Fiscal Outlook of the Czech Republic (November 2012)
In the previous issue of the Fiscal Outlook of the Czech Republic, we asserted that “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”. This by now generally accepted fact was taken into account by the Government of the Czech Republic in July when formulating its fiscal strategy. It is not a new strategy, but an updated one, as a number of reform measures and objectives, as well as the Government’s intention to continue consolidating public finances, remain the same. On the other hand, the element of short-term and medium-term economic development is now also given emphasis.
This Fiscal Outlook contains a considerable amount of unique information. In addition to an updated estimate of the results for general government finances for 2012, and it analyses in detail changes in the revenues and expenditures sides of public budgets. The issues of suspended and non-refunded European funds occupy a specific place in the document, where we demonstrate the impacts on the cash and accrual balances of the government sector in the short and medium-term horizon. Updated forecast of the general government balance (ESA95 methodology) estimates the deficit for year 2012 to 5.0% of GDP. Compared to the October notifications of government deficit and debt, when we estimated a deficit of 3.2% of GDP, the deficit has increased, firstly by CZK 11.2 billion (0.3% of GDP) due to the issues of suspended and non-refunded European funds in selected operational programs; and secondly by CZK 59.0 billion (1.5% GDP) due to the inclusion of the full amount of financial compensation to churches and religious societies (this is just a methodological adjustment of accrual accounting system, not the actual cash payment).
Data for the Fiscal Outlook were assembled on the basis of the updated Macroeconomic Forecast of the Ministry of Finance from October, the new 2013 state budget proposal, and the new medium-term outlook for 2014 and 2015. It therefore reflects the latest economic–political circumstances, which are projected into the aggregates of the development in public sector finances.
Among the government’s fiscal objectives, we would like to highlight that of achieving such a balance in 2013, which would clearly close the excessive deficit procedure maintained in the Czech Republic since 2009 (i.e. to achieve and maintain the general government deficit below 3% of GDP).
The updated Convergence Programme of the Czech Republic for 2012–2015 approved by the Government in April presented the recovery steps taken and planned in the public finances area, as well as the impacts of structural reforms. The consolidation mix clearly indicated that the two sides of the budget are connected. The Fiscal Outlook continues in this spirit and presents a range of consolidating and other discretionary measures, reaching almost 2% of GDP cumulatively for the years of the outlook.
The implications of a slightly relaxed consolidation strategy are most apparent at the end of the forecast horizon. In comparison with the April Convergence Programme of the Czech Republic, the Fiscal Outlook also differs in terms of its macroeconomic scope. General government deficits are therefore more than 1 p.p. higher on average in 2014 and 2015.
In an international comparison (to which we dedicated more space this time), the Czech Republic is among the more responsible half of European Union countries in the deficit and debt area. The comparison is now extended to include the development of state bond yields and the amount and structure of taxation.
Long-term projections upon which the Ministry of Finance collaborates with the European Commission also have their specific place in the Fiscal Outlook. The projections contain adjustments of the previous year’s parametric system, which are crucial for the pay-as-you-go pension system. Results indicate that spending on old-age pensions from public funds (under given assumptions) will rise from 7.2% of GDP in 2010 to 9.5% of GDP in 2060.
As is usual in the autumn issue, the final chapter is dedicated to a special topic closely related to Czech public finance. This time, we have focused on calculations of various scenarios for impacts from introducing the voluntary fund-based savings pillar (opt-out) on the long-term sustainability of the pension system, and, in turn, on public finances. These are simulations of more or less probable variants. The results indicate that, due to the system’s voluntariness and parameters, the impact is rather negative, though not so very significant. Moreover, savings in expenditures will come in longer horizon together with retiring of people participating in opt-out and thus differences between scenario without opt-out will shrink. The advantage of the pension reform stemming from the possibility to diversify the resources for old-age pensions certainly markedly outweighs this negative factor.
As usual, the Fiscal Outlook also includes an extensive annex of tables.