THE ECONOMY CAN MAKE DO WITHOUT GREATER STIMULATION, BUT THE STATE SHOULD PREVENTIVELY PREPARE FOR WORSE TIMES

THE ECONOMY CAN MAKE DO WITHOUT GREATER STIMULATION, BUT THE STATE SHOULD PREVENTIVELY PREPARE FOR WORSE TIMES

On Wednesday 4 September, the Czech Fiscal Council issued its regular quarterly statement with respect to the development of public sector finances and the set-up of fiscal and budgetary policy. Among other things, it states that, in Q2 of this year, the Czech economy noted a year-on-year increase by 2.7%, which is, in principle, in accordance with the expectations of the Ministry of Finance. According to the Council, there is, however, a relatively high level of uncertainty among economists, but also, for example, among corporate representatives, as to future developments. “The Ministry of Finance expects Czech GDP to increase by 2.4% for this year as a whole, and in 2020, the country’s economy should add 2.2%. At the same time, however, downward risks prevail, which arise, above all, from the situation abroad, and the materialisation of which is not factored in by the present prediction,” states the Council, referring primarily to the threat of a no-deal Brexit or the escalation of trade wars between the US and China.

In terms of domestic risks, the Council says the situation on the labour market is the most evident, as wage growth is faster than the rate of labour productivity growth, which may over time weaken the price-competitiveness of Czech companies abroad.


In its opinion, the Czech Fiscal Council also notes that certain tax income is growing more slowly than planned (e.g., VAT). According to the Council, it can therefore not be assumed that the state budget balance for the entire year would be significantly better than the planned CZK – 40 bn. “If the deceleration in the growth of tax income carries continues in the months to come, it may even threaten the achievement of the planned deficit,” notes the Council. It believes that, in that case, the government should respond, for example, by restricted drawing of operating expenses, i.e., to try not to exceed the forty-billion deficit.


If the risks do not materialise and the economy continues to develop in accordance with the prediction of the Ministry of Finance, it is not, according to the Czech Fiscal Council, necessary to perform a more significant stimulation of the economy by fiscal policy. Among other things, because the effect of the measure would only be limited, given the tense situation on the labour market.


As concerns the government budget proposal for 2020, the Council believes that its deficit should not exceed the 40 billion crowns announced earlier. From the point of view of long-term economic growth, investment expenses should continue to gradually grow, in order that the infrastructure gap between the Czech Republic and old EU Member States be closed.


In its opinion, the Czech Fiscal Council also states that foreign developments involve significant risks whose potential materialisation would have an adverse impact on the Czech economy, in particular, in the sphere of industrial production. Hence, the CFC believes that the government should preventatively prepare for this possibility by drawing up a set of possible measures to stimulate the country’s economy, should the need arise.


In the conclusion of its opinion, the Council also expresses its opinion on the pension system, which, according to it, requires modifications, as it is the most significant risk in terms of the long-term sustainability of Czech public finance. “Not addressing the problem also has an impact on the determination of the medium-term budget objective (MTO) and hence on how much room the government has for fiscal stimulation of the economy, should it be required,” states the Council.