Last year’s development of Czech general government finances can be assessed positively. The indicator of their medium-term imbalance, i.e. the structural balance, improved by approximately 0.8 pp. There was also a significant reduction in the volume of one-off and temporary expenditure measures, which contributed to a reduction in the overall deficit from 3.7% of gross domestic product (“GDP”) in 2023 to 2.2% of GDP in 2024. The decline in the deficit below 3% of GDP also meant that the Maastricht fiscal criteria were met for the first time since 2019. National fiscal rules clearly played an important positive role in this process, with the amendment to Act No. 23/2017 Coll., on the Rules of Budgetary Responsibility, as amended, (the “Act”) of 2023 defines a clear trajectory for reducing the structural deficit by 0.5% of GDP annually until it reaches its original value of 1% of GDP, i.e., a value that does not jeopardize the medium-term sustainability of general government finances.
The existence of fiscal rules is particularly important given the strong tendency of politicians to run persistent deficits, which then undermines the medium-term and long-term sustainability of general government finances. One of the key conditions for their operation is transparency and stability, which, however, has not been respected in the Czech Republic in recent years. Two amendments to the Act in 2020 opened the door to a significant increase in the structural deficit. This subsequently led to an increase in debt burden, which rose by almost 14 pp between 2019 and 2024 to 43.3% of GDP in 2024. Fortunately, the last amendment to the Act in 2023 went in the opposite direction and tightened the structural deficit rule. It can thus be described as one of the key elements of the adopted consolidation package.
The proper functioning of fiscal rules also requires their regular evaluation based on relevant data. This is the content of this Report on Compliance with the Rules of Budgetary Responsibility (“the Report on Compliance with the Rules”), the preparation of which is one of the main tasks of the Czech Fiscal Council (the “CFC” or the “Council”) set out by the Act. Strict adherence to clearly defined and stable fiscal rules should significantly contribute to establishing the medium- and long-term sustainability of Czech general government finances.
In addition to assessing compliance with the three fiscal rules defined in the Act, the CFC decided to include other sub-topics (boxes) in the Report on Compliance with the Rules that focus on current issues and deserve attention. The first of these tracks changes in the general government debt in EU countries in the period 2020–2024 and analyses the factors behind the different developments in individual countries. We also focus on the impact of the deficit spending of the social security funds subsector (health insurance companies) on the cash balances in their accounts. We also devote considerable space to the new EU fiscal rule based on the net expenditure path – Box 3 deals in more detail with its construction and also with the impact of the application of the national escape clause on the position of individual EU Member States. In the case of local governments, we analyse in the fourth Box the development of the application of the so-called local real estate tax coefficient in municipalities and monitor how they use this space to increase (but also decrease) their own revenues.
The information presented in this Report on Compliance with the Rules confirms that the Czech Republic complied with both national and European fiscal rules in 2024. Nevertheless, Czech general government finances cannot be considered fully recovered yet. Despite the decline in the deficit, the debt ratio is rising (it is expected to increase from 43.3% of GDP to 44.2% of GDP in 2025) and the structural balance remains around 1 pp worse than the target value of −1% of GDP. Furthermore, forecasts show that continuing consolidation in line with the trajectory set out in the Act will require further adjustments to general government revenue and expenditure. In addition, the ratio of general government revenue to GDP has remained virtually unchanged compared to the year before the COVID-19 pandemic (40.7% of GDP in 2019 vs. 40.6% of GDP in 2024), while general government expenditure is roughly 2.4 pp higher (40.4% of GDP in 2019 vs. 42.8% of GDP in 2024). Also, further consolidation will be hampered by the need to allocate significant resources to increase defence capabilities, and the state’s borrowing needs will be further increased by the need to draw on resources for the construction of additional units at the Dukovany nuclear power plant. All this will place considerable demands on Czech general government finances and will require prudent decision-making by political representatives when approving any new expenditure items or reducing the tax burden. It is worth bearing in mind that sound general government finances are one of the pillars of macroeconomic stability and create a suitable environment for economic growth. Stable and comprehensible fiscal rules are an appropriate and effective tool for maintaining fiscal discipline.