Fiscal Balance in Czech Republic

Czech Republic - Fiscal Balance

Government introduces swath of measures to cushion coronavirus blow in March

In mid-March, the government announced a fiscal package to the tune of CZK 1.0 trillion (about EUR 36.3 billion) to support households and businesses cope with the economic fallout of the coronavirus outbreak. The lion’s share of the package, worth CZK 900 billion, came in the form of state loan guarantees and subsidized credit, while the remaining CZK 100 billion, amounting to about 2.0% of GDP, was pledged for direct assistance. As a result of the increased spending, the government also revised its 2020 budget, now foreseeing a budget gap of CZK 200 billion, much larger than the CZK 40 billion shortfall that was previously approved by Parliament. Nevertheless, the country’s strong fiscal buffers and low public debt profile should enable the government to withstand the spending demands.

Notable measures in the package include income support of 80% of wages for workers that were sent into quarantine and for those in businesses which closed because of containment measures; a CZK 25,000 (about EUR 905) stipend and a six-month suspension of health and social insurance payments to the self-employed; a moratorium on the repayment of loans and mortgages; and penalty waivers for failing to pay income and property taxes on time.

Given the country’s has run budget surpluses for the past four years and has one of the lowest public-debt-to-GDP ratios in the EU, the government has ample room for maneuver to undertake these measures and even deploy additional stimulus once the immediate shock of the pandemic passes.

Commenting on the fiscal position and outlook for the economy, Jakub Seidler, chief economist for Czech Republic at ING, noted:

“Czech Republic has large fiscal room to support the domestic economy in the current adverse situation. Even if the total deficit will be more significant than currently expected, for example CZK300 bn, being approximately 5% of GDP, the total indebtedness will remain close to 35% of GDP, being still among the lowest among the EU countries. This provides some comfort, though the potential recovery of the Czech economy will very likely be disrupted by the global economic slowdown in 2H20, in our view”.