Fiscal Forecast of the Czech Republic – May 2025
The Ministry of Finance’s Fiscal Forecast is a new document responding to changes in the European Semester and in the governance of economic affairs in the European Union. From April 2024, the new regulation of European fiscal rules came into force, in particular Regulation (EU) 2024/1263 of the European Parliament and of the Council of 29 April 2024 on the Effective Coordination of Economic Policies and on Multilateral Budgetary Surveillance and repealing Council Regulation (EC) No 1466/97. This legislation abolished the convergence and stability programmes, which contained a fiscal forecast and described the government’s economic policy intentions. The convergence and stability programmes were replaced by medium-term fiscal-structural plans. However, the plans do not contain a fiscal forecast and neither do the annual progress reports that assess the fiscal-structural plans. Thus, fiscal forecasts would only be produced in August for the preparation of the State budget for the coming year and in November in the Fiscal Outlook. The separate May forecast thus reverts to the practice followed until 2015 in issuing fiscal forecasts.
The fiscal forecast is based on the Ministry of Finance’s macroeconomic forecast issued in April 2025. The forecast anticipates that economic activity could increase by 2.0% this year, mainly thanks to an acceleration in household consumption and, to a lesser extent, gross capital formation and government consumption expenditure. In 2026, the economy could grow by 2.4%, thanks to stronger investment momentum and accelerating economic growth in major trading partner countries. The average inflation rate could reach 2.4% this year and fall slightly to 2.3% in 2026. Inflationary pressures will continue to be dampened this year by restrictive monetary policy through interest rates, a slight appreciation of the koruna and lower energy prices. On the other hand, inflationary factors include continued higher wage growth or increased price dynamics in services. Labour market imbalances related to labour shortages continue to manifest themselves, with the unemployment rate likely to remain at 2.6% on average this year. It could fall slightly to 2.5% next year as the economic recovery continues.
The general government balance ended with a deficit of 2.2% of GDP in 2024. The deficit decreased by 1.5 percentage points as a result of the consolidation package, the end of measures related to the energy crisis and the partial economic recovery. The structural balance improved by 0.7 percentage point to −1.9% of GDP. The Czech Republic thus meets the Stability and Growth Pact’s benchmark of a general government deficit of 3% of GDP. At the same time, the national fiscal rule allowing a structural deficit of no more than 2.75% of GDP was also met last year. For this year, we expect the general government deficit to be similar to that in 2024, i.e. around 2.2% of GDP, corresponding to 1.9% of GDP after taking into account the effects of the business cycle and one-off or other temporary measures. For 2026, the government’s Budgetary Strategy of the Public Sector for 2026–2028, in line with the Act on Fiscal Responsibility Rules, foresees a structural deficit of no more than 1.75% of GDP. Beyond this deficit, it is foreseen that defence spending can be increased in cash terms above 2% of GDP, so far for 2026 by an amount equivalent to 0.2% of GDP. The defence expenditure should have an exception even within European rules in the form of an escape clause.
General government debt increased to 43.6% of GDP in 2024, and we expect it to rise slightly in the following years, peaking at around 45.5% of GDP. In addition to the forecasted public deficit, the debt level will be affected by the loan provided by the state in connection with the construction of the new nuclear power plants at Dukovany.
The approved pension reform has significantly improved the expected balances of the pay-as-you-go pension system in the Czech Republic. In the longer term, when the approved measures take full effect, deficits should thus fall by around 1.5 percentage points of GDP. The most significant measures with a positive impact on public finances are the further increase of the retirement age to 67 and the reduction in the increase in newly assessed pensions. The impacts of the adopted reform were presented in the Working Group on Ageing Populations and Sustainability of the EU Economic Policy Committee on 24 March 2025 and subsequently endorsed by the Economic Policy Committee at the EU level.