A key task of the Czech Fiscal Council (CFC) under Act No. 23/2017 Coll., on the Rules of Budgetary Responsibility (the “Act”) every year is to prepare a Report on the Long-Term Sustainability of Public Finances (the “Report”) and submit it to the Chamber of Deputies of the Parliament of the Czech Republic.
The basis for assessing public finance sustainability is the future path of public debt. Like the first two Reports in 2018 and 2019, the current Report focuses on projecting public debt over the next 50 years, assuming that the current configuration of fiscal policy and other components of economic policy that affect public debt is maintained.
Sufficient argumentation for the choice of a 50-year timescale was given in the previous two Reports and in the public debates on various platforms initiated by their publication. This year’s Report is again based on the latest data and documents published by public institutions (the CZSO’s updated demographic projection, the Convergence Programme of the Czech Republic and the General Government Budgetary Strategy of the Czech Republic) and also makes comparisons with the preceding June 2019 Report. The Report also tries as much as possible to reflect and incorporate the suggestions made at meetings of the Chamber of Deputies Budget Committee and in many other places and also the ideas arising from the November 2019 international conference on the role of fiscal councils in EU countries organised by the Czech Fiscal Council under the auspices of the Representation of the European Commission in the Czech Republic.
For the second year, the Report contains alternative scenarios alongside the baseline one. These show how the projection would look given different demographic variants assuming that the retirement age is linked to life expectancy based on the “quarter of life retired” principle, or given faster productivity growth due to technological progress. For the first time, the current Report also contains analyses of public finance sustainability-related issues, in particular an international comparison of old-age pension expenditure, the ways of expressing and measuring healthy life expectancy using various indicators, estimates of the sensitivity of the government bond interest rate to the level of public debt, and an analytical look at the fulfilment of the stabilisation function of fiscal policy over the past business cycle.
The structure of the Report is similar to previous years. It begins with an assessment of the starting point in section 2 and goes on to describe the long-term macroeconomic and demographic projections in section 3. Section 4 is devoted to estimating thepublic finance revenue and expenditure sides, and section 5 describes the resulting balance and debt projections over the 50-year timescale. Section 6 contains a comparison of the results of the current Report with those of the previous Report and presents the alternative scenarios.
As in the first two Reports, population ageing is the main common denominator of future public finance problems. Starting in late February, however, this problem took on different dimensions due to the COVID-19 pandemic. Public finances for 2020 have been hit hard by the combination of a global economic contraction and the economic impacts of measures taken to protect the health of the Czech population and keep the health system afloat, and by the government’s subsequent efforts to mitigate the impacts of these measures on firms and individuals. It will not be possible to assess the total bill of the COVID-19 pandemic until the next Report. However, it is already clear that the starting level of public debt will move from the 30.5% of GDP originally expected
in the Czech Ministry of Finance’s January 2020
Macroeconomic Forecast to around 40% of GDP. The starting position of the current Report for the projection for the decades ahead has therefore moved significantly, and not only for 2020 itself, but also for the next seven years due to an amendment of the Act on the Rules of Budgetary Responsibility. The weaknesses in public finances that the CFC has been drawing attention to since it was established have been fully confirmed. Procyclical fiscal policy in recent years has made it impossible to create public finance buffers for unexpected negative shocks, so any unexpected, even relatively short-lived, stress will significantly worsen the government’s starting position for preparing for population ageing.
The COVID-19 pandemic will recede, but the long-term challenges for public finances, caused primarily by population ageing, will remain relevant. Pension reform-related activities came to a virtual halt during the pandemic. The results of the work of the Fair Pensions Committee also pointed to an urgent need to find suitable solutions as soon as possible. They also showed that if politicians agree to keep the real purchasing power of pensions in the present form, the demands on public finances will be at least equal to what the CFC expects in its projections. In addition, the Czech Republic last year asked the OECD to conduct a pension system analysis and recommend changes to make the system sustainable. The Czech Republic has received the results of the OECD study but does not plan to publish the document until the end of June 2020. It is therefore not possible to include these recommendations and comment on them in this year’s CFC Report.