Fiscal Outlook of the Czech Republic (November 2015)
The year 2015 brought several exceptional events in the sphere of fiscal policy, in particular in the sphere of investment activity and government bond yields. The amount of investment in the general government sector has been the highest at least since 1995. In addition, even when taking the leasing of the JAS-39 Gripen aircrafts into account, the investment value exceeds the highest pre-crisis level by more than CZK 10 billion. It has been considerably supported by the quicker utilisation of European funds.
The second phenomenon is the record-breaking low government bond yields. On 28 August 2015, medium-term bonds with negative yields (−0.001%) in the value of nearly CZK 4.2 billion were sold on the primary market for the first time in the history of the Czech Republic. Due to this success, other bonds were issued, this time with a maturity period in 2017 and with zero coupon. In their sale on 11 September 2015, a yield of −0.212% with a volume of CZK 16.6 billion was achieved, and also in the following tranche on 14 October 2015 bonds with a yield of −0.323% in the volume of CZK 9.2 billion were issued. Last but not least, in the auction on 11 November 2015 medium- and long-term government bonds were placed in the total nominal value of CZK 11.0 billion with an average yield of –0.332% p.a. Treasury bills have been traded continually with negative interest rate on the primary market since September 2015. On the secondary market, the average monthly rates of medium-term bonds with a maturity of 2 years became negative figures in April 2015, and since August 2015 they have been maintained as negative (in October 2015, it was −0.28%). In October 2015, a negative average monthly rate was also recorded on the secondary market for bonds with a residual maturity of 5 years (−0.05%).
From the perspective of the future development of fiscal policy, the topic being currently discussed is the amount of the state budget deficit in 2016. Already during its discussions on the Convergence Programme, the coalition agreed upon the deficit of CZK 70 billion, which has been maintained. When taking account of the economic growth in 2015, the amount of the state budget deficit proposed in 2015 is considered to be less ambitious. This objection is not quite justifiable. From the perspective of the macroeconomic development, the year 2015 surprised considerably (we expect real economic growth of 4.5%), nevertheless it is necessary to understand it as exceptional due to several key factors. It mainly includes a fiscal impulse driven by massive investments co-financed from the programming period 2007–2013, and further low price of crude oil. In the years to come, we expect the GDP growth to slow gradually to 2.7% and 2.4%. The directly proportional impact of real GDP growth on the growth of tax revenues is relevant only in the event of zero price growth, an unchanging income structure and GDP utilisation structure, not to mention the stability of tax rates or legislative bases for tax payment. Therefore, real GDP growth is only a rather indicative indicator for an increase in tax revenues. Instead of that, the nominal development of macroeconomic bases of individual taxes is more appropriate, in particular household consumption and wage bill development. In the course of 2015, the estimates of these quantities were changing much less in the Ministry of Finance forecasts for 2015 and 2016 than GDP real growth. Rising estimates of real growth in 2015 are at the expense of strong investment activity, which is not, however, primarily tax effective.
For the whole general government sector, the Czech Republic received a recommendation from the EU to ensure fiscal effort (i.e. a change in the structural balance) of 0.5% of GDP in 2016. According to current calculations, the consolidation in this amount would require additional savings of approx. CZK 10 billion, which is not achievable due to current problems (in particular risks coming from the external environment, including the migration crisis). On the other hand, the government is trying in its strategy, in particular due to measures aimed at better tax collection, to pursue an anti-cyclical fiscal policy, and from 2016 structural balance should decrease in each year of the outlook.
The submitted Fiscal Outlook is based on the Macroeconomic Forecast of October 2015 of the Ministry of Finance and the draft state budget and state funds budgets for 2016, including the draft medium-term outlook until 2018. The budgetary documents reflect the coalition cabinet programme, in particular pro-growth orientation of the economic policy. Nevertheless, everything is subordinated to the target to keep the general government balance safely above the limit value of −3% of GDP. For 2016, we estimate the total balance of the general government sector to be −1.2% of GDP and this indicator should gradually be improving with economic growth and decreasing structural balance.
The current Fiscal Outlook traditionally includes a thematic chapter. This edition includes two thematic chapters. The first of themes deals with the Ministry of Finance of the Czech Republic approach to the calculation of the impact of fiscal policy on real economy, the so-called fiscal impulse. The calculation of fiscal impulse as the Ministry of Finance original approach is focused on using the so-called input approach, the issues of multipliers and quantified impact on the GDP itself are addressed using studies calculating the size of fiscal policy multipliers for the Czech Republic. The second thematic group describes the current version of government bills on budgetary responsibility. Thereby we are mainly accommodating the demand of the professional public often requiring this information. However, it is necessary to emphasise that its current form can be, of course, changed after it is discussed in Parliament.
The Fiscal Outlook traditionally, includes a large table appendix, freely downloadable in the full numerical series on the website of the Ministry of Finance.