The Czech economy, like most economies around the world, was still being affected by the COVID-19 pandemic in 2021. Government budgets again ended in a large deficit, even though the economy returned to a growth path. This was due mainly to the adoption of a range of structural revenue and expenditure measures, some of which had nothing to do with the COVID-19 crisis. The approach taken to the fiscal rules also turned out to be very negative. Act No. 23/2017 Coll., on the Rules of Budgetary Responsibility, as amended (the “Act”), was amended twice during 2020, in the second case through a private member’s motion to amend, which unfortunately had an adverse effect on the applicability of the current version. The amendment consisted primarily in deactivating the structural balance rule for 2021 and relaxing it very significantly for 2022. The result is the present state of Czech public finance, which is on a collision course with the debt brake by the end of this decade. It’s a classic example of what happens when the fiscal rules are adapted to fiscal policy and not vice versa.
The major changes made to the Act in 2020 point to a general lack of understanding of the logic of the fiscal rules. If they are to be of any use, the rules need to be stable over the long term. They cannot be altered whenever compliance with them requires the introduction of unpopular measures. The Czech Republic still has an advantage over the majority of EU countries in the form of relatively low government debt. However, the relaxation of the fiscal rules and the ensuing over-optimistic deficit outlook for the years ahead makes it highly likely that we will forfeit this advantage in the foreseeable future.
This Report on Compliance with the Rules of Budgetary Responsibility (the “Report”) contains an assessment of compliance with the fiscal rules in 2021. Preparing the Report is one of the main duties of the Czech Fiscal Council (CFC) set out in the Act. Although the Report evaluates the information relating to 2021 only, it also examines the period before that year. Unlike previous years’ Reports, this one does not look at expected trends in future years. This is because at the time the Report was prepared (early September 2022) the main parameters of the state budget for 2023 had not yet been approved and the preparation of the budget for that year and the outlook for 2024 and 2025 was moreover subject to additional uncertainty associated with resolving the acute energy crisis and mitigating its impact on the real economy.
The whole report is available here.
Charts and tables are available here.