Fiscal Outlook of the Czech Republic (May 2013)
The second wave of the economic recession, with its long duration and consistently restricted outlook for future, is forcing economic policy makers to make difficult decisions. On the one hand there are efforts to consolidate public budgets, whose position is dismal in most developed economies as a result of persistent structural deficits and the previous stage of the crisis on the other hand, however, we cannot ignore the fact that budget savings in combination with increase in taxation have their impact into domestic economy. Preparation and implementation of consolidation strategies are increasingly confronted with the limits, which are caused both by the institutional quality of government sector and the current economic development. The effort is therefore oriented towards adaptation of structural reforms and politics, which contribute to the increase in competitiveness and growth of potential product, which subsequently have a positive spillover effect to the government sector performance.
On 24 April 2013, the Czech government approved the update of the Convergence Programme of the Czech Republic for 2013–2016, wherein it presented its realized and planned measures in the area of fiscal policy , as well as of other policies with quantitative or qualitative consequences into government sector. The priority for government fiscal policy in 2013 is to ensure such a performance of the state budget and state funds, which would end the excessive deficit procedure (EDP). Compliance with the requirements for termination of EDP will be judged both on the basis of the actual government sector performance in 2013 and on setting of the fiscal policy in a demonstrably sustainable way below the excessive deficit in the future.
In the conditions of expected fragile recovery of the Czech economy, government decided to continue in consolidation on the expenditure side, while stabilising future expectations primarily regarding tax policy, which is supposed to boost domestic demand and help to the business environment. This step leads to the postponement of some reform measures to the subsequent years of the outlook. These often have a stimulating effect and should help speed up the recovery of the convergence process to developed world economies. The government is also committed to support economy with additional active measures in the current and next year.
This May Fiscal Outlook of the Czech Republic is conceived as a supplement to the Convergence Programme, from which the data and information are drawn. It is also based on the Macroeconomic Forecast of the Ministry of Finance of the Czech Republic and on the update of the medium-term expenditure framework for the state budget and state funds, which was approved in April by the government.
Current and expected macroeconomic and fiscal developments are briefly outlined in the first chapter. In the first quarter of this year, the Czech economy would be found in recession for six consecutive quarters. Nevertheless, we expect that the fall in the first quarter was the minimum and the economy is bouncing back from the bottom. Yet it is likely, that the economy will be in this and next year in a relatively deep output gap, comparable to the output gap in 2009. The slower pace of consolidation accompanied by economic incentives is therefore welcome with regard to the economic growth.
Government sector finances, which are under surveillance of financial markets and international institutions, have been achieving very good results for several years in a row. Relatively low interest rates on newly issued Czech government bonds are tangible bonus of successful consolidation. Yields to maturity of all 10-years bonds were around 1.82%, a level comparable with French government bonds and 0.62% higher than German government bonds. Government sector performance, including international comparison, is discussed in the second chapter.
The third chapter expands the Convergence Programme with a review of the budgetary outcome based on cash‐flow methodology.