Fiscal Outlook of the Czech Republic (November 2025)

The last few years have been extremely challenging for Czech society, the economy and public finances. Following a series of external shocks, including the COVID-19 pandemic and the war in Ukraine, the economy faced increased uncertainty, disrupted supply chains and high inflation. These factors contributed to a decline in economic activity and subsequent stagnation. Since 2024, there has been a noticeable trend of gradual recovery, with the Czech economy growing by 1.2% last year and expected to accelerate to 2.4% this year. Stable growth at approximately this rate is expected in the coming years.

Extensive budgetary expenditure in response to crisis situations, including measures of a more permanent nature, particularly in the tax and social areas, led to a significant deepening of the structural imbalance in public finances. In response to this development, the government began consolidating public finances, primarily at the state budget level. Since 2024, it has been implementing a consolidation package containing more than 60 measures with the aim of reducing the structural deficit by more than 1% of GDP. In 2024, despite an increase in defence spending, the structural deficit fell by 0.9 percentage points and the overall balance of the general government sector reached −2.0% of GDP. The Czech Republic thus joined the group of EU Member States against which no excessive deficit procedure was initiated.

For 2025, the general government deficit is expected to fall just below 2% of GDP, with a similar level expected to be achieved in 2026. These figures take into account, among other things, the gradual increase in defence spending in line with the new commitment of NATO members and increased investment in transport infrastructure. Structural deficits should reach levels consistent with the fiscal rule contained in the Act on Fiscal Responsibility Rules. For the years covered by the outlook, the Act envisages a further reduction in structural deficits to a maximum of 1% of GDP in 2028.

The expenditure frameworks for 2026 originally allowed the government to draft a state budget and state funds with a deficit of CZK 236.9 billion. This figure is based on the April 2025 Budgetary Strategy for the Public Sector and subsequent amendments permitted by law from August of the same year. It was also possible to increase expenditure by an additional CZK 30.7 billion as a result of an amendment to the Budgetary Rules Act, which allows all defence expenditure above 2% of GDP to be financed beyond the expenditure limits set by the Fiscal Responsibility Rules Act until 2033. Furthermore, cash expenditures from the state budget were increased by a loan of CZK 18.3 billion to Elektrárna Dukovany II, a.s., which is investing in the construction of new nuclear power plants. The final deficit of the proposed state budget for 2026 is thus CZK 286 billion. 

We also expect health insurance companies to run deficits, while local governments should continue to report surpluses. The deficits of the general government sector will also be reflected in an increase in debt, which could rise by more than 2 percentage points in 2025 and 2026. At the end of 2026, the debt ratio is expected to reach 45.3% of GDP.

Several important measures relating to the pension system have been approved with a view to medium- and long-term developments of public finances. First and foremost, these were changes in the area of early retirement (tightening of eligibility conditions and increased penalties), the indexation system (taking into account one-third of real wage growth instead of one-half, no indexation of the earnings-related part of pension benefits for early retirement), the statutory retirement age (further gradual increase to 67) and adjustments to the calculation of newly granted pensions (reduction in the crediting of income up to the first reduction threshold and a decrease in the accrual rate). The overall impact of these measures is estimated at approximately 2% of GDP in the long term.

At the European Union level, a reformed economic governance framework has been introduced, which includes a new fiscal rule in the form of a net expenditure path. Net expenditure is based on total public expenditure, but does not include interest expenditure, expenditure related to European Union projects, or one-off or other temporary measures. In addition, expenditure is reduced as a result of legislative or administrative changes that have a negative impact on public revenues, and vice versa. The thematic chapter of this publication provides an analysis of specific parts of this rule. It follows on from last year's chapter, which described broader changes to the European fiscal framework resulting from new EU legislation.

The chapter also illustrates the application of the escape clause using a specific practical example of defence expenditure and highlights some of its problematic aspects.  To date, 16 EU countries have requested an exemption from the rule. Currently, it is possible to apply defence spending in the years 2025 to 2028, which cumulatively exceeds the reference year level (in the case of the Czech Republic, this is 2021) by up to 1.5% of GDP.