Convergence Programme of the Czech Republic (April 2023)
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 2023 PDF (1087kB)
- Table Annex of the Convergence Programme CR - April 2023 XLSX (111kB)
External shocks in the form of the pandemic followed by the Russian invasion of Ukraine and the associated extreme volatility in energy markets have placed a heavy burden on society and the economy. Starting in 2020, the European Commission has for the first time ever activated a general escape clause to allow EU Member States to respond flexibly through fiscal policy in times of crisis. A New Generation EU instrument with a total allocation of over EUR 800 billion was created and adopted to support economic recovery. With the risks receding, the European Commission proposes a shift from an overall supportive fiscal policy from 2020 to 2022 to a neutral setting for 2023. The general escape clause is very likely to be deactivated next year. The European Commission has therefore invited Member States to indicate in this year’s Stability and Convergence Programmes how their fiscal plans will ensure compliance with the 3% of GDP deficit benchmark, as well as credible and continuous debt reduction or debt sustainability at prudent levels over the medium term.
Recent developments have largely rehabilitated fiscal policy as an effective and necessary tool of the economic policy mix. Without its use, it is inconceivable that countries could cope with the consequences of such enormous pressures solely with monetary policy, which, moreover, in Europe pursues and addresses price stability almost exclusively. This means, on the other hand, that there has to be fiscal space to be used if necessary. The issue of the medium- and long-term sustainability of public finances therefore comes to the fore once again.
Although the Czech Republic had a relatively low general government debt before 2020, its significant increase in recent years calls for consolidation of public finances. The Czech government is therefore preparing measures to reduce the deficit by at least CZK 70 billion next year. Although the requirement to consolidate public finances is already included in the Budget Responsibility Rules Act from 2020. However, it only sets a minimum rate of reduction of the structural balance of 0.5 percentage points per year for the purposes of deriving the expenditure frameworks of the state budget and state funds, not a specific way of achieving the medium-term budgetary objective, which for the Czech Republic is currently a structural general government balance of −0.75% of GDP.
We expect that 2023 will continue to be strongly influenced by the geopolitical situation and the development of electricity and gas prices. The Czech economy, which is going through a mild recession, should gradually recover from the second quarter of this year. The Czech economy could be essentially flat year-on-year, while we expect GDP growth of 3.0% next year. This development is primarily determined by household consumption, which is reacting negatively to the rising price level. The negative output gap should gradually close towards the end of the forecast horizon. Although the inflation rate should decline, consumer prices should still rise at a double-digit rate on average this year due to market factors and energy prices. Inflation should not return to the tolerance band of the Czech National Bank’s inflation target until 2024. In the area of earnings, real wages will continue to decline this year, albeit at a much slower pace than in 2022. After rising to 3% in 2023, the unemployment rate should start to fall again in the following years.
Public finances reached a deficit of 3.6% of GDP in 2022, mainly due to the state budget deficit, which generally bears the burden of fiscal expansion. The state budget’s cash execution (in national cash terms) ended last year at CZK −360.4 billion and CZK −316.1 billion excluding the impact of EU funds. This is a significantly better result than budgeted, which was also affected by a number of one-off measures. For 2023, we are notifying a general government deficit of 3.5% of GDP, again to be determined by the performance of central government. We also expect a moderate deficit for health insurance companies, while local governments should be rather more subdued. The deficit performance of the general government sector is reflected in the level of debt, which rises by 2.1 percentage points to 44.1% of GDP in 2022, with debt expected to reach 43.5% of GDP in 2023. We expect the general government deficit to fall below 3% of GDP next year and to around 2% of GDP by the end of the outlook.
However, the forecast is burdened with relatively large risks and uncertainties. The development of energy prices is undoubtedly one of the biggest ones. The government has proceeded to set price caps on electricity and gas for 2023, with compensating the traders of these commodities for their losses. On the other hand, it has introduced temporary tax measures targeting extraordinary profits in the energy, mining or banking sectors. Energy prices will thus affect both sides of public finances to the tune of tens of billions CZK.
In addition to addressing the current structural imbalances in public finances, the government is preparing a set of measures to strengthen the long-term sustainability of the pension system. According to its programme statement, the government should present a comprehensive pension reform by the end of this year. Several areas where changes could be made have been publicly declared. These include the retirement age or the conditions for early retirement pensions.
In April 2023, the Convergence Programme of the Czech Republic was subject to an inter-ministerial comment procedure. The document was approved by the Government of the Czech Republic on 26 April 2023.