Budgets under scrutiny

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 a number of 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 as a special law on an annual basis. The state budget is essentially a one-year economic plan for the state. The largest items of income in the Czech state budget are social security premiums and taxes. Together, these two items accounted for more than 90% of all state incomes in 2018. The largest share of expenditures in 2018 (almost 40%) 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. For the state to be able to cover deficit management, it usually has to contract more debt. The state budget has always resulted in a deficit in the history of the independent Czech Republic, save 1993–1995, 2016 and 2018.

Table: Balances of the state budget 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
2008-20.00
2009-192.39
2010-156.42
2011-142.77
2012-101.00
2013-81.26
2014-77.78
2015-62.80
201661.77
2017-6.15
20182.94

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 has risen from CZK 158 billion in 1993 to CZK 1.62 trillion in 2018. The national debt has grown most of that time, declining only in 1994, 1995, 2014 and 2016.

When the liabilities of local and regional authorities, health insurance funds, extra-budgetary funds and other institutions that fall within the system of public budgets are added to the national debt, this is the so-called public debt (also known as “government debt” or “government sector debt”). This debt was CZK 1.75 trillion at the end of 2017 and CZK 1735.1 billion at the end of the fourth quarter of 2018.

Debt-to-GDP ratio
Anyone who wants to paint the most 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. This shows how large the debt is compared to the size of the country’s economy. The government debt of the Czech Republic in the third quarter of 2018 was 32.7% of GDP and was therefore among the lowest in the European Union. In Greece, for example, the government debt was  181.1% of GDP over the same period. Italy, Portugal, Belgium and Cyprus also owe more than 100% of their annual GDP.

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 2018)
Estonia8,4
Luxembourg21,4
Bulgaria22,6
Czech republic32,7
Romania35,0
Denmark34,1
Slovakia48,9
Germany60,9
Austria73,8
Averadge EU 2880,1
Spain97,1
France98,5
Belgium102,0
Cyprus102,5
Portugal121,5
Italy132,2
Greece181,1

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 40.6 billion to this end in 2018.

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 at its website.

Debt brake
If public sector debt reaches 55% of the nominal gross domestic product, measures are activated under Act No. 23/2017 Coll. on the rules of budgetary responsibility leading to a level of public finance which is sustainable over the long-term. Based on the so-called debt brake, the government, e.g., approves and submits to the Chamber of Deputies a proposal and a medium-term outlook for the state budget and the budgets of state funds leading to a level of public finances that is sustainable over the long-term and submits proposals for balanced budgets of health insurance funds to the Chamber of Deputies. Furthermore, local and regional authorities approve their own budgets for the following year as balanced or surplus. Other public institutions may not enter into new contractual obligations when the amount of debt is above 55 % of the gross domestic product, except for commitments related to projects co-financed by the European Union budget or commitments necessary to comply with a court or public authority decision leading to an increase in the public sector debt for a period of more than one calendar year. There are exceptions to the foregoing rules, for example, 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
The Act on the Rules of Budgetary Responsibility allows the total expenditures of the public sector to be higher than its total incomes. 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 public sector – for example, when the state is faced with natural disasters or a deteriorating security situation or when a significant economic downturn is expected (quarterly year-on-year drop in real GDP of at least 3%).