Convergence Programme of the Czech Republic (April 2015)

Dept 37 - Economic Policy Department
Dept 37 - Economic Policy Department

Published

  • Convergence Programme

ISSN 1804‐798X

The document specifies the basic aggregate fiscal data and the forthcoming most important measures in the form of medium-term budgetary impacts of the government's fiscal strategy.

Convergence Programme of the Czech Republic (April 2015)

This submitted update of the Convergence Programme of the Czech Republic (CP) for the period 2015–2018 was approved by the Government of the Czech Republic on 29 April 2015 and is consistent with the National Reform Programme of the Czech Republic approved by the Government of the Czech Republic on the same day. The CP is fully consistent with the rules on the content and format of stability and convergence programmes (EFC, 2012). In April 2015, the CP was also presented and discussed with the relevant committees of the Chamber of Deputies and the Senate of the Czech Republic.

This year’s CP update is the second in a row describing the aims of the current coalition government, which was formed following the early election in 2013. Based on the last year’s CP, the EU Council decided to abrogate the excessive deficit procedure, explaining that the excessive deficit had been removed in the Czech Republic in a permanent and credible manner (EU Council, 2014a). The European Commission assessed the CP both with regard to its importance for sustainable fiscal and social and economic policies in the Czech Republic and to its compliance with EU rules. On this basis, the EU Council expressed its viewpoint in the following recommendations: “Following the correction of the excessive deficit, preserve a sound fiscal position in 2014. Significantly strengthen the budgetary strategy in 2015 to ensure that the medium-term objective is achieved and remain at the medium-term objective thereafter. Prioritise growth-enhancing expenditure to support the recovery and improve growth prospects. Adopt and implement measures to strengthen the fiscal framework, and in particular establish an independent fiscal institution to monitor fiscal policies, introduce fiscal rules for local and regional governments and improve coordination between all layers of government.” (EU Council, 2014b) The individual elements of this Recommendation are discussed in the respective chapters of the CP.

The Convergence Programme is divided into seven chapters. Chapter 1 sets out the economic and political intentions and targets of the Government of the Czech Republic in the spheres of fiscal policy and basic elements of structural reforms, as well as the description of the monetary policy framework.

The macroeconomic scenario of the CP is detailed in Chapter 2. In 2014, the Czech economy continued the recovery started in the first half of 2013, and real GDP increased by 2.0% for the whole year. The economy is being stimulated by several one-off factors in 2015: by the positive supply shock resulting from low oil prices and by fiscal stimulation, partially reflecting the effort to draw down maximum possible resources from the EU funds of the 2007–2013 financial perspective. In 2015, we expect a quicker growth of real GDP of 2.7%. The year 2015 should be characterised by a very low inflation, a reduction in the unemployment rate, employment growth and closing the output gap.

The economic policy in 2014 and fiscal strategy of the government in future years are discussed in Chapter 3. This Chapter is based on the results of the Deficit and Debt Notifications approved by Eurostat on 21 April 2015, and on the now more precise economic-policy intentions of the Government (closing date for data sources was 29 April 2015). For 2014, a government sector deficit of 2.0% of GDP and government debt of 42.6% of GDP were notified. The forecast estimates a government sector deficit of 1.9% of GDP in 2015 with a subsequent gradual decrease to 0.6% in 2018. The structural balance should develop positively in the same period, from −1.7% of GDP in 2015 to −1.1% of GDP in 2018, i.e. to a level close to the medium-term budgetary objective of the Czech Republic. General government debt as a percentage of GDP culminated at 45.0% in 2013, for 2015 we expect it to decrease to 40.9% of GDP, i.e. by more than 4 pp compared to 2013. The primary reason is the integration of liquidity from the state treasury system. In 2018, government debt should fluctuate around the level of 40% of GDP.

Macroeconomic and fiscal scenarios are verified in Chapter 4 by comparing them with the forecasts of other public and independent private institutions. Moreover, the scenario is supplemented with a sensitivity analysis, in which the impacts of alternative scenarios of economic development are simulated based on different interest rates, lower economic growth of the main economic partners in the EU and a higher price of oil. An equally important part of the chapter is also the analysis of the variances between the current scenario and the scenario from the last update of the CP.

In Chapter 5, aspects of long-term sustainability are monitored. The chapter provides information on the pension scheme and the public health insurance scheme, including reform measures. In terms of long-term sustainability, the update of pension projections in the Ageing Working Group of the Economic Policy Committee (EPC/AWG) of autumn 2014 is also present¬ed. This chapter also examines the size and structure of guarantees of the general government sector.

Chapter 6 addresses the qualitative side of government sector revenues and expenditure. At present, priority is given to a description of planned changes in the tax system which should result in preventing tax evasion and improving tax collection.
The last section, Chapter 7, deals with already implemented or planned changes in the institutional environment, the transparency of public finances and strengthening their efficiency. Special emphasis is paid to issues around strengthening the fiscal and budgetary framework.

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