benefits in public policy and academic analysis. By application of MSMTBs in analysing contemporary economic and policy problems, the project will demonstrate the usefulness of these models, and attract the attention of public administration leaders (PALs) and researchers in Croatia. The research project has three objectives: (1) Develop the microsimulation model of Croatian taxes and benefits – miCROmod: miCROmod will be a conventional static arithmetic MSMTB that simulates social security contributions, personal income tax, guaranteed minimum income, child benefit, parental benefits and unemployment benefit. miCROmod will also include: (a) a local government supplement, modelling taxes and benefits in the City of Zagreb and (b) a behavioural supplement, simulating the impact of changes of tax-benefit instruments on the labour supply and gross wages. (2) Employ miCROmod and EUROMOD in the analysis of tax-benefit reform scenarios: miCROmod and EUROMOD (a comprehensive MSMTB for the EU) will then be used in the the analysis of the effect of a number of tax-benefit reforms on income inequality, poverty rates and incentives to work. These reforms cover: (a) Child benefits, (b) Personal income tax (c) In-work policies, and (d) Local social benefits. (3) Present the performance of miCROmod and EUROMOD to PALs and researchers.

Economic efficiency is a traditional and still dominant topic of economic research. However, in the last forty years, and especially in recent times, economists increasingly emphasise the importance of studying the issues of equity in the distribution of income. It has become evident that economic analysis is not comprehensive enough if it does not deal with both economic efficiency and equity. Welfare economics conceptualises social welfare as a function that embodies both the level of total income and its distribution. Therefore, maximization of this function implies achieving a degree of compromise between economic efficiency and equity in the distribution of income.

Fiscal devaluation can be described as a budget-neutral mix of fiscal policies which should mimic the effects of nominal exchange rate devaluation, i.e. bring improvements in country’s external competitiveness and increase net exports. After the outset of the recent economic crisis, fiscal devaluations have become priority topic in economic policy discussions in Europe. These discussions are mostly related to European Monetary Union member states, but the topic is highly relevant for a broader set of countries, including those which may be outside currency unions, but pursue fixed exchange rate policy (e.g. Croatia). There are, however, significant gaps in the scientific research of fiscal devaluations. The largest part of related contributions consists of simulation studies, whose results are driven by model specifications and calibrations. The econometric studies, on the other hand, which could provide answers on the effectiveness and channels of fiscal devaluations in practice, remain very scarce. The proposed research aims to fill some of the gaps in the literature, by providing new econometric evidence in an improved econometric approach to testing the hypothesis of the fiscal devaluation effectiveness, and by examining the relevance of some of the specific channels through which fiscal devaluations should work. The proposed research is divided into four segments: 1) Testing the effectiveness of fiscal devaluations in the EU using bilateral trade data; 2) Testing the impact of fiscal devaluation on real exchange rates; 3) Testing whether the effects of fiscal devaluations vary for industries with different labor intensity in production; 4) Testing the impact of cuts in social security contributions (and overall tax burden on labor) on wages. Our sample will include all EU countries for which data is available. We shall also consider the period of the recent crisis during which many EU countries implemented reforms of taxation systems.

In the past years the social policy systems in the broader sense (pension and health insurance, employment and unemployment protection as well as social care), together with expenditures for education, have been a pressure on the expenditure side of national budgets in many current and future EU member states, as well as in Croatia. At the same time, a significant part of population is exposed to the increased danger from poverty and/or unsatisfying approach to the quality of public services. The project deals with the current condition, similarities and differences of social policy in the EU and Croatia. The special attention is given to the condition and difficulties, advantages and disadvantages of some solutions as well as possibilities of implementation of good practices. Despite many differences and national specificities, general preconditions of economic development and efficient social policy are similar in the EU and in Croatia: insufficient number of work posts, relatively high unemployment, aging population and hence high expenditures for pension and health system with retained or reduced number of insured persons. Croatia provides relatively high amounts for various rights in the social system and that leads to insufficient amounts of funds for economic development programs. Expenditures for social needs in Croatia are high, even compared to other transitional countries and only recently more serious activities have been taken to reduce them. The reduction has been followed by increased participation of private sector in providing services. Although the social system as a whole can be considered relatively efficient and well directed, there is still room for its improvement. The project takes account of the condition and suggests measures for improvement in Croatian social policy system. Based on that goal of research, a hypothesis of the research has been set: Constant improvements of social policy measures make possible the increase of its efficiency and still provide long-term financial sustainability of the system as a whole. The results of the research bring new scientific findings on key determinants of efficient and financially sustainable social policy. Through the project we learn about the level of convergence or divergence in social policy of Croatia with the EU systems. Also, EU demands constant analyses and strategic documents which make the findings of this project useful in creating and follow up of those documents.

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