# EUR-Lex - 52011SC0819 - EN

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# 52011SC0819

**Recommendation for a COUNCIL RECOMMENDATION on the National Reform Programme 2011 of the Czech Republicand delivering a Council opinionon the updated Convergence Programme of the Czech Republic, 2011-2014 /* SEC/2011/0819 final */**

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Recommendation for a

COUNCIL RECOMMENDATION

on the National Reform Programme 2011 of
the Czech Republic
and delivering a Council opinion
on the updated Convergence Programme of the Czech Republic, 2011-2014

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the
Functioning of the European Union, and in particular Articles 121(2) and 148(4)
thereof,

Having regard to Council Regulation (EC) No
1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary
positions and the surveillance and coordination of economic policies[1], and in particular Article 9(3)
thereof,

Having regard to the recommendation of the European
Commission[2],

Having regard to the conclusions of the
European Council,

Having regard to the opinion of the Employment
Committee,

After consulting the Economic and Financial
Committee,

Whereas:

(1) 
On 26 March 2010, the European Council agreed to
the European Commission's proposal to launch a new strategy for jobs and
growth, Europe 2020, based on enhanced coordination of economic policies, which
will focus on the key areas where action is needed to boost Europe’s potential
for sustainable growth and competitiveness.

(2) 
On 13 July 2010, the Council adopted a
recommendation on the broad guidelines for the economic policies of the Member
States and the Union (2010 to 2014) and on 21 October 2010, adopted a decision
on Guidelines for the employment policies of the Member States[3], which together form the “integrated
guidelines”. Member States were invited to take the integrated guidelines into
account in their national economic and employment policies.

(3) 
On 12 January 2011, the Commission adopted the
first Annual Growth Survey, marking the start of a new cycle of economic
governance in the EU and the first European semester of ex-ante and integrated
policy coordination, which is anchored in the Europe 2020 strategy.

(4) 
On 25 March 2011, the European Council endorsed
the priorities for fiscal consolidation and structural reform (in line with the
Council’s conclusions of 15 February and 7 March 2011 and further to the
Commission’s Annual Growth Survey). It underscored the need to give priority to
restoring sound budgets and fiscal sustainability, reducing unemployment
through labour market reforms and making new efforts to enhance growth. It
requested Member States to translate these priorities into concrete measures to
be included in their Stability or Convergence Programmes and National Reform
Programmes.

(5) 
On 29 April 2011, the Czech Republic submitted
its 2011 National Reform Programme and on 5 May its 2011 Convergence Programme
update covering the period 2011-2014. In order to take into account the
interlinkages, the two programmes have been assessed at
the same time.

(6) 
The global financial crisis, channelled through
the Czech economy's high trade openness, took a heavy toll on GDP growth and
unemployment in the Czech Republic. Real GDP declined by 4.1% in 2009, as a
result of the fall in exports and in domestic investment. The unemployment rate
increased significantly from 4.4% in 2008 to 7.3% in 2010, and the employment
rate fell by 2 percentage points between 2008 and 2010. However, the high
degree of exposure to international trade and a fast recovery in the Czech
Republic's main trading partners have also facilitated a quick rebound in the
real GDP growth rate in 2010 to 2.3% and will continue to support a moderate
recovery.

(7) 
Based on the assessment of the updated Convergence
Programme pursuant to Council Regulation (EC) No 1466/97, the Council is of the
opinion that the macroeconomic assumptions underpinning the programme are
plausible in the first two years of the programme and too favourable
thereafter. The programme is based on a lower growth projection for 2012
compared with the Commission services 2011 Spring forecast, mainly on account
of a further sustained reduction in real government consumption expenditure,
which is not taken up in the Commission services' no-policy-change forecast for
2012. The programme foresees a reduction of the general government deficit
below 3% of GDP in 2013 and further to 1.9% of GDP in 2014. The planned
consolidation is mainly based on expenditure restraint. The proposed measures
are broadly sufficient to reach the target by 2013, as recommended by the
Council, but there are risks to the actual budgetary outcome of measures as
presented in the programme. Moreover, the attainment of the targets for the
outer years of the programme seems to rely largely on favourable cyclical
conditions and further efficiency gains in public administration, which may become
increasingly difficult to materialise. The achievement of the medium-term
budgetary objective is foreseen beyond the horizon of the programme. The
average annual fiscal effort over the period 2011-2013 is below 1% of GDP
recommended by the Council under the EDP procedure of 2 December 2009.

(8) 
The Programme set out a clear objective to bring
the deficit in public finances below 3% of GDP by 2013. The challenge will be
to ensure that measures underlying the path for the deficit reduction in
2011-13, as well as in subsequent years, do not compromise long-term growth,
especially by safeguarding expenditure on education and public R&D, and
that they provide an adequate buffer for increases in expenditure entailed by
demographic developments.

(9) 
The budgetary consolidation strategy includes
measures that affect VAT revenue: the lower VAT rate is planned to rise in 2012
and 2013, while the higher rate is to decrease in 2013. The government also
intends to increase the number of firms liable to VAT from 2013. According to
the Programme, these changes should result in an increase in tax receipts of
0.7% of GDP in 2012 and further by 0.1% of GDP in 2013. In addition, there
seems to be further scope for boosting revenue from indirect taxes, which stood
at 11.8% of GDP in 2010, compared to the EU average of 13.4%, and thereby
possibly shift taxes away from labour. Furthermore, the difference between
actual VAT revenue and the theoretical VAT liability is estimated to be
significantly above the EU average, substantiating the need for measures improving
tax compliance.

(10) 
Given that the budgetary impact of ageing is
projected to be well above the EU average, the reform of the pension system is
an important issue. The government has put forward two sets of proposals. The
first package is expected to receive Parliamentary approval by September 2011
and targets the public Pay-As-You-Go pillar, which has been in deficit since
2009. It includes, among other measures, an increase in the statutory
retirement age, which will be unified at 67 years in 2041 for men and women. This
set of parametric reforms goes some way towards addressing the fiscal sustainability
problem; it may, however, not be sufficient to address the challenges created
by population ageing. The second package of measures, not yet formally approved
by the government, would consist in the introduction of a voluntary second
private pillar in 2013, with the aim to increase diversification in retirement
incomes and support their future adequacy by promoting the development of private
savings. However, the suggested form of the pillar creates few incentives to
join the scheme and may actually add to the long-term pressures highlighted
above. The operating costs of such pension funds also need to be carefully
analysed and kept as low as possible to ensure the effectiveness of the system.

(11) 
The labour market is perceived as moderately
flexible and had not shown evidence of major dysfunctions before the global
financial crisis. Yet, some structural weaknesses are evident. A key challenge
concerns the severe difficulties that women with children face when
re-integrating into the labour market after maternity leave. The issue is
significant also because of its wider economic repercussions: longer spells out
of work, a high gender employment gap, and the highest gender pay gap among all
Member States. Early return to work remains difficult despite the government's
effort to give parents greater choice in determining the length of parental
leave. The problem can be attributed partly to the low willingness of firms to
provide part-time employment contracts, often used by employees with small
children in other Member States, and partly to limited availability of
affordable child-care facilities, especially for children below the age of
three.

(12) 
While the overall unemployment rate remains
firmly below the EU average, long-term unemployment is on the rise,
particularly among the 20-29 years old. The low-educated as well as other
low-wage earners face considerable difficulties in finding employment. High
long-term unemployment is consistent with under-funded and relatively low-scale
active labour market policies and a low share of participants in regular
activation measures.

(13) 
Inefficiencies in public administration, which
weigh on the business environment, could be addressed by comprehensively
implementing existing strategies. The government has launched a 'better
regulation' agenda in 2007 and an anti-corruption strategy for the years
2011-2012. They announce measures that are important to improve the quality of
the Czech legal and regulatory framework, which ranks below the EU average
according to international surveys, and strengthen the confidence of
businesses. A challenge is to stabilise the public administration, as frequent
and far-reaching reorganisations impede its efficiency. For doing so, it would
be important to adopt the Public Servant Act, which has been repeatedly
postponed. The government has recently adopted measures to increase the transparency
of public procurement. However, one element of the regulatory framework, namely
the specific type of company shares that permit a fully anonymous transfer of
wealth, remains prone to risks and therefore deserves attention.

(14) 
The crisis is expected to have negativly impacted
on potential growth. Improving human capital is important, despite the high
ratio of young people enrolled in universities, and is hindered by insufficient
quality of training, as illustrated by the low ranking of Czech tertiary
education institutes in international surveys. Furthermore, spending
per student, in comparable prices, is in the lower quarter of the EU countries
and is especially limited for primary education. The National Reform Programme
outlines measures for all stages of education. A complex reform of tertiary education
has been in preparation for several years. Ensuring quality and efficient
tertiary education is important for competitiveness and innovation capacity.

(15) 
The Commission has assessed the Convergence
Programme and National Reform Programme of the Czech Republic[4]. It has taken into account not only their relevance for sustainable
fiscal and socio-economic policy in the Czech Republic but also their conformity
with EU rules and guidance, given the need to reinforce the overall economic
governance of the European Union by providing EU level input into future
national decisions. In this
light, the Commission considers that the focus on
fiscal consolidation should be kept, while protecting growth-enhancing
expenditure. The long-term sustainability of public finances depends, to a
large extent, on the capacity to implement now the necessary pension reform.
Raising labour market participation, in particular of women, and job
opportunities for the long-term unemployed, are essential. Further steps to
improve the quality of public services and the regulatory framework, as well as
the quality of tertiary education, are crucial for competitiveness.

(16) 
In light of this assessment, also taking into
account the Council Recommendation under Article 126(7) Treaty on the Functioning
of the European Union of 2 December 2009, the Council has examined the 2011
update of the Convergence Programme of the Czech Republic and its opinion[5] is reflected in particular in
its recommendations under (1) and (2) below. Taking into account the European
Council conclusions of 25 March 2011, the Council has examined the National
Reform Programme of the Czech Republic,

HEREBY RECOMMENDS that the Czech
Republic should take action within the period 2011-2012 to:

(1) 
Implement the planned consolidation in 2011 and
take countervailing measures of a permanent nature in case of any revenue
shortfalls or expenditure slippages. Adopt fiscal measures as planned in the
programme for 2012 and underpin the target for 2013 by more specific measures.
Avoid cutting expenditure on growth-enhancing items and exploit the available
space for increases in indirect tax revenue, improve tax compliance, and reduce
tax evasion.

(2) 
Introduce a comprehensive
pension reform in order to improve the long-term sustainability of public
finances and to ensure the future adequacy of pensions. Efforts should focus,
first, on further changes to the public pillar,
including a more rapid increase in the statutory retirement age than
planned, underpinned by measures
promoting the employment of older workers; and, second, on the development of
private savings. In this context, ensure that the envisaged funded scheme
attracts broad participation and is designed to keep administrative costs
transparent and low.

(3) 
Enhance participation in the labour market by reducing
the barriers for parents with young children to re-enter the labour market
through increased availability and access to affordable childcare facilities. Increase
the attractiveness and availability of more flexible
forms of working arrangements, such as part-time jobs.

(4) 
Strengthen the capacity of
the public employment service to increase the quality and effectiveness of
training, job search assistance and individualised
services, linking funding of programmes to results. In
consultation with stakeholders, introduce tailor-made training programmes, for older
workers, young people, low skilled and other vulnerable groups.

(5) 
Take the necessary measures to improve the
quality of public services in areas essential for the business environment. In
this context speed up the implementation of the anti-corruption strategy in
line with the identified targets, adopt the Public Servants Act to promote
stability and effectiveness of the public administration, and revise the Commercial
Code to abolish anonymous shareholding.

(6) 
Establish a transparent system of quality
evaluation of academic institutions and link it to its funding in order to
improve the performance of tertiary education.

Done at Brussels,

For
the Council

The
President

[1]               OJ L 209, 2.8.1997, p. 1.

[2]               OJ C, p. .

[3]               Maintained for 2011 by
Council Decision 2011/308/EU of 19 May 2011.

[4]               SEC(2011) 712.

[5]               Foreseen in Article 9(3) of Council Regulation (EC)
No 1466/97.