One of the key tasks of the Czech Fiscal Council (CFC or Council) under Act No. 23/2017 Coll., on the Rules of Budgetary Responsibility, as amended, (the Act) is to prepare a regular annual Report on the Long-Term Sustainability of Public Finances (the Long-Term Sustainability Report) and, in accordance with Section 21 of the Act, to submit it to the Chamber of Deputies of the Parliament of the Czech Republic for discussion.
As in previous Long-Term Sustainability Reports, this year CFC assesses the situation of Czech public finances primarily from a medium- and long-term perspective. In the first case, the key assessment indicator is the current and expected structural balance, and in the second, the projected development of public debt over a 50-year horizon, which provides a model approximation of the extent of the long-term fiscal imbalance.
In last year’s Long-Term Sustainability Report, the CFC stated that in 2023 public finances found themselves at a crossroads between long-term unsustainability and a return to the more moderate fiscal policy that had been typical for Czechia before the COVID-19 pandemic. At the same time, it was noted that the first signs of a gradual improvement in the fiscal imbalance could be seen during 2024. At the time of publication of this Long-Term Sustainability Report (October 2025), with the benefit of a further year’s hindsight, it is possible to confirm that the signs seen the year before last have translated into a noticeable move towards more sustainable public finances. This can be demonstrated by the fact that in 2024 the overall general government deficit reached a value close to 2% of gross domestic product (GDP) and we expect a similar ratio this year. These are by far the best economic results since 2019 and also the lowest deficits in direct comparison with all of the Czech Republic’s neighbouring countries.
However, as was the case last year, it must be emphasised that a necessary prerequisite for continuing the favourable trend is to maintain the changes that were prepared and approved in 2023 and implemented in 2024, and not to worsen the fiscal trajectory with new inappropriate revenue or expenditure measures. And not only that – looking ahead to the coming years, it is already clear that in order to comply with national fiscal rules, any government emerging from this year’s elections to the Chamber of Deputies of the Parliament of the Czech Republic will have to present, at the latest in the draft state budget for 2027, further consolidation measures that will definitively return Czech public finances to a sustainable path. Czech legislation defines this as a structural public finance deficit of no more than 1% of GDP, and according to the current wording of the Act, the Czech Republic is to return to this level by 2028 at the latest. The CFC is already fairly certain that without new consolidation measures, the Czech Republic will not be able to comply with national fiscal rules as early as 2027.
This will by no means be an easy task. Although the overall state of public finances has improved in recent years, the structural component of the general government deficit has improved less markedly, from over 3% of GDP during the COVID-19 pandemic to just under 2% of GDP. In other words, although the government’s consolidation efforts between 2021 and 2025 were visible, they fell short of expectations and even of its own resolutions. As explained above, the CFC therefore still cannot consider the value of the general government´s structural balance under the Act to be such that it would define public budgets as stable and healthy, especially from a medium-term perspective.
Much greater progress has been made in the long term. Here, the CFC views very positively the changes that have been made to the parameters of the pension system, which have become known as the “small pension reform” and the “great pension reform”. The “small pension reform” mainly tightened the conditions for granting early retirement pensions and slowed down the indexation of pensions to real wages (the contribution of real wage growth was reduced from half to one third, as was the case until 2017). The “great pension reform” then brought about a gradual increase in the retirement age (albeit capped at 67) and a reduction in the replacement rates for newly granted pensions. The overall impact of all the measures of the “great pension reform” is estimated to improve the negative balance of the pension system by approximately 2 pp in relation to GDP in the worst times, i.e. at the turn of the 1950s and 1960s. In 2024, this reform also successfully passed the assessment of the Constitutional Court of the Czech Republic. If all the reform measures of previous years were to be annulled, the pension system deficit in the period in question would reach almost 4% of GDP, while the sum of both reforms will, according to the current CFC projection, reduce this deficit to 1.5% of GDP (for more details, see subchapter 3.1).
Thanks to the changes in the pension system described above, accompanied by changes in the demographic projection by the Czech Statistical Office (CZSO), see chapter 2, this year’s Long-Term Sustainability Report is significantly more optimistic in terms of the assessment of public finance sustainability than the previous one. In the baseline scenario, debt at the end of the projection fell from 217% of GDP to 178% of GDP. The moment of breaching the so-called debt brake threshold (general government debt-to-GDP ratio of 55%) has shifted only slightly compared to last year’s Long-Term Sustainability Report, from the projected year of 2038 last year to the currently projected year of 2037, mainly as a result of expected higher defence costs, which in the CFC’s baseline projection scenario will rise to 3% of GDP by 2030.
However, demographic factors will not only manifest themselves in the deepening imbalance of the pension system. The ageing population will also require increased healthcare spending. According to the current projection, public healthcare expenditure is expected to rise from the current 6.4% of GDP to 7.7% of GDP over the next 50 years. In this context, it should be noted that the CFC has repeatedly drawn attention to the deteriorating balance of the health insurance system, which will gradually fall into deficit from 2023 onwards, despite the newly codified automatic indexation of payments for state insurees, which came into effect for the first time last year.
The stability of public finances in the coming years will also be affected by two “new” types of expenditure. The first of these is the aforementioned defence expenditure, which currently stands at 2% of GDP. However, within the North Atlantic Treaty Organization (NATO), there has been agreement on the need to increase this to 5% of GDP. Increasing defence spending will also mean increasing general government deficits, as no decision has been made at the political level to reduce other spending or increase the tax burden in order to finance defence. This fact has also been reflected in an amendment to national fiscal rules in the form of an exemption whereby defence spending exceeding 2% of GDP will no longer be included in the general government sector’s expenditure frameworks. The impact of increased defence spending on the general government deficit and debt is discussed in subchapter 5.3.
The second type of new expenditure is the financing of the construction of nuclear reactors in Dukovany. In this case, the situation is somewhat specific. The state will provide EDU II with a loan, which will be used to finance the construction of new reactors on an ongoing basis.
Once the nuclear facilities are operational and the electricity they produce is sold, EDU II will begin to repay the loan to the state, including interest. While the provision of the loan by the state will be reflected in the cash balance of public budgets, the so-called Maastricht balance will not be affected. On the other hand, general government debt will increase during the provision of the loan for this purpose. However, between 2037 and 2066, when repayment is expected, this operation will have the opposite effect on debt. At the end of the entire 50-year horizon, the general government debt will not be affected by the construction of new nuclear units in Dukovany (if the project runs according to the current schedule), see subchapter 5.5.
In connection with 2024, it is also necessary to mention the amendments to the fiscal rules of the European Union (EU). Although their new form was approved in the first half of 2024, as we announced in last year’s Long-Term Sustainability Report, EU Member States have already agreed on their partial relaxation. This is again due to the need to increase their defence capabilities and, at the same time, their unwillingness to give up other priorities, at least for a limited period. The result is that new fiscal rules are in place, but the EU finds itself in a situation where the rules are less clear and predictable than in the past, are on average less binding on member state governments than the previous rules and are relaxed on an ad hoc basis or only partially applied right from the start. This is happening at a time when a number of important EU countries have been struggling for many years with obvious over-indebtedness and exhausted fiscal capacity. At the same time, there is a major fiscal turnaround in Germany, the EU’s largest economy. The significant loosening of the German debt brake threatens to cause a rapid swing from a very moderate fiscal policy to an extremely loose one, and Germany is thus ceasing to be the last and largest safeguard against over-indebtedness within the entire club of eurozone and EU countries.
The CFC therefore not only continues to regard the maintenance of the stability of the Czech Republic’s public finances and efforts to enforce fiscal rules as its fundamental mission but is also aware of something else this year: in terms of these statutory tasks, the coming years may bring even greater challenges than the often turbulent years of the past.