Fiscal Outlook of the Czech Republic (May 2015)

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

Published

  • Fiscal Outlook
  • Macroeconomic Forecast

ISSN 1804‐7998

In spite of the economic conditions prevalent at the time, in 2010−2013 the government endeavoured to consolidate public budgets. During this period of pro-cyclical fiscal policy, the general government sector deficit was reduced and the excessive deficit procedure was abrogated on 20 June 2014, but at the expense of deeper recession. At the end of 2013, there was an about-turn in the direction of fiscal policy in order to primarily support economic growth. However, the priority of the Government of the Czech Republic is also greater effectiveness both on the revenue and expenditure side. On the revenue side, crucial measures are aimed at improving tax collection, preventing tax evasion and restructuring the financial and customs administration. The main measures in combatting tax evasion should include the fiscalisation of cash payments, electronic VAT reporting and the potential extension of the reverse charge mechanism. On the side of operating expenses, there should be savings mainly due to the central purchasing system and greater transparency. The MoF has started publishing contracts and invoices in order to enable public control over the spending of funds generated by tax payers. On the other hand, the government is supporting demand both through higher consumption expenditure (higher wage bill and the extraordinary pension indexation in 2015) and higher investment expenditure (infrastructure, R&D, etc.). This is contributing to the closure of the output gap, which should occur in 2015. In 2016–2018, the positive output gap should gradually increase. We expect an increase in the cyclical component of the balance from −0.4% of GDP in 2014 to 0.5% of GDP in 2018. The structural balance reached −1.4% of GDP in 2014 and we forecast it to deteriorate to −1.7% of GDP in 2015. We expect fiscal effort to be 0.2 pp annually in the years of the outlook, which implies a structural balance of −1.1% of GDP in 2018. The Czech Republic should practically reach its medium-term budgetary objective, in line with its obligations towards the EU.

On 29 April 2015, the Government of the Czech Republic approved the update of the Convergence Programme of the Czech Republic (MF CR, 2015a), which sets out its macroeconomic policy until 2018 with emphasis on fiscal issues. On the same day, the government also approved the National Programme of Reforms, which describes a number of planned structural reforms. As usual, the May Fiscal Outlook of the Czech Republic is understood as a supplement to the Convergence Programme of the Czech Republic, from which it draws data and information and develops them further. Therefore, the Fiscal Outlook is based on the April Macroeconomic Forecast of the Ministry of Finance, further on the April Government Deficit and Debt Notification of the Czech Statistical Office published by Eurostat as of 21 April 2015 and, for international comparison, on the Government Deficit and Debt Notifications of other EU Member States released by Eurostat (the cut-off date as of 21 April 2015) as well as the 10-year government bond yields published by the European Central Bank on 13 May 2015.

The first chapter of the Fiscal Outlook of the Czech Republic briefly outlines the expected macroeconomic and fiscal development. We estimate a real GDP growth rate of 2.7% in 2015. However, accelerated growth is primarily due to one-off factors, such as the low price of crude oil and a positive fiscal impulse, which includes the uptake from EU funds from the programming period 2007−2013. The uptake of these funds accelerated considerably in 2014, and a similar development is also expected in 2015. After these impacts disappear, the growth rate will slow to 2.3% in 2017 and 2018. Growth should mainly be driven by domestic demand, while we expect the contribution of foreign trade to be negligible. The government sector balance should decrease to −0.6% of GDP by 2018. Government debt as a percentage of GDP should have decreasing tendency throughout the horizon and end up at 40.2% of GDP. Fiscal policy has been perceived as credible for a long time, which is confirmed, for example, by 10-year government bond yields, where the Czech Republic has been achieving historic lows and has been for some time now among the quarter of EU countries with the lowest bond yields. Thanks to this, we expect that debt-management expenditure will decrease to 1.1% of GDP in the years of the outlook.

The second chapter deals in detail with revenues and expenditures of the general government sector in 2014 and 2015, their autonomous development, discretionary changes and the deficit and debt structure. In its thematic box, the chapter also examines the reclassification of entities into the general government sector. In 2015, the following financial institutions were included in this sector based on Eurostat recommendation: the Czech-Moravian Guarantee and Development Bank, the Export Guarantee and Insurance Corporation and the Deposit Insurance Fund.

The last chapter extends the purview of the Convergence Programme over the performance of a part of the government sector with the use of cash flow methodology. As usual, the Fiscal Outlook includes an extensive table annex, which is also available in electronic format on the website of the Ministry of Finance.

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