Consolidating public finances

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This period was chosen for reasons of comparability with Ministry of Finance documents and bearing in mind the necessary degree of credibility of macroeconomic predictions and, last but not least, the economic and political consequences of the Czech Republic's accession to the EU.

The analyses show that the problem with the public budgets lies on the expenditure side, and in particular in the extremely high and ever-growing proportion of mandatory expenditures, which is expanding out of step with economic growth.

On the revenue side, the possibilities for change are limited by the risk of a loss of tax competitiveness, since increasing the tax burden above the level in neighbouring countries could dissuade foreign investors from operating in the Czech Republic.

The model analysis of the impacts of public finance consolidation takes this fact into account and concentrates on corrections to the expenditure side of the budgets.

Joining the eurozone is conditional on fulfilment of the Maastricht criteria, including the criteria in the fiscal area.

This real expenditure stagnation is in essence divided equally between all the expenditure items.In the second phase of the analysis, the monetary policy response to the changes in fiscal policy defined in each scenario was also estimated.The logic was as follows: a reduction in public budget expenditure leads to a decline in GDP growth, a subsequent reduction in interest rates, a depreciation of the koruna and an improvement in net exports.For each scenario it was also assumed that the immediate savings in expenditure will be reinforced with reform measures in the pension area to foster sustainable development of public finances in the medium and long run.The above scenarios formed the basis for a more detailed assessment of the impacts of public finance consolidation on Czech economic growth.

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