Statement of the Czech Fiscal Council concerning the government´s proposal to amend Act No. 23/2017 Coll. on budgetary responsibility rules

Statement of the Czech Fiscal Council concerning the government´s proposal to amend Act No. 23/2017 Coll. on budgetary responsibility rules

At its extraordinary meeting of 1 April 2020, the Government of the Czech Republic approved a bill amending Act No. 23/2017 Coll., on budgetary responsibility rules (hereinafter referred to as the “Act”). The substance of the proposal is a dramatic increase of the maximum admissible structural deficit values for 2021-2027, from 1% of GDP stated in the applicable text of the Act. Specifically, the maximum permissible structural deficit value proposed for 2021 is 4% and, in subsequent years, the structural balance is to be improved by at least 0.5 percentage points. The explanatory memorandum for the government bill states that, if this regulation is not approved, the government would have to set fiscal policy in 2021 very restrictively, in the event of the sharp drop of the economy in 2020 that is currently envisaged. That would, according to the explanatory memorandum, most likely result in a recession.

The CFC agrees that the present situation requires extraordinary measures, in terms of both the scope and speed of their enactment. It also understands that some of those measures, and probably also a certain measure of fiscal stimulation of the economy, will be required in the subsequent year. Nevertheless, the applicable version of the Act does not, in this case, limit the fiscal room given to the government with its 1% limit on the structural balance. This is due to several institutes that the Act contains and that allow fiscal policy to adequately respond to extraordinary situations linked to major economic problems, without it being bound by the 1% limit.

First and foremost, we must mention the institute of one-off and temporary measures that are taken into account in the setting of expense frameworks. This means that, if the government needs to stabilise the economy in a specific (limited) time-period by reducing income (e.g., premium reductions) or by increasing expenditures (e.g., a time-limited benefit programme for self-employed people), it can exceed the maximum value of structural balance set by the Act, by the expected scope of those measures. The same applies to the application of so-called salvage measures. These include, for example, costs incurred due to a state of emergency or expenditures related to an expected significant worsening of economic developments.

According to the Czech Fiscal Council, anchoring the maximum structural deficit value for 2021 at 4% is excessive, because even the applicable text of the Act, as well as methodological materials drawn up by the Ministry of Finance of the Czech Republic in cooperation with the Council, allows for the adoption of necessary fiscal measures. Furthermore, at a time when the contours of economic development are not known for 2020, let alone for the year after, it is not, from the point of view of the Czech Fiscal Council, reasonable to set specific values of structural deficits in the Act.

The Czech Fiscal Council is of the opinion that laws, not only those in the sphere of fiscal rules, should be of universal application and should not, as far as possible, take heed of every specific situation with new sections that apply only to a specific period or one year. In this context, the Council also deems it inappropriate that the bill amending the Act on Budgetary Responsibility Rules, adherence to which the Council is to oversee, was not consulted with key partners, which include, according to the Act, the Czech Fiscal Council, and they were not even informed of the plan in advance. Members of the Czech Fiscal Council understand that the present situation requires speed and actionability; however, on the other hand, it is not possible to drive at any cost to adopt, in a legislative emergency regime, changes that are not essential to overcoming the crisis.

Even though the Czech Fiscal Council agrees that, in crisis situations such as this, the response of fiscal policy must be sufficiently massive, it again stresses that the money expended must also be targeted as effectively as possible. The government does not have unlimited means and individual measures must therefore be targeted to areas where they will either prevent major social problems related, for example, to bankruptcies of companies or sole proprietors or layoffs, or yield a significant positive stimulus for the country’s economy. No such loosening of fiscal policy is necessary in the coming seven years, even in a situation when the health of the population is a priority. Furthermore, there is no guarantee that the expanded fiscal space will be used only for expense and income measures related to elimination of the economic consequences of the “coronavirus” crisis and there is a risk that the purpose of budgetary responsibility rules will be defied and room will be opened up without justification for an increase in public sector indebtedness.