Fiscal Outlook of the Czech Republic (January 2021)

Department 37 – Economic Policy
Department 37 – Economic Policy


  • Fiscal Outlook
  • Macroeconomic Forecast

ISSN 2570-5695

The epidemic situation in 2020 affected the world economy in a way unprecedented in modern history. Finding a balance between preventing the spread of the disease as effectively as possible and the economic impact of measures adopted for that purpose has been very difficult. Therefore, especially at the beginning of the pandemic, the countries acted relatively differently in the choice of approach, intensity and speed of the anti-epidemic measures taken. At the same time, the approach of “natural infection of the population” seemed to be rather odd. Without constant massive testing or problematic monitoring of people's movements in democratic countries, the only other most effective solution in the absence of a vaccine was to reduce social contacts. In an effort to mitigate the negative effects of restrictions as much as possible, states have embarked on massive fiscal and monetary stimulus economies. Nevertheless, avoiding economic downturns and their social consequences at the cost of a significant increase in public debt could not be prevented.

The Czech economy did not escape the economic downturn either. We expect gross domestic product to decline by 6.1% in 2020. Except for public expenditure, the decline was seen in all its components. The recovery in 2021 should be gradual. The development of the economy, the solution of the epidemic and the package of stimulus measures significantly affected the performance of public finances in the Czech Republic. The general government balance probably ended with a deficit of −5.8% of GDP and the debt rose to 38.3% of GDP at the end of 2020.

Although in 2020 the legislation made it possible to use two escape clauses, namely the declaration of a state of emergency and a deep economic recession, it was necessary to proceed to the amendment of the legal framework in order to prepare the expenditure framework for 2021 to 2023. Otherwise, fiscal policy would undermine the potential recovery this year with drastic restrictions. The first amendment to the Act on Budgetary Responsibility Rules of April 2020 set a fixed value of the structural balance at −4% of GDP for 2021. In the second amendment from December 2020, the key is the predicted value of the structural balance in 2021, from which a gradual consolidation of public finances shall start. Its trajectory requires a reduction of the structural deficit by at least half a percentage point per year. In addition, according to our estimates, consolidation will begin just as the economy regains optimal use of its production capacities.

Both amendments were criticized for their own nature, i.e. the loosening of the fiscal rule for a limited period. However, efforts to put in place restrictive and austerity measures immediately to prevent debt growth are also questionable in terms of effectiveness: “In the context of fiscal stimulus packages, there has been much talk of fiscal sustainability. This is as it should be. There is absolutely nothing wrong with fiscal sustainability; quite the contrary, it is target to be aimed at. What is wrong with much of the conversation on fiscal sustainability is the idea that it is to be secured by keeping in check the current government spending, deficits, and debt. In times of deep recession, however, what is needed is not less spending activity but more. If the aim is to balance the budget “tomorrow”, during the slump we should not seek to balance it “today”. In fact, were such a strategy of seeking balance to be tried in the present, the budgetary position would only worsen in the future. Similarly, if we wish to have a stable and sustainable ratio of public debt to GDP tomorrow, we will need to raise that ratio (perhaps dramatically) today.” (Murray Milgate, director of economic studies at Queens’ College, Cambridge). The specific form of the fiscal stimulus is the subject of a political agreement. However, the economic crisis cannot be expected to be managed without a temporary slump in the structural deficit and an increase in public debt.

We predict the structural balance in 2021, from which consolidation will be based according to the law, at −5.9% of GDP in 2021. However, we expect the general government balance in 2021 to reach a deficit of −6.6% of GDP, as the economy will face a negative output gap. The deficit then implies an increase in debt, specifically to 43.3% of GDP.

From the perspective of long-term social expenditure, there were several impulses in 2020. New pension projections were peer reviewed, but they are not much different from the previous ones. In early December, the Organisation for Economic Cooperation and Development (OECD) published its Review of the Czech Pension System, in which it made recommendations to the Czech Republic on social system reforms. Around the same time, the pension reform proposal of the Commission for Fair Pensions was put forward. However, the reform proposal and the OECD recommendations differ in many respects.

The thematic chapter deals with adopted anti-epidemic measures of the government during practically the whole of 2020. It provides a detailed view of individual measures divided into support for health and social services, households, the self-employed and companies; besides monetary credit measures are discussed. The total allocation exceeding 21% of GDP was not fulfilled mainly due to the non-use of provided guarantees. The government created a framework, the administration was entrusted to the financial sector. In the case of direct support, the drawdown in relation to the intended allocation was relatively high. The use of the allocation generally depended on the depth of the problem in individual sectors of the economy, the size of the liquidity gap, as well as other options for financing companies. In total, support amounting to 5% of GDP was implemented in 2020.