This year’s edition of the annual Report on Compliance with the Rules of Budgetary Responsibility (the “Report”) was written a time when adverse economic developments had revealed the full importance of having fiscal rules in place. However, it will not be possible to fully assess compliance with the rules during the COVID-19 pandemic until next year. The following pages therefore offer a look back at 2019, when the Czech economy had already slowed but few could truly have known what 2020 held in store.
Assessing compliance with the fiscal rules and preparing the Report, which is subsequently submitted to the Chamber of Deputies of the Parliament of the Czech Republic, is one of the main statutory duties of the Czech Fiscal Council (CFC). This year’s Report is the third of its kind to be issued during the existence of the CFC, and, in terms of the statutory view of compliance/non-compliance with the fiscal rules, evaluates the information relating to 2019 only. As context, however, it makes an excursion into the period before 2019 and takes a look at current and expected future events.
The Report is divided into five sections. Section 1 describes the evolution of general government1 finances to date. Section 2 evaluates compliance with the debt rule, i.e. the rule applying to the general government debt level. Section 3 examines compliance with the expenditure rule, i.e. the rule for deriving the state budget and state funds expenditure framework and determining total general government expenditure. This section also looks at information on legislative changes made in 2020 relaxing the rules of budgetary responsibility for 2021–2027.
The relatively high sensitivity of compliance with the expenditure rule to the accuracy of the estimate of potential output was confirmed in the course of 2020. The information on compliance/non-compliance with the rule can be distorted if the estimate is not accurate enough. The estimates of potential output and the structural deficit, and, in turn, the view of compliance with the expenditure rule, change significantly in the event of a shock to the economy.
The CFC therefore established intensive communication with the Ministry of Finance of the Czech Republic to jointly eliminate these weaknesses in the quantification of compliance with one of the two main rules of budgetary responsibility. The outcome is a revised expenditure framework determination methodology, which the Ministry of Finance used in its September macroeconomic forecast.
Section 4 of the Report examines compliance with the rules of budget responsibility by territorial self-governing units. New stress tests of municipalities have been created to test the resilience of territorial self-governing units to economic shocks. These stress tests will feature in all future issues of the Report as well. Those in the current Report respond primarily to changes and challenges associated with the coronavirus crisis.
The new section 5 compares compliance with the fiscal rules in the Czech Republic with that in the rest of the EU. This part of the Report describes the historical roots of the fiscal rules and how they were gradually adapted in order to fulfil the underlying objective of keeping public finances sustainable in the long term. This new section also provides a wider and more comprehensive view of public finances in the Czech Republic over the last two decades by comparison with the usually available analyses.