Convergence Programme of the Czech Republic (April 2019)

Dept 37 - Economic Policy
Dept 37 - Economic Policy

Published

  • Convergence Programme

ISSN 2570-5687

The document specifies the basic aggregate fiscal data and the forthcoming most important measures in the form of medium-term budgetary impacts of the government's fiscal strategy.

Convergence Programme of the Czech Republic (April 2019)

The Convergence Programme of the Czech Republic 2019–2022, submitted in accordance with Article 121 of the Treaty on the Functioning of the European Union and the applicable version of Council Regulation (EC) No. 1466/97, was approved by the Government of the Czech Republic on 29 April 2019. The Convergence Programme is consistent with the National Reform Programme of the Czech Republic (OG, 2019), which complements it with a detailed description of the implemented and planned reform measures. It is compiled in accordance with the rules of the opinion of the Council’s Economic and Financial Committee on the content and format of stability and convergence programmes (EFC, 2017). The document was also presented, discusses and acknowledged in the relevant committees of the Chamber of Deputies and the Senate of the Parliament of the Czech Republic in April 2019. The opinion of the Council of the European Union of May 2018 on last year’s Convergence Programme of the Czech Republic was acknowledged in June 2018 by a resolution of the competent Committee on European Affairs of the Chamber of Deputies, and in July 2018 it was discussed in the Senate, which agreed with the recommendations for the Czech Republic.

The Convergence Programme of the Czech Republic is divided into seven interconnected chapters. The first chapter presents the purposes and objectives of the Government’s fiscal policy and the monetary policy framework of the Czech National Bank, whose implications for the macroeconomic and fiscal scenarios elaborate the following chapters.

The macroeconomic scenario in Chapter 2 is based on the Macroeconomic Forecast of the Ministry of Finance published in April (MF CR, 2019a). GDP growth reached 2.9% in 2018; for the years 2019 and 2020 we predict the economy to grow by 2.4% in both years. The main barriers to growth are the slowing down of our business partner economies and the shortage of labour, with labour market showing significant signs of overheating. We believe that the unemployment rate has already reached its bottom, and in the following years it should hover around 2.2%. The inflation rate should remain close to 2% inflation target of the Czech National Bank, despite the current inflationary trend in the national economy. In terms of the balance of current trans-actions, the Czech Republic’s external relations can be considered balanced.

The general government sector reported a surplus of 0.9% of GDP in 2018 and the debt fell to 32.7% of GDP, i.e. below the 2009 level. The forecast for 2019, which, like the Government’s fiscal strategy in future years, is addressed in Chapter 3, is based on the results of the government balance and debt notification, confirmed by Eurostat on 23 April 2019, and on Government-approved economic policy objectives as of 5 April 2019. For 2019, we estimate a surplus of 0.3% of GDP and an almost balance in structural terms. Therefore, the Czech Republic continues to meet its medium-term budgetary objective and this should also be the case over the entire forecast horizon. The general government debt should drop below 30% of GDP at the end of the forecast period.

The macroeconomic and fiscal scenarios were assessed by the Committee on Budgetary Forecasts on 15 April 2019 as realistic. In addition, in Chapter 4 the baseline scenario is supplemented to include a sensitivity analysis, which simulates the impact of alternative scenarios of economic developments based on a higher interest rate, lower economic growth in the EU and higher USD price of crude oil. An equally important part of this chapter is also an analysis of deviations of the current scenario from the scenario of the last Convergence Programme.

Chapter 5 addresses aspects of long-term sustainability of public finances. Total expenditure related to the demographic change should increase by more than 6 pp over the long term, mainly as a result of higher pension expenditure and increased health and long-term care demands. With regard to ageing, the Czech Republic is assessed as a medium-risk country in terms of long-term sustainability, which is also reflected in the stricter medium-term budgetary objective. In contrast, the level of public guarantees has practically no effect on long-term sustainability.

Chapter 6 covers qualitative aspects of revenue and expenditure in the general government sector. They mainly include the characteristics of tax changes related to the fight against tax evasion or the simplification of the tax administration. In addition, measures to rationalize public spending are presented.

The last chapter 7 deals with implemented or planned changes in the institutional environment of fiscal and budgetary policy and enhanced transparency of public finances. Emphasis is placed on the implementation of measures related to the rules of fiscal responsibility, the scope and quality of published data and anti-corruption measures, such as the law on conflicts of interest or the Supreme Audit Office Act amendment. 

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