#Lukáš Kovanda, Ph. D.

The Czech Republic is improving its public finances and is better prepared for a possible crisis than the vast majority of European countries

4 April 2019

The state of public finances of the Czech Republic continued to consolidate last year. But rather because of general economic prosperity than because of austerity measures. The nominal amount of general government debt fell by CZK 14.5 billion last year. From just under 14 percent, it contributed to a decline in general government debt relative to gross domestic product from 34.66 percent to 32.71 percent. Of the remaining roughly 86 percent, economic growth contributed to the reduction, as measured by growth in gross domestic product at current prices from around five billion crowns in 2017 to 5.3 billion last year. It is difficult for a government to make a greater contribution to debt reduction. Its main merit is that it was not tempted by macroeconomic conditions to realize and promise even higher operating costs of the government.

Thus, the Czech Republic remains one of the countries of the European Union with the lowest level of government debt to gross domestic product. Only three countries in the EU were noticeably better last year: Estonia, Luxembourg and Bulgaria. Thanks to this, the Czech Republic is relatively well prepared for a possible economic crisis. If such a crisis hit, the Czech Republic has a stimulus “ammunition” at its fiscal and monetary level. In other words, in terms of potential stimulation, it can afford the “luxury” of a relatively perceptible increase in public spending relative to GDP at European rates. At the same time, it has nowhere to cut interest rates in monetary policy, as the key interest rate currently set by the Czech National Bank is 1.75 percent. This is the highest level among Visegrad countries and, of course, higher than the rates in the euro area. These are either negative or zero.

This favorable reality must not appease the Czech Republic in any way. From today’s  data on the general government balance in the fourth quarter last year, it can be seen that, especially at the end of 2018, public finances have been under pressure that they have not felt since 2016. This indicates that this year will be relatively difficult in terms of public finance. This is also partly evidenced by this year’s February and March deficit in the state budget, which indicates that the state budget will show a deficit of several tens of billions of crowns this year.
Lukáš Kovanda

Lukáš Kovanda, Ph.D., je český ekonom a autor ekonomické literatury. Působí jako hlavní ekonom CZECH FUND. Analyzuje a komentuje makroekonomická témata, investice i nové fenomény typu sdílené ekonomiky, kryptoměn či fintechu. Přednáší na Národohospodářské fakultě Vysoké školy ekonomické v Praze.
Je členem vědeckého grémia České bankovní asociace.

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