On Wednesday 4 December, the Czech Fiscal Council (CFC) issued its regular quarterly opinion on the development of public sector finances and the set-up of fiscal and budgetary policy.

Among other things, it points to problematic aspects in the approval of the 2020 government budget, as the budget bill counts on certain income, the attainment of which is conditioned on the enactment of other acts (known as the tax package).  But those had not been approved at the time of deliberations on the government budget and, given the duration of the legislative process, there is a risk that they will not come into force as at 1 January 2020.

Hence, the government budget may be approved counting on income that will, in the end, not be collected, as the relevant acts may not be enacted, or changes made during the deliberations may have a negative impact on the expected collection.  According to the CFC, it is also important to mention the adverse effect on taxpayers who are exposed to uncertainty with respect to their obligations starting from 1 January 2020 and do not have time sufficient to prepare for the new conditions. 

Furthermore, in its opinion, the Council draws attention to the fact that this year is not the first in which such problems occur.  Hence, from its point of view, it seems appropriate to adopt a regulation governing this part of the budget process that would ensure that the draft budget only operate with tax income that is based on already applicable laws.  Inspiration may be sought in other EU states (Sweden, United Kingdom).

As for 2019 tax proceeds, the CFC expects in its opinion that collection in the planned amount will not be attained at the end of the year with respect to some of them.  According to the Czech Fiscal Council, the results of government budget performance at the end of November 2019, published by the MF ČR, indicate that the planned values will probably not be achieved in VAT and social security insurance premiums, but only in terms of CZK billion in single digits.  The aggregate difference between taxes collected and the planned values at the end of the year can be expected not to exceed 1% of planned tax income.

Hence, the Council notes that the overall balance of the 2019 government budget will depend primarily on the scope of capital expenditure draw-down, which may exceed the planned values, if claims from unconsumed expenditures are involved to a significant degree, as they were last year.

For 2020, it expects the economy to further decelerate, to approximately 2%, which will still be a very good result in the European context.  This outlook is, however, burdened by uncertainty.  A negative surprise has come primarily in the form of new data on household consumption, which, however, only confirmed the weakening of consumer sentiment, which has been ongoing for many months.  On the other hand, despite the continuing foreign risks, leading indicators abroad have recently been improving, but this has not yet been reflected in the expectations of Czech businesses.

The CFC considers the neutral nature of the Czech Republic’s fiscal policy for 2020, expected by the Ministry of Finance, to be optimal in macroeconomic terms.  Even though there is a gradual slowdown in the rate of GDP growth, and this trend will continue in 2020 according to most macroeconomic predictions, the Czech economy will still be slightly above the potential product.  Any fiscal stimulation would thus encounter a shortage of disposable resources, especially on the labour market, where the unemployment rate reaches extremely low values.  On the other hand, it is not appropriate, according to the CFC, to perform any fiscal restrictions at this time, as they may have an adverse impact on the expectations of economic entities.

In its opinion, the Czech Fiscal Council again draws attention to foreign risks, the materialisation of which would affect primarily the industrial sector and pose a threat to the maintenance of dynamism of economic growth at around 2%.  As in its previous opinion, from September 2019, the CFC holds that the government should prepare a specific form of fiscal stimulation for the economy, in the event that extreme risks materialise and a further loss in the dynamism of economic growth occurs.