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PUBLIC FINANCE REFORM IN THE CZECH REPUBLIC

Ministry of Finance of the Czech Republic

Paper completed: December 2005

1. Introduction and key challenges

In 2004 the reform of public finances was initiated. The concept of public finance reform is a result of
the long-term process as it has been prepared for the whole last decade. Only in 2003 there was political
will to put the reform into the practice. It is aimed at gradually reducing the budgetary deficits and also at
improving the quality of public finances. Its implementation is crucial for Czech fiscal policy in the
nearest future and its main principles can be summarized as follows:

• Reducing the fiscal imbalance and slowing down the rate of public debt accumulation


• Well-balanced fiscal consolidation


• Improving composition of public spending


• Strengthening institutional framework for conduct of fiscal policy

Reducing the fiscal imbalance and slowing down the rate of public debt accumulation

As the Czech Republic is currently reporting an excessive deficit (see following table), which is not in
line with convergence criteria, the public finance consolidation and gradual budgetary deficit reduction
are the main government priorities. The government adopted the budgetary deficits reduction strategy,
which would result in deficit lower than 3% of GDP in 2008. Introduction of fiscal targeting and
medium-term expenditure frameworks should help to fulfill this aim.

Table 1 - General government deficit/surplus and debt development

(% of GDP) 2000 2001 2002 2003 2004 (1)^2005 (2)^2006 (2)^2007 (2)

Government deficit (-) / surplus (+) -3.7 -5.9 -6.8 -12.6 -5.2 -4.7 -3.8 -3.3

Government expenditure 42.1 45 46.9 54.5 47.6 45.8 44.7 43.9

Government revenue 38.5 39.1 40.2 41.9 42.4 41.1 40.9 40.6

Government debt 18.2 25.3 28.8 37.8 38.6 38.3 39.2 (^40) (1)
Forecasts, (2) Trend values or period averages
Source: Convergence Programme of the Czech Republic

1.1.Well-balanced fiscal consolidation and improvement in expenditure composition

Apart from the commitment to reduce the deficit, the government has taken up changing the structure of
taxes and government expenditure, with the aim of strengthening the supply side of the economy and of
establishing conditions for the acceleration of potential growth. The share of legally determined