Report on the development of budgetary management of municipalities, voluntary associations of municipalities and regions as at 30 September 2023
Territorial self-governing units in September of this year recorded the highest positive budget balance in history. Territorial budgets have been showing the highest budget surpluses since August, and nothing has changed in the third quarter either. Although the domestic economy is facing an economic downturn in the third quarter, so it is not reflected in the results of the territorial budgets. Inflation, problems in supply chains or the war in Ukraine. These factors brought the Czech economy back into recession after a brief recovery after the pandemic. After the economic decline caused by the pandemic, this is another downturn which has no impact on the results of the territorial self-governing units. The reason is principally the higher collection of tax revenues and the higher volume of received transfers, which fundamentally affect the revenue side of territorial budgets.
In the third quarter of this year, there is an expected slowdown in price growth and a gradual decline to the limit of the tolerance range of the Czech National Bank. Inflation, which increased by 6.9% year-on-year in September, continues to lead to the growth of the own income of territorial budgets and thus to the strengthening of their self-sufficiency. Inflation continues to contribute to an increase in the national collection of tax revenues (mainly due to the growth of VAT collection). The tax revenues of the territorial budgets are thus developing according to the macroeconomic predictions of the Ministry of Finance, which expects their increasing trend this year. However, we cannot ignore the negative effects of inflation on the budgets of municipalities and regions, in the form of an increase in their expenses side (e.g. an increase in the price of construction works, an increase in energy prices, an increase in the price of accepted loans, etc.). While last year there was a decrease in the planned investment activities of the territorial self-governing units, in the third quarter of this year they continue to increase the rate of investment. At a time of ever-high inflation, which devalues savings in current bank accounts, investing is one way to preserve the purchasing power of money. Despite this, in the third quarter, the territorial self-governing units continued the trend of accumulating their savings in bank accounts and at the same time reducing their debt. The year-on-year reduction in debt and at the same time the year-on-year increase in capital expenditure confirms the good financial situation of municipalities and regions, which are able to finance some of their investment activities even without the involvement of external sources.
Management of Local Governments
In September 2023 municipalities, regions and voluntary associations of municipalities operated with the highest budget surplus in history of CZK 77.3 billion. The economic result increased against last year by 28.1%, i.e. CZK 16.9 billion (see chart no. 1). Compared to 2020, which was associated with the pandemic, the economic result more than tripled. This proves that the territorial budgets are in excellent financial condition, despite the current stagflation. If we reduce the budget balance by the direct costs of education and subsidies for private schools1, the economic surplus reached CZK 70.3 billion and increased by 48% year-on-year, i.e. by CZK 22.8 billion.
The total revenues of local budgets reached CZK 644.9 billion in September 2023 and increased by 14.5%, i.e. by CZK 81.8 billion. Adjusted total revenues1 amounted to CZK 483.3 billion. Their own revenues amounted to CZK 389 billion and increased by 30.2% in comparison with last year, i.e. by CZK 90.2 billion. The independence of territorial budgets from the state budget, which represents the share of own revenues in total adjusted revenues, was 80.5% and increased year-on-year. This growth was caused by a rise in tax revenues, which reached CZK 333.8 billion and increased by 15.9%, i.e. by CZK 45.9 billion. In the third quarter of year 2023, there is a year-on-year increase in transfers received by territorial budgets, by 14%, i.e. by CZK 31.5 billion, to CZK 256 billion. This was mainly due to received non-investment transfers, which increased by 12.4% year-on-year, i.e. by CZK 25.4 billion, to CZK 230.1 billion. Investment received transfers reach CZK 25.9 billion in September 2023 and year-on-year increased by 30.4%, i.e. by CZK 6 billion. On the contrary, the year-on-year decrease occurred only on the side of capital income, which fell by 35.8%, i.e. by CZK 2.9 billion, to CZK 5.1 billion.
The total consolidated expenditures of local budgets in September 2023 amounted to CZK 567.6 billion and increased by 12.9% in comparison with last year, i.e. by CZK 64.9 billion. Adjusted total expenditures1 amounted to CZK 413 billion. There is year-on-year growth in current expenses, which at the end of September recorded an increase of 13.4%, i.e. by CZK 54.6 billion, and reached CZK 463.1 billion. In terms of sectors, current expenditures were directed mainly to the education sector (due to direct costs of education and subsidies to private schools) and to the transport sector. The capital expenditures in September increased by 10.9%, i.e. by CZK 10.3 billion, to CZK 104.5 billion. In 2023 local governments realized consolidated expenditures for aid to Ukraine in the amount of CZK 5.8 billion (mainly the capital city of Prague). This year, were compensated from the state budget related to aid to Ukraine of CZK 7.9 billion (including compensation of part of expenses from the end of 2022).
Management of regions
In September of this year, the regions managed a record budget surplus, amounting to CZK 21.5 billion. The surplus increased compared to last year by 5.9%, i.e. by CZK 1.2 billion and significantly exceeded the budget balance from 2019, i.e. before the outbreak of the pandemic COVID-19 (see chart no. 2). If we reduce the budget balance by the direct costs of education and subsidies for private schools1, the economic surplus reached CZK 14.7 billion and increased by 36.1%, i.e. by CZK 3.9 billion.
The total revenues of the regions in September amounted to CZK 283.9 billion and increased by 15.5%, i.e. by CZK 38.1 billion. Adjusted total revenues1 reached CZK 142.3 billion. Their own income reached CZK 87.2 billion (year-on-year increase by 16.1%, i.e. by CZK 12.1 billion) and represent 61.3% of total income adjusted for direct education costs. This share indicates a certain dependence of regions on received transfers from the state budget and state funds and their relatively lower self-sufficiency in contrast to municipalities. Improvement of region´s own income was caused by the growth of tax revenues, which increased by 16.8%, i.e. by CZK 11.3 billion, to CZK 78.8 billion.
The total expenditures of the regions in September 2023 amounted to CZK 262.4 billion and increased by 16.4% compared to last year, i.e. by CZK 36.9 billion. Adjusted total expenditures1 reached CZK 127.6 billion. The total expenditures of the regions were directed mainly to field of education and school services (CZK 148.4 billion), transport (CZK 43.8 billion) and social services (CZK 24.3 billion).This growth was mainly caused by an increase in current expenses, which increased by 12.9% compared to last year, i.e.by CZK 26.3 billion, to CZK 230.1 billion. The major part of the total current expenses (specifically 75.4%) consists of transfers that the regions transferred to contributory and similar organizations, in the amount of CZK 173.6 billion. Most of these funds were intended for direct education costs. In September 2023 capital expenditures also increased by 48.6%, i.e. by CZK 10.6 billion, to CZK 32.3 billion, despite of actual inflation. In 2023 the regions realized expenditures for aid to Ukraine and its population in the amount of CZK 4.9 billion.
Debt and balance on the regions' bank accounts
At the end of September 2023, the debt of the regions, including the contributory organizations, amounted to CZK 26.7 billion and compared to 2022 increased by 5.6%, i.e. by CZK 1.4 billion. Although there is a year-on-year increase in debt, there is also a year-on-year increase in capital expenditure. Regions as well finance their investment activities with the help of received borrowed funds.
In the third quarter of 2023, the regions are continuing the trend of accumulating their savings. In September of this year, the amount of regional deposits in bank accounts amounted to 106.3 billion, which represents an increase in savings by 49.2% compared to 2022, i.e. by CZK 35.1 billion. After deducting the direct costs of education and subsidies for private schools1, the deposit on regions ‘bank accounts reached CZK 99.4 billion, so savings increased by 64.4% year-on-year, i.e. by CZK 39 billion. As can be seen from graph no. 3, while the debt of the regions has decreased by 0.3% since 2013, the balances on bank accounts are growing dynamically, namely by 309.2%. In general, high levels of funds deposited on bank accounts are currently considered not entirely desirable, as these deposits lose their value due to inflation.
Management of municipalities
In September of this year, municipalities managed the historically highest budget balance surplus of CZK 55.2 billion and thus continue to create additional financial reserves. Year-on-year, the economic result increased by 38.3%, i.e. by CZK 15.3 billion (see graph no. 4). Without the capital city, the total consolidated revenues of the municipalities in the third quarter of year amounted to CZK 262.1 billion, expenses to CZK 230.7 billion, and the result of budget management ended in a surplus of CZK 31.4 billion. Budget of the city of Prague ended up with a surplus of CZK 23.8 billion, with total revenues of CZK 106.5 billion and expenses of CZK 82.7 billion.
The total revenues of municipalities in September 2023 reached CZK 368.7 billion and increased by 14.1%, i.e. by CZK 45.5 billion compared to 2022. Adjusted total revenues1 reached CZK 348.7 billion. Their own income amounted to CZK 300.7 billion (year-on-year growth of 29.6%, i.e. by CZK 68.6 billion) and represented 86.2% of total adjusted income. Compared to regions, municipalities are relatively more self-sufficient and thus do not show significant dependence on received transfers from the state budget and state funds. Increase in own income of municipalities was caused mainly by the growth of tax revenues, which increased by 15.7%, i.e. by CZK 34.6 billion to CZK 255.1 billion.
The total expenditures of municipalities in September 2023 amounted to CZK 313.5 billion and increased by 10.7 %, i.e.by CZK 30.2 billion compared to last year. Adjusted total expenditures1reached CZK 293.6 billion. The total expenditure of the municipalities was directed mainly to the field of education and school services (CZK 54.8 billion), to transport (CZK 54.7 billion) and to territorial self-government (CZK 48.6 billion). The year-on-year growth of total expenses was caused by an increase in current expenses, which increased by 14.2% compared to last year, i.e. by CZK 29.9 billion, to CZK 240.7 billion. The capital expenditures of municipalities in September this year increased slightly year-on-year, namely by 0.5%, i.e. by CZK 0.3 billion, to CZK 72.8 billion. In 2023, the municipalities realized expenditures for aid to Ukraine and its population almost one billion.
Debt and balance on the municipalities' bank accounts
Municipal debt in September 2023 amounted to CZK 64 billion, and in comparison to 2022 decreased by 10%, i.e. by CZK 7.1 billion. The year-on-year reduction in debt corresponds to the still high rate of inflation, which leads to higher prices for loans and credits. At the same time the year-on-year increase in capital expenditure proves a good financial position of municipalities, which always has a certain amount of savings to a greater or lesser extent, so there is no need to use borrowed funds for some smaller investment projects.
At the end of the third quarter of 2023, the municipalities had deposited funds in bank accounts in the amount of CZK 386.5 billion, which represents an increase in savings by 16.6%, i.e. by CZK 55 billion, compared to 2022. After deducting the direct costs of education and subsidies for private schools1, the balance of savings reached CZK 386.4 billion, so deposits increased by 17.7% year-on-year, i.e. by CZK 58.2 billion. As well as regions, municipalities follow the trend of accumulation of savings. As can be seen from chart no. 5, since 2013, the balances of municipal savings have been growing dynamically (+ 248.1%), while the debt of municipalities has been decreasing (- 30.6%) in the same period. Like other municipalities, the capital city accumulated deposits, despite low interest rates. In general, high amounts of money deposited in regular bank accounts are considered not entirely desirable at the current time of still high inflation rates, as these savings are being devalued.
Management of voluntary associations of municipalities
In September 2023, voluntary associations of municipalities reported total revenues of CZK 3.8 billion (year-on-year increase of 4.2%, i.e. CZK 0.2 billion) and total expenses of CZK 3.4 billion (year-on-year decrease of 6.1%, i.e. by CZK 0.2 billion). The budget balance ended in a surplus of CZK 0.5 billion (year-on-year growth of 450.8%, i.e. by CZK 0.4 billion).
1 The direct costs of education and subsidies for private schools represent funds from the state budget, which are distributed and directly allocated to the schools and school facilities by regions and Prague. It is therefore a non-investment flow transfer and the region and Prague cannot dispose of these funds in any way. For this reason, the total revenues and expenses of the regions and Prague are reduced so not to distort their results of management.