The outlook for the global economic situation has deteriorated severely since May 2011, when the previous Fiscal Outlook was published. The increasing severity of the debt crisis and its spread to other euro zone countries, combined with European politicians’ inability to effectively resolve this situation, have led to growing worries about the ability of the problematic countries’ governments to repay their debt and to anxiety on financial markets. The contagion is gradually spreading also to the banking sector in the euro zone. Activity on interbank markets is decreasing, and a number of banks have had their ratings downgraded due to their exposure to the sovereign bonds of problematic countries.
Anxiety on financial markets together with uncertain expectations – with consequent impact to the real economy – also have their fiscal implications. Worsened macroeconomic outlook, the need for consolidation, commitments to the European Union, and the intensive wariness of financial markets and rating agencies are reflected not only in the current sentiments in a number of advanced EU economies, but also in the spirit of this Fiscal Outlook.
As usual, the Fiscal Outlook is divided into four chapters. The first addresses macroeconomic development and fiscal policy objectives. The Czech Republic’s economy currently performs with a negative output gap and its future development will be determined by possible escalation of the global economic situation, by the recovery steps in the area of public finances both planned and realised, as well as by the impacts of structural reforms.
The second chapter summarises the forecasted development of public finances in 2011, both in the cash as well as in the accrual methodology. To represent the situation comprehensively, the chapter concludes with an international comparison. In its revenue and expenditure parameters, that part of the chapter under the cash-flow methodology is based on both the approved budgets of the general government sector and on the state budget and state funds’ budget proposal for 2012. The sub-chapter under the ESA 95 methodology is based on the October fiscal notification published by Czech Statistical Office in cooperation with the Czech Ministry of Finance and confirmed by Eurostat.
The medium-term fiscal outlook for general government (ESA 95 methodology) for 2012–2014 is discussed in the third chapter. In its resolution, as in the April update of the Convergence Programme of the Czech Republic discussed by the Parliament, the government approved the trajectory for the general government deficit as a proportion of GDP at 3.5% for 2012, 2.9% for 2013 and 1.9% for 2014. For this purpose, in addition to the newly determined medium-term expenditure framework for 2014, values for the medium-term expenditure framework for both 2012 and 2013 were tightened up.
Thus, the government is aware of its commitment not only to the Czech population, but also to the European Union, to consolidate public finances by credible and sustainable means by 2013 such that the deficit does not exceed 3% of GDP. While respecting the long-term sustainability of public finances, it plans to achieve overall balance in public finances by 2016.
The third chapter also describes in greater detail the individual discretionary measures through which the government plans to stabilise its public finances. It is evident from the consolidation mix that both the revenues and expenditures sides of the budget are emphasised.
The autumn Fiscal Outlook figures continue in the tradition of special thematic chapters. In this issue, we decided to devote a space to the topic of selected causes of the European debt crisis and its repercussions for public finances, with an emphasis on Czech public finances. The chapter begins with an economic-historical look at the origin of European monetary union, continues with the recent financial crisis and economic recession, and concludes with a brief look at the debt crisis. The economic impacts of the debt crisis on public finances are simulated in four scenarios. Although each simulated scenario differs from the base scenario to a relatively small degree, it can give the reader a perspective on more risky scenarios of future development.