Convergence Programme (April 2014)

Convergence Programme of the Czech Republic (April 2014)

Dept 37 - Economic Policy
Dept 37 - Economic Policy


  • Convergence Programme

ISSN 1804‐798X

Convergence Programme of the Czech Republic (April 2014)

The submitted update of the Convergence Programme of the Czech Republic is focused on the period 2014–2017. The importance of this strategic document of the Government of the Czech Republic, which defines the direction of the government’s macroeconomic policies, also consists in the fact that it will be used as a basis for the European Com-mission’s and EU Council’s decision-making on abrogation of the excessive deficit procedure. In December 2009, the Council of the EU stated that the Czech Republic should reduce its excessive deficit, caused by both the effect of automatic stabilisers and discretionary stimuli to the economy, below 3% of GDP. At the same time, the Council of the EU demanded the average annual fiscal efforts of the government sector reach at least 1 pp in 2010–2013. Deficit should have been reduced on clearly defined measures that would ensure credible and sustainable correction of the excessive deficit. The result attained by government sector in 2013 of −1.5% of GDP, average fiscal effort of 1.1 pp over the given period and the last year’s structural deficit lower than the level of the medium-term budgetary objective all testify to the successful fulfilment of the consolidation strategy. On the other hand, necessary fiscal restriction through direct and indirect channels has left its mark in the prolongation and deepening of the negative output gap.

The Convergence Programme of the Czech Republic (CP) was approved by the Government of the CR on 28 April 2014 and is consistent with the National Reform Programme of the CR approved by the Government of the CR on 16 April 2014. The CP fully corresponds with the rules on the content and format of stability and convergence programmes (EFC, 2012). In April, the CP was also presented and discussed with the relevant committees of the Chamber of Deputies and the Senate of the CR.

The update of the CP ensues from the aims of the Government of the CR, which was formed following the early election to the Chamber of Deputies of the Parliament of the CR held on 25 and 26 October 2013. The government of the CR in its Policy Statement of 12 February 2014 resolved to “…promote an economic programme … based on supporting business, a functioning and transparent state administration, an effective labour market, a long-term sustainable pension scheme, social reconciliation within society and investment in education, science and research.” The government’s intentions are thus in line with the Annual Growth Survey 2014 of the European Commission (2013a), which is directed particularly towards continued differentiated, growth-friendly fiscal consolidation of public finances, supporting competitiveness, tackling unemployment and the social consequences of the economic recession and the modernisation and professionalisation of public administration.

The CP is divided into seven interconnected chapters. Chapter 1 sets out the economic and political intentions and targets of the Government of the CR, including progress already achieved in reducing the excessive deficit of the general government sector. The chapter also summarises the CR’s responses to the latest recommendations of the Council of the EU, also presented at the committees of the Parliament of the CR.

The macroeconomic scenario of the CP, detailed in Chapter 2, is based on data known as of 1 April 2014. The Czech economy has gone through two periods of economic decline over the last five years, while the second recovery occurred in mid-2013. According to current data, real gross domestic product (GDP) decreased by 0.9% in the whole of 2013, reaching nearly 98% of the level in 2008. In the outlook, we expect a slight acceleration of economic growth. All components of aggregate demand should contribute, but gradually increasing domestic consumption will be the most significant contributor. The risks of the scenario are approximately balanced. Nevertheless, due to the size and openness of the economy, the major risks lie in the external environment.

The outcome of general government sector in 2013, which is a key year in terms of the aforementioned excessive deficit procedure, and the fiscal strategy in the next few years, are the subject of Chapter 3. This Chapter is based on the results of the Deficit and Debt Notifications approved by Eurostat as of 23 April 2014 and on the economic-policy intentions of the Government (closing date for data sources 9 April 2014). The forecast estimates a general government deficit of 1.8% of GDP in 2014 and then around 2.3% in 2015, with a subsequent decrease to 1.7% in 2017. After its slight decrease in 2013, general government debt as a percentage of GDP will probably fall again in 2014, down to 44.9% of GDP. The reason is mainly integration of additional liquidity in the system. In 2017, debt should fluctuate around the level of 47.1% of GDP.

The macroeconomic and fiscal scenarios are verified in Chapter 4 by comparison with the forecasts of other public and independent private institutions. The scenario is also supplemented with a sensitivity analysis in which the impacts of alternative scenarios of economic development are simulated. An equally important part of the chapter is also an analysis of the variances between the current scenario and the scenario from the last update of the CP.

In Chapter 5, aspects of long-term sustainability are monitored, whereby, in addition to the implications of the current pension scheme, attention is also paid to the size and structure of guarantees of the government sector.

The last two chapters analyse the qualitative aspect of government sector revenues and expenditure (Chapter 6), as well as implemented or planned changes in the institutional environment, transparency and efficiency (Chapter 7).