Convergence Programme of the Czech Republic (April 2018)

ISSN 1804‐798X

The document specifies the basic aggregate fiscal data and the forthcoming most important measures in the form of medium-term budgetary impacts of the government's fiscal strategy.

Convergence Programme of the Czech Republic (April 2018)

The public finances have been consolidating since the great recession in 2009, culminating in 2017 with the best result in the history of the Czech Republic. The general government surplus of 1.6% of GDP was also reflected in the record high of the structural balance of 1.1% of GDP. In addition, for the first time, all three parts of the general government sector – not only local governments and social security funds, but also for the first time the central government – contributed to the surplus. The state budget, which posted a surplus of 0.2% of GDP in accrual terms for the first time, also contributed significantly. The prudent and sustainable management of the general government sector should be ensured by the fiscal responsibility laws approved in 2017.

The Convergence Programme of the Czech Republic for 2018–2021, submitted in accordance with Article 121 of the Treaty on the Functioning of the European Union and the applicable version of Council Regulation (EC) No. 1466/97, was approved by the Government of the Czech Republic on 30 April 2018 and is consistent with the National Reform Programme of the Czech Republic. The Convergence Programme has been prepared in line with the opinion of the Council’s Economic and Financial Committee on the contents and format of stability and convergence programmes. The document was also presented, discussed and acknowledged in the relevant committees of the Chamber of Deputies and the Senate of the Parliament of the Czech Republic in April 2018. There have also been discussions with social partners. The opinion of the Council of the European Union on the Convergence Programme of the Czech Republic of April 2017 was acknowledged in June 2017 by a resolution of the competent Committee on European Affairs of the Chamber of Deputies, and in July 2017, it was discussed in the Senate which recommended the Government to take Council’s conclusions into account.

The Convergence Programme of the Czech Republic is divided into seven interconnected chapters. The first chapter presents the intentions and objectives of the Government’s fiscal policy, the basic elements of structural policies and the monetary policy framework of the Czech National Bank, whose implications for the macroeconomic and fiscal scenarios are covered in the following chapters.

The macroeconomic scenario in Chapter 2 is based on the Macroeconomic Forecast of the Ministry of Finance published in April. The favourable developments of our main trading partners as well as the positive situation within the Czech economy create the conditions for continued economic expansion in the Czech Republic. Gross domestic product growth reached 4.4% in 2017; for the years 2018 and 2019 we predict the economy to grow by 3.6% and 3.3%, respectively. The labour market situation, which shows symptoms of overheating, can be considered as the main barrier for a higher growth. We believe that the unemployment rate has already reached its bottom, and in the forecast horizon it should be around 2.3%. The inflation rate should remain close to the 2% inflation target of the Czech National Bank, despite the current inflationary trend in the national economy. In terms of external balance, positive aspects include the development of the current account balance, which should reach a surplus of 0.4% of GDP this year. It should remain positive until the end of the prediction horizon.

General government sector performance in 2017, forecast for 2018 as well as the Government’s fiscal strategy for the years ahead are covered in Chapter 3. Its content is based on the results of the government deficit and debt notification, confirmed by Eurostat on 23 April 2018, and on the economic policy plans as of 4 April 2018 approved by the Government. For 2018, we anticipate a surplus of 1.5% of GDP, and its decrease to 1.1% of GDP in 2019. The structural balance should fall from a surplus of around 1% of GDP closer to balanced budget. The Czech Republic would therefore continue to fulfil its medium-term budgetary objective. The general government debt should reach just below the 30% of GDP at the end of the forecast period.

In Chapter 4, the macroeconomic and fiscal scenarios are validated through comparisons with forecasts of other public and private independent institutions including evaluation of macroeconomic forecast by a panel of independent experts. The baseline scenario is supplemented by a sensitivity analysis, which simulates the impact of different interest rate, lower economic growth of main economic partners and higher price of crude oil. An equally important part of this chapter is also the analysis of deviations of the current scenario from the previous Convergence Programme.

Chapter 5 looks at aspects of long-term sustainability. The chapter provides information on the state of the pension system and public health-care system in the Czech Republic and contains current expenditure projections of the systems most affected by ageing. The chapter also pays attention to the size and structure of the government guarantees.

Chapter 6 deals with qualitative aspects of revenue and expenditure in the general government sector. These aspects mainly include the characteristics of tax changes related to the fight against tax evasion or the simplification of the tax administration. In addition, measures to rationalize public spending are presented.

The last chapter 7 deals with implemented or planned changes in the institutional environment of fiscal and budgetary policy and enhanced transparency of public finances. Emphasis is placed on the implementation of measures related to the rules of fiscal responsibility, the scope and quality of published data and anti-corruption measures, such as the act on conflicts of interest.


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