In 2022, Czech public finances were dominantly affected by a surge in inflation. The post-Covid recovery in many countries of the World, including the Czech Republic, brought with it increased private sector demand which, however, ran up against a stagnant supply of producers and retailers, fuelling a rise in the inflation rate. The invasion of Ukraine by Russian troops in February 2022 – in addition to the incalculable loss of human health and life – was another factor contributing to the rise in the inflation rate due to, among other things, the significant increase in the price of energy, fuel and food. The Czech fiscal policy response to the war conflict in terms of humanitarian and military aid spending was justified and did not have a major impact on the sustainability of public finances. However, the same cannot be said of some other actions of the government in the context of compensation of domestic actors related to energy market interventions or other measures.
Compared to the pandemic years of 2020 and 2021, the general government sector has achieved better economic results, but the effects of the earlier loose fiscal policy and measures taken during the pandemic are also affecting public finances now and will continue to be felt in the years to come. The reverberations of the fiscal policy response to COVID-19 are visible, among other things, in the general government structural deficit which was around 2.8% of GDP in 20221. It reflects actions taken during the pandemic, which ultimately have a more lasting impact on the structure of public revenues and expenditures than the pandemic itself. The change in the structure of public revenue and expenditure, together with one-off and temporary measures to support the economy, also contributed to the rise in inflationary pressures.
On the one hand, it is appropriate that the government has often reacted and is reacting with temporary, not permanent, support for the affected entities and is trying to cover the temporary expenses with extraordinary revenues (e.g. the so-called levy on excessive income or the so-called windfall tax, applied from 2023). However, it should be noted that the design and parametric setting of these temporary measures contribute to increasing uncertainty in the general government sector’s economic results.
On the other hand, the high inflation rate also brought changes with long-term implications for public finances. These include, in particular, three extraordinary pension indexations which will mean increased costs in the coming years, as well as the introduction of so-called indexations for other items of public expenditure. These indexations are then difficult to abolish or reduce, which again does not contribute to the long-term sustainability of public finances.
Currently, the so-called consolidation package presented in May 2023, which should help stabilise public finances, is also widely discussed. However, the list and parameters of all the envisaged changes and their impact in their definitive approved form were not known at the time of writing. Nevertheless, the current efforts to consolidate public finances can be positively appreciated. It is again clear that the setting of the parameters of the consolidation package will affect not only the current but also the future economic development of the general government sector.
This Report on Compliance with the Rules of Budgetary Responsibility (the Report on Compliance with the Rules) contains an assessment of compliance with the fiscal rules in 2022. The preparation of this Report on Compliance with the Rules is one of the main tasks of the Czech Fiscal Council (CFC) set out by Act No. 23/2017 Coll., on the Rules of Budgetary Responsibility, as amended (the Act). Although the Report on Compliance with the Rules only considers facts relating to 2022, it also examines the period before that year. Unlike in previous years, this Report on Compliance with the Rules does not focus on expected developments in the following years. The reason is that at the time of drafting of the Report on Compliance with the Rules (early September 2023), the basic parameters of the state budget for 2024 had not yet been finally approved. The preparation of the budget for this year and the outlook for 2024 and 2025 was thus burdened with a significant degree of uncertaint