Budgets under scrutiny

BUDGETS UNDER SCRUNITY

 

GLOSSARY OF TERMS

 

Public budgets
In addition to the state budget, the system of public budgets encompasses the budgets of local authorities (regions, municipalities), health insurance funds, public institutions of higher education, extra-budgetary funds, subsidised organisations, and other public institutions that do not operate on the competitive market. These institutions use public funds to execute public policies in different areas (defence, education, social, etc.).

State budget
The state budget accounts for the largest share of public budgets. Its main parameters are proposed by the government and approved by the Chamber of Deputies every year as a special law. The state budget is essentially a one-year economic plan for the state. The largest items on the income side of the Czech state budget are social security contributions and taxes. Together, they accounted for more than 86% of all state income in 2019. The largest share of expenditures in 2019 (almost 39%) was spent on social benefits, especially pensions.

State budget deficit/surplus
When the state budget’s expenditures are higher than its revenues for the reference period (usually one calendar year), then there is a budget deficit. If revenues are higher than expenditures, there is a surplus. The state usually has to contract more debt to cover deficit management. The state budget has always resulted in a deficit in the history of the independent Czech Republic, save 1993–1995, 2016, and 2018.

Table: State budget balances in the history of the independent Czech Republic (expressed in cash terms)

YearBalance of state budget (in billions of CZK)
19931.08
199410.44
19957.23
1996-1.56
1997-15.72
1998-29.33
1999-29.63
2000-46.06
2001-67.71
2002-45.72
2003-109.05
2004-93.68
2005-56.34
2006-97.58
2007-66.39
2008-20
2009-192.39
2010-156.42
2011-142.77
2012-101
2013-81.26
2014-77.78
2015-62.8
201661.77
2017-6.15
20182.94
2019-28.52

Source: Ministry of Finance of the Czech Republic

National debt and government sector debt

The national debt is the sum of government liabilities that arise primarily due to deficit management of the state budget. Since the inception of an independent Czech Republic, the national debt rose from CZK 158 billion in 1993 to CZK 1.64 trillion in 2019. The national debt has been growing most of that time, declining only in 1994, 1995, 2014, and 2016.

The so-called public debt (also known as “government debt” or “government sector debt”) is the sum of the national debt and the liabilities of local and regional authorities, health insurance funds, extra-budgetary funds, and other institutions that fall within the system of public budgets. This debt was CZK 1.74 trillion at the end of 2019.

Debt-to-GDP ratio
Anyone who wishes to paint an accurate picture of how states and governments manage to cope with their debts is advised to monitor the debt-to-GDP (gross domestic product) ratio in addition to the absolute amount of debt. The ratio shows how large the debt is compared to the size of the country’s economy. A the end of 2019, the government debt of the Czech Republic was 30.2% of GDP; it was among the lowest in the European Union. By contrast, the government debt of Greece was 176.6% of GDP. Italy and Portugal also owed more than 100% of their annual GDPs at the end of 2019.

Table: Government debt of selected EU countries relative to their GDP

StateGovernment debt relative to GDP (in %, data valid at the end of the 4rd quarter of 2019)
Estonia8.4
Luxembourg22.1
Bulgaria20.4
Czech Republic30.2
Romania35.2
Denmark33.3
Slovakia48
Germany59.8
Austria70.3
Average EU 2879.3
Spain95.5
France98.1
Belgium98.7
Cyprus95.5
Portugal117.7
Italy134.8
Greece176.6

Source Eurostat

Debt service
Countries most frequently contract debts through bond issues, which must be repaid to investors together with interest. Interest and other charges associated with debt account for the costs of so-called debt servicing. The Czech state budget paid out about CZK 39.4 billion to this end in 2019.

Detailed information about the bonds and treasury bills (short-term debt securities) issued and planned for issuance by the Czech Republic is published by the Ministry of Finance of the Czech Republic on its website.

Debt brake
Should the government debt reach 55% of nominal GDP, measures for the long-term sustainability of public finances will be activated under Act No. 23/2017 Coll. on the rules of budgetary responsibility. The following are examples of the measures activated by the so-called debt brake. The government approves and submits to the Chamber of Deputies a proposal and a medium-term outlook for the state budget and the state funds, one which would lead to sustainable public finances over the long-term. The government also submits to the Chamber of Deputies proposals for balanced budgets of health insurance funds. Furthermore, local and regional authorities approve their budgets for the following year as balanced or in surplus. Other public institutions may not enter into new contractual obligations which would raise the government debt for longer than one year, save for the commitments related to projects with EU co-financing or commitments which are necessary to comply with a court or public authority decision. The debt-brake measures need not be activated under certain circumstances, e.g., when there is significant deterioration of economic development for two consecutive years or in the event of an emergency or a state of war.

Maximum deficit level
Act No. 23/2017 Coll. on the rules of budgetary responsibility allows total expenditures of the government sector to be higher than its total income. The difference (deficit), however, may not exceed 1% of nominal GDP. Nevertheless, the Ministry of Finance may, in exceptional cases, increase the expenditures of the government sector, e.g., when the state faces a natural disaster, a deteriorating security situation, or an expected significant economic downturn (quarterly year-on-year drop in real GDP of at least 3%).