Czech Republic: The Fastest Growing Debt in the EU

The Czech Republic has become the fastest-growing debtor nation in the European Union, according to the country’s Supreme Audit Office (SAO). Despite having the lowest unemployment rate in the EU, the state has been unable to benefit from the high employment as the income from the high employment is insufficient to cover the growing state expenses.

The SAO’s report highlights the rapid increase in debt due to growing expenses such as pensions. The report also warns that even high employment rates cannot create enough income for the state to cover the growing costs. The inflation rate in the country was the fifth-highest in the EU last year, and the drop in real wages was the highest in Czech history.

The SAO has suggested that the government undertake systematic budgetary measures to deal with inflation and focus on its causes. The report also points out that the efforts to revive the economy after the COVID-19 pandemic have slowed down due to the energy crisis, further exacerbated by the conflict in Ukraine and its economic impacts. This has led to an increase in energy prices.

The Czech government has introduced a consolidation package to improve public budgets through tax changes. However, the SAO report states that expenses have exceeded income growth by 26 percentage points over the last four years, which is the main reason for the state budget deficits. The SAO suggests there is still room for improvement in state income, such as better tax collection.

According to the SAO, there is also a need to fight tax evasion, particularly about value-added tax or tax system adjustments. Taxes would be increased using inflation coefficients so they do not lose their significance in real terms. The government has proposed increasing real estate tax in the consolidation package.

Moreover, the SAO report warns that even high employment rates cannot create enough income for the state to cover the growing expenses. If the unemployment rate approaches the average rate in the EU, it would mean a significant loss of revenue for public budgets and an increase in expenditures on unemployment benefits. This would further worsen the rise in public debt.