Convergence Programme of the Czech Republic (April 2021)
- Convergence Programme
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 2021)
The global economic downturn caused by the pandemic and by the measures taken to impede its spread has affected the conditions faced by many households, entrepreneurs and businesses. Numerous economies have proved extraordinarily resilient, and the fiscal and monetary authorities worked vigorously to mitigate any adverse effects. The Czech Republic, with its relatively low public debt, long-term adherence to its medium-term budgetary objective, leeway in conventional monetary policy, healthy banking sector, and low unemployment rate, was excellently placed to withstand a shock even of this nature.
Real gross domestic product in the Czech Republic fell by 5.6% in 2020. While the retail and service sectors in particular were directly hit by the crisis, supply chains and lower demand eventually affected most of the economy. A deeper slump was prevented by anti-crisis fiscal measures, which shifted part of the private sector’s costs and losses to the public one. The government did not limit itself simply to waiving social security contributions or lowering tax rates, for example. The fall in tax revenues was also the result of a significant drop in corporate sales and profits, as well as a reduction in earnings. In addition, expenditure shot up to compensate for the loss of income from labour activity and for firms’ spending on wages and certain fixed costs. In this respect, the public sector heavily cushioned the impact of the crisis on the labour market, and unemployment therefore remained very low. However, it was crucial to secure funding for the public health care system, which is responsible for dealing with the epidemic in the Czech Republic.
In many countries, the sheer scale and nature of the crisis required to adopt quite specific approach to economic policy. This not only limited the negative impact of the pandemic on short-term economic performance, but also helped to curb the effects on long-term growth. The efforts to contain the epidemic and mitigate the socio-economic impact came at the cost of a deep budgetary deficit and a corresponding increase in public debts. In the Czech Republic, general government deficit came to 6.2% of GDP in 2020, mainly due to the outcome of the state budget, which financed most of the anti-crisis measures. Debt increased by almost eight percentage points to 38.1% of GDP.
The intensification of the epidemic in the autumn of 2020, combined with new mutations of the virus, exacerbated the risks in this year and reduced the prospects for more rapid economic growth. In contrast, the approval of several types of vaccines and the gradual inoculation of the population offer hope of economic recovery, especially in the second half of the year. We expect GDP growth of 3.1% to be driven by domestic demand and partly by foreign trade. General government consumption will be fuelled by an increase in social transfers in kind and intermediate consumption in the public sector. Private investment in 2021 should benefit from renewed economic growth abroad and a special regime of tangible assets depreciation. For public investment, it is envisaged that capital outlays financed from national funds will be supplemented by Next Generation EU facility. However, none of the private-uses components should exceed the real level reported for 2019.
The labour market should continue to be affected considerably this year by government measures and delayed signs of recession. Although the unemployment rate is likely to rise during 2021, averaging 3.6% for the year, it will still be much lower than would be consistent with the cyclical position of the economy. The negative output gap and fiscal discretionary measures will lead to rather moderate wage bill growth. This, combined with renewed labour productivity growth, will direct unit labour costs downwards. Apart from the oil price, we do not expect any major upward inflationary pressure in 2021, and the average inflation rate should slow to 2.5%.
Limited tax revenues and spending related to efforts to contain the epidemic, vaccinations, the stimulation of the economy, and compensation for costs or lost earnings are expected to push the government deficit up to 8.8% of GDP this year. The deficit being run by general government institutions, and the state budget in particular, is expected to translate into a further increase in debt to 44.8% of GDP.
In 2022, the strength of the recovering economy, supported by the Next Generation EU facility, the outgoing Multiannual Financial Framework, and the start of the new programming period, should come fully to the fore. Aside from fixed capital investment, the economy – with a growth rate of 3.7% – should quickly compensate for the decline in 2020. At the same time, the negative output gap is expected to close this year. According to legislation in effect, fiscal expansion will be replaced by fiscal consolidation in 2022. To make economic recovery sustainable in the long term, the consolidation strategy is based on a minimum fiscal effort of 0.5 percentage points per year.
In addition to stabilising the economy and tackling the epidemic, a number of measures to improve the quality of public finances were prepared or implemented in the past year. Work is continuing on digitalising state administration and streamlining the public procurement system as well as management of state property. However, the long-term pressure on public finances, stemming mainly from demographic changes in the population structure, remains a challenge.
The Convergence Programme of the Czech Republic was presented at and discussed by the relevant committees of the Chamber of Deputies and the Senate of the Parliament of the Czech Republic in April 2021. It was approved by the Czech government on 26 April 2021.