Fiscal Outlook of the Czech Republic (November 2016)
In the last year’s Fiscal Outlook we wrote about two exceptional events in the fiscal area – a very strong investment growth and negative yields on government bonds. Achieving negative interest on government bonds also continues in 2016. A positive development of general government sector performance started which ended with a balance of −0.6 % of GDP in 2015, which is the best result in the history of the CR in relative terms. The MF CR’s current estimate of the general government balance for this year is −0.2 % of GDP.
Medium-term and long-term government bonds with negative yields were placed on the primary market on 28 August 2015 for the first time. Since then, twenty more auctions of medium-term and long-term government bonds with negative yields took place on the primary market. The CR has been selling state bonds with negative yields which resulted into net additional revenues to the state budget of approximately CZK 1 billion between September 2015 and October 2016. Late in October 2016, government bonds with a residual maturity of 2 years and 9 months in total nominal value of CZK 6.2 billion were sold for a historically lowest yield to maturity of −0.608% p. a. Treasury bills have been traded continuously with a negative yield to maturity since 2015. At the same time a partial substitution of state treasury bills outstanding for zero-coupon medium-term and long-term government bonds takes place with a positive impact on refinance risk, as they extend average time to maturity of the debt portfolio. The MF CR also takes advantage of favourable market conditions and issues medium-term and long-term government bonds with relatively longer time to maturity at low interest rates. Interest revenues for state bonds with time to maturity of 10 years traded on the secondary market declined to a monthly average of 0.25% p. a. in September 2016.
In terms of investment activity, there has been a YoY slump. However, this year’s decreasing government investment had long been predicted based on the closure of the 2007–2013 programming period. Last year’s strong economic growth was significantly supported by faster implementation of European funds. The decrease in investments between 2015 and 2016 is therefore completely natural. The previous perspective was being closed in the first half of 2016, and operational programmes of the 2014–2020 perspective are starting up now. We therefore expect that investment activity will speed up from 2017.
In the institutional area of public finance, the CR has been criticised for a weak budgetary framework for several years although it has always met its obligations in terms of general government sector performance over the last years. Since the termination of the excessive deficit procedure with the CR (in June 2014), the medium-term budgetary objective has been met every year. A set of proposals for regulations on budgetary responsibility (a draft constitutional law on fiscal responsibility, a draft law on rules for fiscal responsibility and a draft law amending certain laws in connection with adoption of fiscal responsibility regulations) was approved by the Government already in February 2015, and after then it was under consideration in the Chamber of Deputies of the Parliament of the CR until October 2016. The first reading took place already in spring 2015 but the bills passed the second reading almost a year and a half later, in September 2016. After the first reading, a party in government proposed that the measures to strengthen fiscal responsibility be not addressed at the level of a constitutional law but only by means of an ordinary law. A motion to amend was filed in this sense, which was eventually approved by the Chamber of Deputies in the third reading on 19 October 2016, because a constitutional law on fiscal responsibility had not been approved. The Act on Fiscal Responsibility Rules, which introduces, among other things, new fiscal rules and independent Fiscal Council in the CR’s budgeting – see e.g. the Convergence Programme (MF CR, 2016a), takes effect from 1 January 2017, except measures applicable to local governments with effect from 1 January 2018.
The submitted Fiscal Outlook is based on the Macroeconomic Forecast of November 2016 of the Ministry of Finance (MF CR, 2016b) and the draft state budget and state funds budgets for 2017, including the draft medium-term budgetary outlook until 2019. The budgetary documents reflect the coalition cabinet programme, and everything is subordinated to the target to keep the general government structural balance above medium-term budgetary objective defined by the EU regulations. For 2017, we expect the total balance of the general government sector to be −0.2 % of GDP and this indicator should be gradually improving with stable economic growth and decreasing structural balance to surplus performance.
The thematic chapter in this issue is dedicated to long-term projections of health-care expenditure with a projection horizon up to 2060. We focused on projections of expenditures on pensions several times in the past. This time we introduce analysis of another component of long-term expenditure. This expenditure is used as one of the indicators for the long-term sustainability assessment. The results of our projections clearly show that the negative impact of demographics on health-care expenditure may be significantly offset by greater emphasis on prevention. The Fiscal Outlook traditionally includes a large table appendix, freely downloadable in the full numerical series on the website of the MF CR.