The Czech economy, like most economies around the world, was hit hard by the COVID-19 pandemic in 2020. The ensuing economic contraction and the revenue and expenditure measures taken to mitigate the negative impacts of the crisis gave rise to a large public finance imbalance. All this affected the levels of the indicators monitored in the context of the various fiscal rules. The public finance imbalance persisted into 2021 and widened even further, largely as a result of changes made to tax and expenditure policies. The relative importance of support programmes, taking the form of one-off and temporary measures, diminished. After the pandemic ends, these support programmes will disappear and no longer burden public finances, while other measures will remain in place and the resulting imbalance will have to be addressed in the future with strong fiscal restriction.
This Report on Compliance with the Rules of Budgetary Responsibility (the “Report”) contains an assessment of compliance with the fiscal rules in 2020. Preparing the Report is one of the main duties of the Czech Fiscal Council (CFC) set out in Act No. 23/2017 Coll., on the Rules of Budgetary Responsibility, as amended (the “Act”). Although the Report evaluates the information relating to 2020 only, it also examines the period before 2020 and takes a look at current and expected future trends.
The Act defines the fiscal rules and is crucial for evaluating compliance with them. In 2020, it underwent two amendments that will affect the assessment of the fiscal rules for almost a decade to come. The two amendments relaxed the maximum permitted structural deficits and significantly moved the timescale over which public finances should return to a sustainable level. The form of these changes and the way they were discussed reveal a misunderstanding of the logic of the fiscal rules, for which stability and transparency are key. The result is that the fiscal rules are being adjusted to fiscal policy and not vice versa. Going forward, this will limit the functionality of the fiscal rules in achieving their primary objective of ensuring sustainable public finances.
The Report is divided into four main sections, the first of which outlines the economic situation and general government finances1 and the other three evaluate compliance with each of the fiscal rules. The text is supplemented with three thematic boxes. The first examines the impact of the relaxation of the expenditure rule on the expected path of public debt, the second provides an international comparison of the expected evolution of fiscal policy, and the last analyses the effect of the one-off budget compensation provided to municipalities.