Convergence Programme of the Czech Republic (May 2016)
The document specifies the basic aggregate fiscal data and the forthcoming most important measures in the form of medium-term budgetary impacts of the government's fiscal strategy.
Convergence Programme of the Czech Republic (May 2016)
In the sphere of fiscal policy, several exceptional events occurred in 2015. In spite of record-breaking investment and the compensation of austerity cuts, the lowest general government sector deficit in the modern history of the CR was achieved. The amount of general government sector investment was the highest since at least 1995, that year being the earliest year the relevant data are available for comparison. Even when the lease of the JAS-39 Gripen aircraft is included, the value of investment exceeded the highest pre-crisis level by CZK 4 billion. Quicker utilisation of resources from EU funds made a significant contribution. The second extraordinary phenomenon were the record-breaking low yields of government bonds. On 28 August 2015, medium-term state bonds were sold on the primary market for the first time in the history of the CR with negative yields. Since then, a further ten auctions of medium-term state bonds have been held on the primary market with negative yields. Government treasury bills have continually achieved negative interest yields on the primary market more or less since September 2015. On the secondary market, average monthly rates for medium-term bonds with a residual maturity of 2 years got into negative values for the first time in April 2015 and have remained there continuously since August 2015. Since October 2015 (except for an interlude in January 2016), a negative average monthly rate has also been recorded continually on the secondary market for bonds with a residual maturity of 5 years.
The submitted update of the Convergence Programme (CP) for the period 2016–2019 was approved by the Government of the CR on 11 May 2016 and is consistent with the National Programme of Reforms of the CR. The CP is fully in line with the rules defined in the updated opinion of the Economic and Financial Committee of the Council on the content and format of the Programmes of Stability and the Convergence Programmes (EFC, 2012). In April 2016, the CP was also presented and discussed with the relevant committees of the Chamber of Deputies and the Senate of the CR.
CP is divided into seven interconnected chapters. Chapter 1 sets out the economic and political intentions and targets of the Government of the CR in the sphere of fiscal policy and the basic elements of structural reforms, as well as the monetary policy framework.
The macroeconomic scenario of the CP, based on the April Macroeconomic Forecast of the MF CR (2016a), is detailed in Chapter 2. The economy was stimulated by several exceptional factors in 2015: a positive supply shock resulting from low oil prices and fiscal expansion, reflecting - among other factors - the effort towards maximal absorption of resources from EU funds from the financial perspective 2007-2013. As a result, the economy accelerated considerably and real GDP increased by 4.2% for the whole year. In 2016, we expect a slowdown in real GDP growth to 2.5%. The year 2016 should be characterised by inflation staying extremely low and by a further reduction in the unemployment rate.
The economic policy in 2015, the forecast for 2016, as well as the fiscal strategy of the government in future years are discussed in Chapter 3. This Chapter is based on the results of the Deficit and Debt Notification approved by Eurostat on 21 April 2016, and on the now more precise economic-policy intentions of the Government (closing date for data sources was 11 May 2016). For 2015, the general government sector deficit of 0.4% of GDP and government debt of 41.1% of GDP were notified. The forecast estimates the general government sector deficit of 0.6% of GDP in 2016 with a subsequent decrease to 0.5% of GDP in the whole horizon of the outlook. The structural balance should stay at around -1% of GDP in the same period, i.e. at the level of the medium-term budgetary objective of the CR. In 2015, the EU Council recommended that the CR should realise fiscal effort from 2015 to 2016 at a level of 0.5 pp, whereby it should return to the medium-term budgetary objective. From the perspective of current results, we can consider the given recommendation to have little point now, since in both these years as well as in the years of the outlook the CR should meet its medium-term budgetary objective.
Macroeconomic and fiscal scenarios are verified in Chapter 4 by comparison with the forecasts of other public and private independent institutions, including an evaluation of the macroeconomic forecast by a panel of independent experts. Moreover, the scenario is supplemented with a sensitivity analysis in which the impacts of alternative scenarios of economic development are simulated. These alternatives encompass different interest rates, lower economic growth of the main economic partners in the EU and a higher oil price. An equally important part of the chapter is also the analysis of the variances between the current scenario and the scenario from the last update of the CP.
In Chapter 5, some aspects of long-term sustainability are monitored. The chapter provides information on the pension scheme and the public health insurance scheme, including reform measures. In terms of long-term sustainability, the updated pension projections in the Ageing Working Group of the Economic Policy Committee (EPC/AWG) are also described. This chapter also examines the size and structure of general government sector guarantees.
Chapter 6 addresses the qualitative side of general government sector revenues and expenditure. At present, priority is given to a description of planned and implemented changes in the tax system which should result in preventing tax evasion and improving tax collection. Measures for rationalising government expenditure are also presented here.
The last section, Chapter 7, deals with already implemented or planned changes in the institutional environment, the transparency of public finances and strengthening their efficiency. Special emphasis is paid to issues around strengthening the fiscal and budgetary framework.