Convergence Programme of the Czech Republic (April 2020)

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 2020)

The situation surrounding this year’s Convergence Programme is unprecedented. Uncertainties regarding the duration of the pandemic of the new type of coronavirus, the duration of the various measures already taken, the list of possible new measures and the overall estimate of economic damage, social costs and the resulting repercussions for public finances will evidently not become clear until the end of 2020.

The European Commission is fully aware of these aspects. The requirements concerning the content of the convergence and stability programmes have been significantly reduced so that data is only needed for 2020 and 2021. The reasons for keeping to the original deadlines are essentially purely legal in nature. The deadlines cannot be extended under European Union regulations in force. It is therefore likely that the Convergence Programme can be outdated by the time it is approved by the government and sent to the European Commission. At the same time, the individual recommendations made by the Council of the European Union to Member States will reflect the situation in the fight against the pandemic more than strict adherence to compliance with fiscal rules in 2020. The consolidation of public finances must wait until the risk of the further spread of COVID-19 is under control. This Convergence Programme therefore needs to be viewed through a different lens. It contains a macroeconomic scenario that we were able to put together based on knowledge at the end of March 2020. In doing so, we took account only of those fiscal measures that had been at least approved by the government as at 22 April 2020.

On 20 March 2020, the Czech government discussed an amendment to the Central Government Budget Act for 2020. Within the framework of legislative emergency powers, this amendment was approved four days later by the Chamber of Deputies (the lower parliamentary house). Taking into account the year-on-year decline in gross domestic product by more than 5% and the subsequent decline in income, as well as the need to take further measures to support households and businesses, it increased the originally approved central government budget deficit of CZK 40 billion by another CZK 160 billion. The CZK 200 billion deficit was to enable the Czech government to make an adequate response to the consequences of the pandemic in the Czech Republic. However, dynamic developments have shown that the original fiscal space will not be sufficient. For this reason, on 20 April 2020, the government approved the second amendment to the state budget law, which increases the deficit to CZK 300 billion. The increase in the deficit was then confirmed by the Chamber of Deputies on 22 April.

The macroeconomic scenario for this year’s Convergence Programme anticipates a 5.6% decline in real gross domestic product, and more than 2% in nominal terms. The deepest decline is expected in foreign trade and fixed capital investment. Household consumption should also be lower. In this year's forecast, we assume that economic activity should pick up from the second half of 2020. Although restrictions will be eased in a number of European Union countries or the United States probably later than in the Czech Republic, the shock to aggregate demand and supply should be largely directed to the first half of 2020.

There will be both supply and demand effects on prices, so they should largely cancel each other out. Taking into account the labour market situation, the number of job vacancies, and the measures taken by the Czech government to maintain high employment, on average the unemployment rate is not expected to increase dramatically.

Czech public finances are relatively well prepared for the consequences of the pandemic, at least in a European context. At the end of 2019, general government debt was 30.8% of GDP, i.e. only slightly above the level of 2008, when the global financial and economic crisis started. On the other hand, expressed in terms of the structural balance, the situation for public finances is better. The general government balance was 0.3% of GDP in 2019. Adjusted for the business cycle and one-off measures, it reached exactly the medium-term budgetary objective for the year. In any event, the impact of the pandemic, including government measures to limit its impact on the economy and on the health of the population, will significantly affect the entire general government sector, especially the state budget. There will be a revenue shortfall due to the downturn in economic activity, while some measures such as electronic registration of sales, digital tax or auctions for rights to use radio frequencies are being postponed or cancelled. On the expenditure side, the opportunities for the payment of certain social benefits, in particular those under sickness insurance, have expanded. We currently estimate that the general government sector will be managing a deficit of 5.1% of GDP and that general government debt should increase to 37% of GDP in 2020.

In addition to measures to stabilise the economy in the short or medium term, a number of measures to improve the quality of public finances were implemented last year. Work is continuing on the digitalisation of tax administration, and the system of centralised public procurement or state property management is being streamlined. However, long-term pressure on public finances, mainly due to demographic changes in the population structure, remains a challenge.

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