Fiscal Outlook of the Czech Republic (May 2012)
There is no doubt that developed economies need to consolidate their public finances. The extent of consolidation, however, along with its speed and timing, is subject to debate and disagreements at the academic level as well as among policy-makers.
The pace of deficit reduction should be determined not only by the size of the imbalance in public finances, but also by current and expected economic output in relation to its potential as well as by the state of other economic imbalances. At the same time, such characteristics as an economy’s size, degree of openness, and importance on international financial markets also should be taken into account. The mix of monetary and fiscal policy is no less important. After all, an environment without effective monetary policy cannot sufficiently accommodate fiscal shocks. The external environment, its economic performance, as well as macroeconomic and financial problems also play important roles. Sentiment on financial markets is another specific aspect. The external environment subsequently affects international institutions and such supranational organisations as the European Union. Its members, moreover, are bound by the Stability and Growth Pact, which penalises excessive deficits and debts as well as deviations from the path toward the medium-term budgetary objective. Last but not least, the anticipated extent of borrowing needs and the domestic market’s capacity to absorb bond issues are also crucial.
Regardless of the aforementioned, it applies that each consolidation strategy should be executed in a transparent and credible manner while using non-distorting instruments with a lower multiplier effect. For current and especially future economic growth, a strategy would ideally be conducted in such way that would contribute to resolving the structural inadequacies in the given economy.
Finding an optimal economic–political mixture, even while applying it in real time, is de facto impossible. Therefore, every government, according to its best conviction, chooses such measures as minimise the negative trade-off between economic growth in the short term and the effects of fiscal consolidation.
On 25 April 2012, the Czech government approved the update of the Convergence Programme of the Czech Republic for 2012–2015 wherein it presented the fiscal policy intentions, realised and planned steps for recovery in the area of public finances, and impacts of structural reforms. It is evident from the consolidation mix that emphasis is given to both sides of the budget. The aim of those measures is a clear, credible strategy for completing the excessive deficit procedure in 2013, achieving the medium-term structural deficit target of 1% of gross domestic product in 2015, and fully balancing the overall general government balance in 2016.
This Fiscal Outlook of the Czech Republic for May is conceived as a supplement to the Convergence Programme. The first chapter outlines the expected macroeconomic development and fiscal consolidation trajectory along with a summary of measures that should ensure it. The data and information in this section are based on the aforementioned Convergence Programme and the Macroeconomic Forecast of the Ministry of Finance of the Czech Republic from April 2012. The two following chapters expand upon the Convergence Programme with a review of the budgetary outcome based on cash-flow methodology, a more detailed analysis of general government finances in the accrual methodology for the previous and current year, and an international comparison. As usual, the Fiscal Outlook also includes an extensive annex of tables, which is also available in MS Excel format.