THE CZECH REPUBLIC COMPLIES WITH THE RULES OF BUDGETARY RESPONSIBILITY, ALTHOUGH A DEBT RELIEF MECHANISM FOR MUNICIPALITIES IS LACKING.

THE CZECH REPUBLIC COMPLIES WITH THE RULES OF BUDGETARY RESPONSIBILITY, ALTHOUGH A DEBT RELIEF MECHANISM FOR MUNICIPALITIES IS LACKING.

The Czech Republic last year complied with the expenditure and debt rules of budgetary responsibility laid down by Act No. 23/2017 Sb., on the rules of budgetary responsibility (hereinafter referred to as the “Act”). This is the conclusion of the Report on Compliance with the Rules of Budgetary Responsibility for the Year 2018, published on 24 September by the Czech Fiscal Council (Národní rozpočtová rada). The document, however, also points out that there is still no systemic mechanism in place in the Czech Republic that would make it possible to deal with the situations of those municipalities that are most indebted. The Council also made a statement in its report concerning the government’s plan to have an expansive fiscal policy in the years 2019 and 2020. It is the view of the Council that such a plan cannot be considered macroeconomically optimal, in light of the current situation in the economy and on the labour market.

The proportion of public institution debt fell last year from 34.7% to 32.6% of GDP, while the threshold values that, when exceeded, lead to the activation of certain measures defined by the Act are set at 55% and 60% of GDP. The Czech Republic therefore complied with the rules of budgetary responsibility last year, with room to spare.

The situation was the same for the so-called expenditure rule. The structural balance of economic activity in the government institution sector for the year 2018 was 0.4% of GDP, considerably lower than the limit value of –1.5% of GDP. In its report, the Czech Fiscal Council also stated that the procedure for determining total expenditures in the public institution sector and deriving the expenditure framework of the state budget and of state funds had been observed. The total approved expenditure of the state budget and of state funds for the year 2018 was CZK 1,400.6 billion, almost 3% lower than the approved framework of CZK 1,441 billion.

The Czech Fiscal Council’s report also dealt with adherence to the rules of budgetary responsibility by local authorities. A total of 517 municipalities exceeded the threshold 60% debt limit for a local authority (Section 17(a) of the Act), but not a single region. A total of 3 municipalities failed to comply with the obligation to reduce their debt by the set minimum value in the year 2018, although they did subsequently correct this within the set time limit. The Ministry of Finance of the Czech Republic therefore had no need to suspend the transfer of a share in the tax yield to any local authority. The Czech Fiscal Council also stated that economic activity among local authorities and their subordinate organisations does not pose any significant risks to the overall results of economic activity in the public institution sector. By contrast, it has contributed towards stabilisation since 2013. The level of indebtedness among local authorities is very low and, as a whole, is not a significant risk factor for an increase in indebtedness in the public institution sector. One positive fact, according to the Council, is an increase in investment activities among local authorities in 2018, which approximated the average for the period 2006-2015.

In its report, the Czech Fiscal Council also states that the balance of economic activity in the public institution sector has been significantly positive in recent years, both in standard expression and following adjustment to account for the influence of the economic cycle. It does not even come close to the threshold values of structural deficit ensuing from procedure for the determination of total expenditures in the public institution sector and derivation of the expenditure framework of the state budget and of state funds. In the medium-term outlook, however, meaning for the years 2019 to 2022, we can expect a shift from surpluses to deficits, which will lead to a significant reduction in the room for an active fiscal policy in the future, in connection with a tightening of the MTO (Medium-Term Budgetary Objective) indicator. The fiscal policy should be expansive in the years 2019 and 2020, according to the government’s plan, which will lead to the structural balance falling into negative values. This plan cannot, in the view of the Council, be deemed macroeconomically optimal, in light of the fact that a positive production gap is expected to remain in these years and due to the very tense situation on the labour market.

As concerns local authorities, the Czech Fiscal Council points out that there is still no systemic mechanism in place that would make it possible to deal with the situations of those municipalities that are most indebted and that have long been in a desperate situation. The existing preventative measures defined in the Act are not a solution to insolvency occurring in the past. The result is that there is a significant reduction in the level of services which the concerned municipalities provide their inhabitants. Based on the above, the Czech Fiscal Council believes that such a mechanism should be created.