One of the main tasks of the Czech Fiscal Council (CFC) under Act No. 23/2017 Coll., on the Rules of Budgetary Responsibility, as amended (the “Act”), is to regularly prepare the Report on the Long-Term Sustainability of Public Finances (the “Long-Term Sustainability Report”) and, in accord-ance with Section 21 of the Act, to submit it to the Chamber of Deputies of the Parliament of the Czech Republic for consideration.
As in previous Long-Term Sustainability Reports, in this current one the CFC assesses the situation of Czech public finances primarily from a medium- and long-term perspective. In the first case, the key as-sessment indicator is the current and expected level of the structural balance, while in the second case it is the projected evolution of public debt over a 50-year horizon, which approximates the magni-tude of long-term fiscal imbalances.
If last year’s Long-Term Sustainability Report stated that public finances are at an imaginary crossroads between long-term unsustainability and a return to the moderate fiscal management that was typi-cal for the Czech Republic until the outbreak of the COVID-19 pandemic, this year we can see the first signs of hope for a gradual improvement in the structural fiscal imbalance in the medium and long term. In other words, it is a cautious step towards more sustainable public finances in the fu-ture. Of course, this is only on the assumption that the trends analysed in this year’s Long-Term Sus-tainability Report are maintained, the changes al-ready adopted are maintained and the planned re-forms are implemented. That is, there will be no gradual erosion of the established trend.
In terms of the overall general government sector deficit, it is now relatively safe to divide the last five years into roughly three periods. In 2020–2021, i.e. during the COVID-19 pandemic, the deficit was between 5–6% of GDP and the government balance deteriorated sharply. Between 2022 and 2023, a post-COVID period marked by the energy crisis, the sluggish economic recovery from the pandemic and the conflict in Ukraine, deficits moved below 4% of GDP. They would very likely have continued to oscillate around this level had the government not embarked on the gradual consolidation programme announced in its government statement. This, as embodied in the so-called consolidation package, should bring deficits below 3% of GDP (the planned and expected outcome this year should be in the range of 2.3%–2.5% of GDP) and maintain them at this level or better in the following years. This is the reason why the CFC also supported the con-solidation programme and the intended changes to the pension system (see below) in principle – not necessarily in the individual measures chosen and their calibration – as stated in last year’s Long-Term Sustainability Report.
The CFC also actively supported the government’s idea to offset the extraordinary fiscal expendi-tures related to the energy and war crises by se-curing temporary additional revenue, rather than financing them solely through deficit increases. However, once the situation normalises and when extraordinary and non-recurrent expenditure is no longer pertinent to public budgets, these extraordi-nary instruments should also leave the fiscal policy arsenal so as not to create a “budgetary habit” of consuming extraordinary revenues for current ex-penditure. This is true notwithstanding the fact that the timing of such expenditures in each year has not been synchronised with the timing of revenues, which, on the surface, may obscure or cloud their logical correlation.
However, while these consolidation attempts are bringing the aforementioned numerical improve-ments to the overall deficit trajectory, as shown in the first chapter of the Long-Term Sustainability Report, there have not yet been dramatic changes for the better at the level of the structural balance. If the structural deficit was above 3% of GDP at the peak of the COVID-19 fiscal expansion, it will remain above 2% of GDP at the end of this year. Accord-ing to the CFC, this is not yet a level at which public finances can be considered fully stable and sound in the medium and long term.
After disputes between the CFC and the Ministry of Finance of the Czech Republic (MF CR) in 2022–2023 over the interpretation of the numerical limits for the structural balance in the Act, there has been a positive development in this area since this year. This anchors, frames and also limits volunta-rism in the budget process not only for this govern-ment but also for the next one, and sets a clear po-litical ambition to remain on the path towards sustain-able public finances until the end of the process.
However, if there is a need to analyse why the struc-tural balance has not improved significantly despite these consolidation efforts, it can be briefly stated that, while some public expenditure has been cut and some revenues have been increased, the govern-ment has continued to increase other expenditure, in many cases indexing it, as already noted in last year’s Long-Term Sustainability Report. At the same time, it is still the case that some permanent, i.e. structurally relevant, revenues have been reduced in recent years. It can only be added that the aforemen-tioned unfortunate tendency to index expenditure continues, and although it does not always con-cern essential items such as defence or educa-tion (e.g. also salaries of politicians at local gov-ernment level, remuneration of full-time PhD
students at universities), as a trend it generally works against the sustainability of public fi-nances in the future. Another factor limiting the re-duction of the structural balance is the increase in debt servicing costs. The combination of both higher interest rates and growth in the nominal level of pub-lic debt leads to 1.4% of GDP being spent on interest payments in 2024, compared with half of this amount in 2019. The Czech public finances are thus weighed down by the debt burden of previous years.
Recent trends also include the long-term growing im-portance of other, i.e. non-tax, revenues of the public sector, such as revenues from the sale of emission allowances.
Let’s just add that the extraordinary development in 2022–2023 also had an impact on the reporting of the internationally comparable, i.e. accrual, bal-ance of the general government sector in both years. The initially reported balance for 2022 has subsequently been improved. The considerably sig-nificant collection of corporate income tax sur-charges in 2023 (which, however, accrued in 2022) made it necessary to restate the balance to a better level. In 2023, the initially reported balance deterio-rated again, when Eurostat disagreed with the re-ported deficit, and deducted from government reve-nue part of the dividend paid by a state-owned com-pany, which it no longer considered as revenue but as a symmetrical reduction in the value of the state’s participation in that company. Subsequently, there was again a movement in the corporate income tax levied. The apparently exceptional performance of the corporate sector in 2022 did not continue with the same intensity in 2023, and the resulting refunds of this tax in 2024 in turn began to retroactively worsen the balance of 2023. None of this would have hap-pened without the coincidence of the energy and in-flation crises of 2021–2023, which completely dis-rupted the stability and predictability of key macroe-conomic variables in the economy for a relatively long period of time.
This year, another important circumstance was added, namely an extraordinary revision of the national accounts by the Czech Statistical Office (CZSO). In addition to the normal revision of 2021 and 2022, the CZSO also carried out a general revision of the main macro aggregates from 1990 to the present, which clearly affected all ratio indicators. These include, of course, those relating to public fi-nances. This revision has shifted the general govern-ment sector deficit data for the pandemic and post-pandemic years to a better level, i.e. to lower deficits.
However, all interim adjustments were typically made after the decimal point of the balance of the general government sector, i.e. they did not change the main story of fiscal policy in the Czech Republic or its long-term trends.
From the point of view of the long-term balance of public finances, 2023 was a turning point because the government presented a concrete plan of the so-called Great Pension Reform, which is being discussed by the legislators at the time of publi-cation of this text. Following the limitation of ex-traordinary pension indexation and the so-called Small Pension Reform, which were approved in 2023, the intended combination of all these system adjustments should significantly improve the long-term sustainability of the pension system as the backbone of the sustainability of the overall public fi-nances (see chapters 3 and 5).
Thanks to the above-described changes in the pension system, together with changes in the de-mographic projections by the CZSO (see chapter 2), this year’s Long-Term Sustainability Report is significantly more optimistic in terms of the as-sessment of the sustainability of public finances compared to the previous one. Debt at the end of the projection is reduced from 311% of GDP to 217% of GDP in the baseline scenario, and the year at which the debt brake threshold would probably be breached has been postponed quite significantly be-yond 2030.
It should also be added that new budgetary rules were being developed within the European Union during 2023, with final approval occurring in 2024. However, a description and analysis of this change is the subject of another CFC document, namely the Report on the Compliance with the Rules of Budget-ary Responsibility, which the CFC is also publishing this year as required by the Act.