The Czech Republic’s Debt is Growing at an Alarming Rate

The rising debt is not only due to the effects of the pandemic, which has affected all countries, but the insufficient pace of consolidation of public finances will play a key role in the coming years, warns Eva Zamrazilová, chair of the National Budget Council.

According to all projections, the public debt of the Czech Republic, i.e. the debt of the state, municipalities and health insurance companies, will exceed CZK 2.5 trillion by the end of the year. At the end of last year, it was 2.15 trillion. The state debt alone (i.e. without regions, municipalities, etc.) reached CZK 2.05 trillion.

The growth of the Czech debt is related to the government’s budgetary policy. Last year, the state’s economy, affected by the pandemic, showed a deficit of CZK 367.4 billion, while a deficit of CZK 500 billion has been approved for this year. In January this year the budget was in deficit by 31.5 billion, in May the deficit had already reached 255 billion. Economists are beating Finance Minister Alena Schiller (ANO) for such a big axe to the state budget.

Zamrazilová blames her mainly for the abolition of the super gross wage, the real estate acquisition tax and the repeated increase in pensions beyond the statutory indexation.
The reduction in income tax after the abolition of the super gross wage caused a shortfall of up to 100 billion a year. Yet critics point out that the reduced rate mainly benefits higher earners.

Schiller argues that the consolidation of state finances is set optimally, and if it were faster, it could stifle the economy’s growth. Most economists disagree. “The consolidation of public finances should be faster compared to the pace envisaged by the finance ministry. Already next year, according to our forecast, the public deficit will halve in most European countries,” agrees František Táborský, an analyst at Komerční banka, with Zamrazilová.

However, he also expects a better development in the Czech Republic compared to the government’s forecasts. “Even so, the deficit would only fall by a third. The better development is due to faster economic growth and the associated higher tax revenues, which the Finance Ministry traditionally underestimates in its forecasts, and lower spending related to the pandemic,” Táborský told Právo.

Already this year, the IMF forecasts a year-on-year deficit reduction for 21 EU-27 countries. “Thus, the Czech Republic is one of only six countries for which a further deepening of the public finance deficit is forecast for 2021. In the case of the Czech Republic, this deepening is 1.8 percentage points, the second highest after Estonia,” Zamrazilová told Právo.

For 2022, the IMF already expects a lower public finance deficit for all EU countries except the Czech Republic and Estonia compared to 2020. The outlook for the Czech public finance balance for 2023 of -5.6 percent of GDP represents the second highest deficit in the EU27 after Romania (with a value of -6.2 percent of GDP). The Czech Republic is expected to maintain this unflattering position between 2024 and 2026.

“In eighteen EU countries, public debt will start to decline from 2023 at the latest, while in the remaining eight it will either remain low, such as in Estonia (40.8% of GDP), or at least the debt dynamics will not be as high as in the Czech Republic,” Zamrazilová added.