Fiscal Outlook of the Czech Republic (November 2018)
In the first half of the year, the Czech economy grew by 3.0% year-on-year. Growth is slowing from last year’s 4.3%, basically to potential product growth. Gross domestic product growth was based solely on robust domestic demand. This development is reflected in record public finance surpluses. In 2017, the general government of the Czech Republic ended with a positive balance of 1.5% of GDP; for the first time, all three of the basic components contributed to the surplus: not only local governments and social security funds, but also the central government. The structural balance reached 1.0% of GDP and the Czech Republic, with a considerable margin, met its commitments in the form of the medium-term budgetary objective. The current prediction of general government sector indicates that the positive balance in this and also in the following years will be maintained. In accordance with the expected macroeconomic development and budgetary impact of government policies we estimate for the coming years that the structural balance should continue to be positive and the total balance should be around 1% GDP due to economic growth.
The state budget balance for January to October 2018 reached a surplus of nearly CZK 6 billion. By the end of September, local governments reported a surplus CZK 23 billion, and health insurance companies reported a positive balance CZK 10 billion. National tax revenues keep their dynamics around 8.3%. As a result of the good economic situation, there is a particularly strong growth in the collection of personal income tax, which grew by more than 14%. Similarly, double-digit growth can also be observed for social security contributions or property taxes.
A positive phenomenon, although reducing the balance, is the increase in investment expenditure. After a weaker first quarter, government investment in the second quarter increased by more than 20%, with a marked increase in investments co-financed by EU funds and financial mechanisms. For the first half of the year, the growth of co-funded capital expenditures was about 70%. Thus the risk of non-utilisation of 2014 and 2015 allocations by the end of 2018 according to arranged rules is greatly reduced.
The Act on Fiscal Responsibility Rules, which has completely changed the way in which the budgetary frameworks for state budget and state funds are derived, also introduced institutional control mechanisms within the budgetary process. In January 2018, the National Budget Council started to perform its mandate, as an independent supervisory body for the performance of public finances of the Czech Republic. In cooperation with the Ministry of Finance, a new methodology was developed for the identification of one-off and temporary measures for the purpose of applying the national fiscal rule. Furthermore, the method of adjusting the general government sector balance for the impact of the business cycle was agreed. The National Budget Council has thereby become involved in this year’s budgetary process since the beginning. The second institution that started its activity this year is the Committee on Budgetary Forecasts, which assesses the macroeconomic and fiscal forecasts of the Ministry of Finance in terms of their likelihood.
The values and derivations of expenditure frameworks for 2019 to 2021 are contained in the Budgetary Strategy for the General Government Sector of the Czech Republic, approved by the Government on 30 April 2018. Updated framework amounts are the basis for a draft state budget and state fund budgets for 2019 and their medium-term outlooks. The present Fiscal Outlook of the Czech Republic relies on them in particular in public expenditure set-up. Moreover, it is based on the November Macroeconomic Forecast for the Czech Republic prepared by the Ministry of Finance, to which it adds detailed aspects of the fiscal development.
The Fiscal Outlook of the Czech Republic expects for this year a surplus of the general government sector of 1.6% of GDP, which should be spread across all sub-sectors again. For the year 2019, we estimate the surplus at 1.0% of GDP, reflecting the fulfilment of the government’s programme priorities in the social area, as well as in the investment expenditures in both physical and human capital. In the following years, we expect surpluses to trend towards 0.8% of GDP in 2021. The structural balance should be positive in all years of the outlook. The Czech Republic should therefore continue to meet its medium-term budgetary objective under the preventive arm of the Stability and Growth Pact. Given the surpluses and nominal GDP growth, general government debt should continue to decrease throughout the outlook and reach 30% of GDP in 2021.
The quantified future expenditure of the pension system in the Czech Republic gives an idea about the causes and magnitude of the risks of its long-term sustainability. The current Eurostat demographic projection foresees a relatively large decline in the population of the Czech Republic in the long term. The ratio of people over the age of 65 to the working age population (15–64 years) should almost double by 2070 and reach approximately 50%. By 2070, expenditure on pensions should increase by 2.8 percentage points from 8.2% of GDP to 10.9% of GDP. The real cost of ageing will also be significantly dependent on possible revisions of the retirement age in line with the expected life expectancy. In addition to the current forecast, the impact of recently approved measures to increase the average level of pensions beyond the normal indexation, i.e. the increase in the flat-rate component and the increase of benefits for those aged at least 85 are also calculated. These changes will lead to an increase in pension expenditure by around 0.3 percentage points in the long term.