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IP/07/717
Brussels, 30 May 2007
Commission recommends to the Council to find that the Czech Republic has taken inadequate action to control its public deficit
Having examined the convergence programme of the Czech Republic, the Commission today recommends to the Council to conclude that the country has taken inadequate action to control its public finances and is, therefore, not on track to correct its excessive deficit by 2008, as was agreed with the Council in 2004. This recommendation, issued under Article 104.8 of the EC Treaty, is expected to be adopted by the Council on 10 July together with an opinion on the Czech Republics updated convergence programme.
"The updated convergence programme of the Czech Republic postpones the planned correction of the excessive deficit despite the fact that in 2006 the deficit was already below 3% and despite stronger economic growth than previously expected. Whereas there is a need to react, the 2007 budget includes substantial increases in expenditure. I hope this will be corrected as soon as possible as there is still an opportunity to do so.” said Joaquín Almunia, European Commissioner for Economic and Monetary Affairs.
The Commission today recommended to the Ecofin Council to conclude, based on Article 104(8) of the EU Treaty, that the action taken by the Czech Republic in response to the Council recommendation of 5 July 2004 is proving inadequate to correct the excessive deficit by 2008.
The Council is expected to adopt the decision on 10 July.
Following the constitution of its new government in January 2007, the Czech Republic submitted a new update of its convergence programme on 15 March 2007, covering the period 2006-2009. Based on growth assumptions that appear plausible, the programme aims at reducing the general government deficit to 3.2% of GDP by 2009, thus not correcting the excessive deficit within the programme period. Compared with the previous programme, this would postpone the planned correction by two years despite a more favourable macroeconomic scenario. The programme presents an alternative scenario considered by the government with lower deficit targets of 3.2% of GDP in 2008 and 2.8% of GDP in 2009. But this relies on yet unknown policy measures and the original 2008 deadline for correcting the deficit would still not be met.
The Czech Republic has set itself the objective of a deficit of 1% of GDP in the medium term (so called medium-term objective or MTO) in structural terms, i.e. cyclically-adjusted and net of one-off and temporary measures. The programme foresees that this target will be reached only in 2013, i.e. well beyond the programme horizon and one year later than previously planned. The risks attached to the budgetary targets are broadly balanced but the fiscal stance in the programme is not consistent with a correction of the excessive deficit by 2008, as required in the Council Recommendation of 5 July 2004.

At 30.6% of GDP in 2006, the public debt is well below the 60% reference value set in the Treaty, but it is expected to increase by almost two percentage points over the programme period. It must also be noted that the Czech Republic has been found to be at high risk with regard to the sustainability of public finances over the long-term (see IP/06/1356).
Overall, in spite of better growth prospects and a lower-than-expected deficit in 2006, the programme postpones the correction of the excessive deficit by at least one year compared with the 2008 deadline set in July 2004. The postponement reflects the planned pro-cyclical expansionary fiscal stance in 2007, primarily due to discretionary increases.
Therefore, based on its assessment of the convergence programme, the Commission proposes that the Council invites the Czech Republic to: (i) limit the budgetary deterioration in 2007 and ensure the correction of the excessive deficit in a credible and sustainable manner by 2008 at the latest; (ii) review the composition of expenditure in order to reduce the share of mandatory expenditure; and (iii) in view of the projected increase in age-related expenditure, improve the long-term sustainability of public finances by implementing the necessary pension and health care reforms.
The Commission’s recommendations can be found at:
http://ec.europa.eu/economy_finance/about/activities/sgp/main_en.htm

Comparison of key macroeconomic and budgetary projections

2005
2006
2007
2008
2009
CP Mar 2007
6.1
6.0
4.9
4.8
4.8
COM May 2007
6.1
6.1
4.9
4.9
n.a.
CP Nov 2005
4.8
4.4
4.2
4.3
n.a.
CP Mar 2007
1.6
2.4
2.6
2.5
2.5
COM May 2007
1.6
2.1
2.4
2.9
n.a.
CP Nov 2005
1.5
2.2
2.0
2.1
n.a.
CP Mar 2007
1
-0.7
0.9
1.1
1.0
1.0
COM May 2007
3
-1.1
0.4
0.5
0.5
n.a.
CP Nov 2005
1
-0.8
-0.1
0.3
0.8
n.a.
CP Mar 2007
6
-3.6
-3.5
-4.0
-3.5
-3.2
COM May 2007
-3.5
-2.9
-3.9
-3.6
n.a.
CP Nov 2005
-4.8
-3.8
-3.3
-2.7
n.a.
CP Mar 2007
-2.5
-2.4
-2.6
-2.0
-1.6
COM May 2007
-2.4
-1.8
-2.8
-2.6
n.a.
CP Nov 2005
-4.1
-3.0
-2.4
-1.7
n.a.
CP Mar 2007
1
-3.4
-3.9
-4.4
-3.9
-3.5
COM May 2007
-3.1
-3.1
-4.1
-3.8
n.a.
CP Nov 2005
1
-4.5
-3.8
-3.4
-3.0
n.a.
CP Mar 2007
-3.4
-3.9
-4.4
-3.9
-3.5
COM May 2007
4
-2.0
-2.8
-4.1
-3.8
n.a.
CP Nov 2005
5
-3.4
-3.8
-3.4
-3.0
n.a.
CP Mar 2007
30.4
30.6
30.5
31.3
32.2
COM May 2007
30.4
30.4
30.6
30.9
n.a.
CP Nov 2005
37.4
37.1
37.9
37.8
n.a.
Notes
:
1
Commission services calculations on the basis of the information in the programme.
2
Cyclically-adjusted balance (as in the previous rows) excluding one-off and other temporary measures.
3
Based on estimated potential growth of 4.2%, 4.6%, 4.8% and 4.9% respectively in the period 2005-2008.
4
One-off and other temporary measures taken from the Commission services spring 2007 forecast
(1.1% of GDP in 2005 and 0.2% of GDP in 2006 - both deficit increasing)
5
One-off and other temporary measures taken from the CP 2005 programme
(1.1% of GDP in 2005 - deficit increasing)
6
Alternative deficit targets based on as yet unapproved measures 3.2% of GDP in 2008, 2.8% of GDP in 2009
Source:

Real GDP
(% change)
HICP inflation
(%)
Structural balance
2
(% of GDP)
Output gap
(% of potential GDP)
General government balance
(% of GDP)
Primary balance
(% of GDP)
Cyclically-adjusted balance
(% of GDP)
Convergence programme (CP); Commission services’ spring 2007 economic forecasts (COM); Commission services’
calculations

Government gross debt
(% of GDP)