Even though the Czech Republic continues to be one of the least indebted countries in the European Union and, in the medium term, its public finance will continue to be in a relatively good condition, when viewed in terms of long-term sustainability, significant changes will have to be made. If the present expense and tax policies were retained, public sector debt may climb to 222% of GDP by 2069. This was the finding of the Report on Long-term Public Finance Sustainability published by the Czech Fiscal Council (available in Czech language here, in English available here)
The main cause for the Czech public finance long-term unsustainability is the ageing of the population that the Czech Republic and other developed countries alike are facing. While today, the share of persons aged 65 and over on the total population of the Czech Republic is 19%, demographic projections of the Czech Statistical Office (CSO) from November 2018 show that it will grow up to 30% in the next 50 years.
Even though the new demographic projection is slightly more favourable than previous CSO estimates from 2013, the Czech Fiscal Council’s data continue to show that, if present tax and expense policies are maintained, ageing will lead to a significant growth in expenditures on pensions, medical and long-term care. Also education and defence expenditures will grow in proportion to the GDP. “Not even continued economic convergence of the Czech Republic to more developed countries and resulting higher economic growth that will manifest in higher public revenues will suffice to offset this development. Pension scheme expenditure combined with increases in other expense items will, according to our projection, ultimately reach levels that will bring the public finance to high deficits,” says member of the Czech Fiscal Council Jan Pavel. According to him, the problem will become fully manifested after 2030, when the populationally strong age cohorts enter retirement age.
According to the projection’s baseline scenario, the “debt brake” threshold, which is legally set at 55% of GDP, will be breached around the year 2047. Already some 15 years prior, the Czech Republic could face problems adhering to the statutory 1% of GDP structural deficit limit. “Even though it may at first glance seem that there is still enough time for seeking a solution, that is not the case. The more the solution of the problem is postponed, the narrower the space to manoeuvre will be. With every additional year of delay in reaction to expected demographic change, we not only lose precious time, but, above all, we are increasing the costs of any future measures,” says Chairman of the Czech Fiscal Council Eva Zamrazilová. She also notes that the Council is not authorised to present solutions itself, but it is prepared to carry out expert evaluations of any proposed solutions from the point of view of their long-term sustainability.
The Report on Long-term Public Finance Sustainability was presented by the Czech Fiscal Council to the Chamber of Deputies according to the Act . This report also employed alternative scenarios that evaluated, for example, the possibility of linking pension age to life expectancy or with an impact of digitisation, automation, and robotization on labour productivity that would be more positive than expected. “Some alternative scenarios show that, at the end of the 50-year horizon, the ratio of debt to GDP would be lower than in the basic scenario, but, even then, the Czech Republic would not attain long-term sustainability of its public finance,” concludes a Czech Fiscal Council member, Richard Hindls.
Key findings of the Report on Long-term Public Finance Sustainability:
- The present tax and expense policies will require significant modifications in a 50-year time frame.
- The number of old-age pensioners will culminate around 2059, when there should be around 3.2 milionof them, i.e. about a third more than today. The working age population will decline.
- Binding retirement age with life expectancy does not by itself lead to long-term sustainability of the public finances. However, pension system spending would be reduced by up to 1.3 % of GDP as of 2059.
- If the current tax and expenditures policies were maintained, the breach of the debt limit would take place around 2047. At the end of the projection´s 50 year horizont the general government debt-to-GDP ratio could reach up to 222 % of GDP.
- 2.79 % of GDP is by how much the primary structural balance would have to be better from 2019 till 2069 to ensure that the debt-to-GDP ratio does not exceed the debt brake.