Question

1. Evaluate the fiscal indicators of the Czech Republic with regards to the Maastricht criteria.   

Answer 1

With regard to Maastricht criteria, the evaluation of the fiscal indicators of the Czech Republic centers on the evaluation of public deficit and public debt position.

It shall be noted that the Maastricht criteria on the government financial position are said to be satisfied only when both components of the fiscal criterion, i.e. a general government deficit of no more than 3% of GDP and general government debt of no more than 60% of GDP, are fulfilled in a sustainable manner.

After years of deficits, the Czech Republic recorded a general government surplus (of 0.7% of GDP) for the first time in 2016. The general government deficit rose to 1.5% of GDP in 2017. On the revenue side, this was aided by growth in tax revenues and social security contributions. Most expenditures rose at a modest pace, the exceptions being growth in compensation of employees and renewed growth in investment. Government debt interest expenditure continued to fall.

The Ministry of Finance expects a general government surplus of 1.6% of GDP for 2018. On the revenue side, tax revenues – in particular value-added tax and income tax, and social security contributions should continue to rise. Growth in expenditure is due mainly to current expenditure, especially a further rise in the compensation of employees. Investment expenditure is continuing to go up as well.

The medium-term outlook envisages the drop of the general government deficits below the reference value of 3 % GDP putting thus public finances in line with requirements of the Maastricht deficit criterion.

Thus, with this, the Czech Republic will continue to achieve a general government surplus of close to 1% of GDP over the next three years as estimated. Based on this outlook, this part of the public finance criterion is expected to be fulfilled in the future as well. However, the efforts are also needed to fulfill the medium-term objective (MTO) of a structural general government deficit of no more than 1.0% of GDP.

According to the current outlook, the Czech Republic should be compliant even with this stricter limit - structural deficit to be 0.5% of GDP.

Given the current fiscal policy settings and forecasted economic growth, the debt-to-GDP ratio should continue to decline, reaching 30% of GDP in 2021.

General government debt surged in 2009–2012 from less than 30% of GDP to around 45% of GDP in 2013 owing to the global financial and economic crisis. Since then, however, the government debt-to-GDP ratio has been falling markedly, mainly due to a general government surplus and a positive financial market situation. Given the above, compliance with this item of the criterion is not a problem in the Czech Republic.

The Czech Republic never had any problems with keeping the debt-to-GDP ratio below the 60 % reference value, given the low initial indebtedness. After a significant increase in public debt in 2001-2003, which was caused by accounting for government guarantees and liabilities of consolidated agencies, the general government debt levels stabilized around 30% of GDP. It started to grow sharply in 2009 after the outbreak of the global financial crisis accompanied by the economic recession.

The indebtedness of the Czech government sector still remains below the EU average but without reforms promoting the long-term sustainability of public finances the ability to comply with the debt criterion would narrow.