Convergence Programme (April 2012)

Convergence Programme of the Czech Republic (April 2012)


  • Convergence Programme

The update of the Convergence Programme for 2011-2015 presented here has for the second time in a row been prepared in accordance with a new timetable, the European Semester, and for the first time under the regime of new European legislative measures, the so-called "six-pack", fundamentally changing economic-political coordination. The objective of the European Semester is to deepen and strengthen multilateral budget surveillance as well as fiscal and structural policy coordination within the EU. National fiscal policies are therefore coordinated in the preparation phase of public budgets and their medium?term outlooks.

Since the end of last year, the set of six legal regulations further extending the preventive and corrective component of the Stability and Growth Pact and introducing mechanisms for monitoring and correcting macroeconomic imbalances is in effect. The package also includes a Council Directive requiring member states to standardise and modernise national budgetary frameworks. The "six-pack" is considered to be the most comprehensive reinforcement of economic-political coordination between EU countries in the last 20 years.

The current Convergence Programme (CP) of the Czech Republic was approved by the Government of the Czech Republic on 25 April 2012 and it endeavours to be as consistent as possible with the National Reform Programme of the Czech Republic, approved by the Czech government on 11 April 2012. The CP corresponds with the rules established in the updated Code of Conduct (January 2012) of the Stability and Growth Pact for preparing the stability and convergence programmes. The document was also discussed with the substantively relevant committees of the Chamber of Deputies and the Senate of the Parliament of the Czech Republic.

This update of the CP proceeds from the mandate of the coalition government adopted in mid?2010. In its Policy Statement from 4 August 2010, the government set out a number of ambitious reform programmes, including a public finances reform. It aims to eliminate the structural deficit and achieve a balanced budget by 2016. The government adopted additional priorities to enhance transparency in dealing with public funds, limit corruption, and increase transparency in public procurement. It also declared its intention to reform the fiscal framework as a whole.

Structural reforms aimed at improving long-term sustainability of public finances were prepared and adjusted in accordance with the Annual Growth Survey (European Commission, 2011) and Recommendations of the Council to the CP from 30 November 2009 and 1 July 2011. Last year, reforms of the pension and health care systems were approved. Their points of departure, intentions and impacts are presented in several chapters herein. Additional structural reforms are also included, although the fiscal impacts are given only for the more important reforms. The CP also includes the government-approved consolidation package of 11 April 2012.

The CP is divided into seven interconnected chapters. The first chapter lists the main directions in which the Czech Republic has been headed in recent years and in which it is planning to go. The chapter reflects that on 2 December 2009 an Excessive Deficit Procedure was initiated for the Czech Republic, which recommends the general government to bring the deficit below 3% of GDP in a credible and sustainable manner by 2013.

The CP's macroeconomic scenario is based on data available as of 23 March 2012. Even excluding political factors, macroeconomic and fiscal development is today encumbered with considerable uncertainties. The main sources of risk relate to potential further escalation of problems in the euro zone and transmission of negative external shocks to the Czech economy. Due to the influence of fiscal consolidation measures and the unfavourable economic situation in the euro zone, economic growth is expected to stagnate in 2012. Growth should gradually accelerate in subsequent years of the outlook. Chapter 2 addresses macroeconomic development in greater detail.

The fiscal forecast discussed in Chapter 3 proceeds from the results of the April fiscal notification (closing date for data sources 11 April 2012). We expect the government sector balance for 2012 to be ?3.0% of GDP. The general government debt will probably rise to 44.0% of GDP. In coming years, the government is resolved to strictly follow the deficit targets, to which end those discretionary measures already realised and prepared should contribute.

Chapter 4 follows on from the fiscal section with a sensitivity analysis of short-term shocks influencing development of the Czech economy and finances in the government sector. Verification of the CP's macroeconomic framework by forecasts from independent institutions is an equally important part of this chapter.

Chapter 5 monitors long?term impacts of the current fiscal policy settings. Particular attention is devoted to long-term sustainability in relation to ageing of the population.

The final two chapters deal with the qualitative side of public finances and adjustments to the institutional framework. On the one hand, they address changes boosting the quality of public finances on both the revenue and expenditure sides (Chapter 6). On the other, they discuss changes in institutional relations, the legal anchorage of authority and responsibility of the public sector, as well as changes in the system of public administration (Chapter 7). In particular, the final chapter contains information on the ongoing fiscal framework reform of the Czech general government sector.