In recent years, the Czech Republic has witnessed the fastest accumulation of debt among EU countries, and this trend persisted in the previous year. Despite boasting the EU’s lowest unemployment rate, the state has been unable to leverage the benefits due to an inability to match ever-increasing government expenditures with the revenues generated by robust employment levels. Consequently, maintaining employment has become pivotal in the quest to reduce deficits.
In the assessment of last year’s state accounts, the Supreme Audit Office (SAO) revealed that inflation was the fifth highest in the EU, while the decline in real wages marked the most significant in Czech history. The SAO also spotlighted the burgeoning mandatory budget expenses, known as mandatories, which crossed the CZK 1 trillion threshold for the first time, primarily driven by increased pension outlays. Regarding inflation, the SAO emphasized the need for the government to take systematic budgetary measures and address the root causes, including escalating spending leading to deficit management and mounting debt. The SAO underscored how the efforts to revive the economy from the COVID-19 pandemic had been hampered by the energy crisis, exacerbated by the Ukraine conflict and its economic repercussions, resulting in surging energy prices.
Responding to these challenges, the government has presented a draft consolidation package to the Chamber of Deputies, focusing on public budget improvements, primarily through tax adjustments, and targeting billions in savings through spending reductions.
Miloslav Kala, President of the SAO, emphasized the potential for enhancing state revenues, particularly through more effective tax collection, given the substantial volume of tax arrears, exceeding CZK 106 billion in 2022. The fight against tax evasion, particularly in value-added tax, and tax system modifications are also on the agenda.
Kala also highlighted the high mandatorial and quasi-mandatorial expenditure, with mandatory spending exceeding CZK 1 trillion for the first time last year, a year-on-year increase of more than CZK 94 billion. This was predominantly due to exceptional pension indexations. The government has taken steps to reduce these extraordinary indexations this year and seeks to replace them in the future with a temporary contribution that won’t impact future indexations.
Furthermore, the SAO cautioned that even with high employment rates, state revenues cannot sufficiently cover escalating state spending. Any future approach toward the EU’s average unemployment rate would result in a considerable revenue shortfall for public budgets and increased unemployment benefit expenses, exacerbating public debt growth.
The Ministry of Finance acknowledges the challenges and underscores ongoing parliamentary discussions, including changes to the pension system and the need for consolidation measures. They recognize the costly nature of the extraordinary indexation mechanism and highlight the detrimental effect of high inflation on public finances, attributing primary responsibility for inflation reduction to the Czech National Bank (CNB).
The SAO’s report also noted that in international comparisons, three-quarters of EU countries achieved higher annual GDP growth than the Czech Republic last year. The country recorded growth 1.1 percentage points below the EU average, failing to return to the pre-crisis growth rate of 2019, which stood at three percent.
Source: ceskenoviny.cz
