Convergence Programme of the Czech Republic (April 2022)

ISSN 2570-5687 (on-line)

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 2022)

Two years ago, the world went through a synchronised global recession, the deepest since the end of the Second World War. The gross domestic product of the countries of the European Union fell by 6.1%, while the Czech economy fell by 5.8%. The situation was complicated by the fact that the recession was caused by a viral pandemic. The contagion, measures aimed at limiting the spread of the epidemic and the disruption of supply and demand chains paralysed the activity of many sectors. Economic policies responded with massive fiscal and monetary stimuli. The uncertainties about the depth, duration and, above all, the combined aspects of the health and economic crisis in the context of a globalised world were unprecedented.

As the first wave of the pandemic receded and restrictions on social and economic activity eased, demand accelerated, but supply, still burdened in places by anti-epidemic measures, responded much more slowly. The consequences, in the form of delays or interruptions in the supply of intermediate and final products, continue to this day. Shortages of materials, equipment and labour continue to hamper production, compounded by rising prices for commodities and transport services. Substantial cost increases are particularly evident in energy prices, which dampen household and business spending.

The waning winter pandemic wave was replaced at the end of February 2022 by the biggest security and humanitarian crisis in Europe since the Second World War. The invasion of Ukraine by the Russian Federation has already forced over five million people, mostly women and children, to flee the country. Russian aggression and retaliatory measures by Western countries have led to further price shocks on world markets. The accumulation of these factors, together with the importance of both countries for world exports of materials, energy and food, poses a significant risk to economic growth and raises further challenges, again outside the framework of traditional economic policy.

In addition to these events, the Czech economy is exposed to structural problems, such as the ongoing process of population ageing, and global factors in the form of planetary climate change. The direction of the Czech Republic is also influenced by the priorities of the new political representation resulting from the elections to the Chamber of Deputies on 8 and 9 October 2021. The new government, consisting of two coalitions of five political entities, has revised the draft State Budget of the Czech Republic for 2022 and pushed for a deficit of almost 1.5% of GDP lower than the original proposal before the elections. In addition to savings in operating expenditure, salaries and some transfers, the budget already responds to some of the extraordinary price effects, for example by additional indexation of pensions and social benefits. However, further adjustments during the year cannot be ruled out due to factors related to the war in Ukraine and the rise in energy prices.

Macroeconomic developments are burdened by a number of uncertainties. The impact of geopolitical events on the Czech economy can be difficult to quantify reliably during the ongoing conflict. Whether it is of unknown duration, humanitarian or economic impact, what is certain is that the conflict in Ukraine has escalated imbalances in supply and demand chains, the manifestation of which is rising prices. The Russian invasion has further deepened and widened the problems associated with inflation.

The labour market in the Czech Republic is tense again. While there was a rise in the unemployment rate during the 2020 and 2021 epidemics, the highest rate over the whole period was only slightly above 3%. It was thus much lower than would be consistent with the cyclical position of the economy. Support measures during the epidemic have played a significant role in keeping unemployment low. Despite the persistence of a negative output gap, wages and salaries grew by over 6% last year, and similar pace is expected in 2022 and 2023.

Public finances have fallen into substantial deficits as a result of the impact of the epidemic and the measures taken to slow it down, offset the economic downturn and stimulate the economy. The general government sector ended with a deficit of 5.8% of GDP in 2020 and 5.9% of GDP in 2021. Nevertheless, the outcome was better than expected. The resilience of the Czech economy, the effectiveness of various economic policy measures and the associated renewed tax revenues and social contributions were the main reasons for the more favourable execution of public budgets. Debt at the end of 2021 reached 41.9% of GDP.

This year, the consolidation of public finances, which is also defined by the fiscal rule in the Fiscal Responsibility Rules Act, started. For 2022, we estimate a decline in the general government deficit to 4.5% of GDP, which, after taking into account the cyclical position of the economy and one-off or other temporary measures, represents a year-on-year improvement of almost one percentage point.

Without significantly dampening economic growth, the government aims to take a more ambitious approach to reducing public deficits than the limits set by law. EU funding, whether from the ending 2014–2020 financial perspective, the new financial perspective or the Next Generation European Union instrument, should also help to strengthen the dynamics of the Czech economy. However, the current war conflict brings with it changes in priorities and economic policy settings, the financial aspect of which will be reflected in the structure of the economy. Taking into account the current legal provisions in force, we expect public finances to be back in compliance with the Stability and Growth Pact criterion for the general government deficit in 2024.

The Convergence Programme of the Czech Republic was presented and discussed in the relevant committees of the Parliament of the Czech Republic in April 2022. The document was approved by the Government of the Czech Republic on 11 May 2022.


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