# EUR-Lex - 52012DC0303 - EN

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# 52012DC0303

**Recommendation for a COUNCIL RECOMMENDATION on the Czech Republic’s 2012 national reform programme and delivering a Council opinion on the Czech Republic’s convergence programme for 2012-2015 /* COM/2012/0303 final */**

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Recommendation for a

COUNCIL RECOMMENDATION

on the Czech Republic’s 2012 national
reform programme
and delivering a Council opinion on the Czech Republic’s convergence programme
for 2012-2015

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 5(2)
thereof,

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

Having regard to the resolutions of the
European Parliament,[3]

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[4],
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 July 2011, the
Council adopted a recommendation on the Czech Republic’s national reform
programme for 2011 and delivered its opinion on the Czech Republic’s convergence
programme for 2011-2014.

(4)       On 23 November 2011, the
Commission adopted the second Annual Growth Survey, marking the start of the second
European Semester of ex ante and integrated policy coordination, which is
anchored in the Europe 2020 strategy. On 14 February 2012, the Commission, on
the basis of Regulation (EU) No 1176/2011, adopted the Alert Mechanism Report[5], in which it did not identify
the Czech Republic as one of the Member States for which an in-depth review
would be carried out.

(5)       On 2 March 2012, the
European Council endorsed the priorities for ensuring financial stability,
fiscal consolidation and action to foster growth. It underscored the need to pursue
differentiated, growth-friendly fiscal consolidation, to restore normal lending
conditions to the economy, to promote growth and competitiveness, to tackle
unemployment and the social consequences of the crisis, and to modernise public
administration.

(6)       On 25 April 2012, the
Czech Republic submitted its convergence programme covering the period 2012-2015
and, on 13 April 2012, its 2012 national reform programme. In order to take
account of their interlinkages, the two programmes have been assessed at the
same time.

(7)       Based on the assessment of
the 2012 convergence programme pursuant to Council Regulation (EC) No 1466/97,
the Council is of the opinion that the macroeconomic scenario underpinning
the budgetary projections in the programme is plausible. According to the
convergence programme, GDP growth is expected to reach 0.2% and 1.3% in 2012
and 2013 respectively, compared to 0% and 1.5% in 2012 and 2013 respectively in
the Commission's 2012 spring forecast. The objective of the budgetary strategy
outlined in the programme is to reach a balanced budget in 2016. The general
government deficit target of 2.9% of GDP in 2013 is in line with the deadline
for correcting the excessive deficit set out in the Council recommendations of
2 December 2009. The average annual fiscal effort of 0.9% of GDP over the
period 2010-2013, based on the (recalculated) structural budget balance[6], is slightly below the effort
of 1% of GDP recommended by the Council. The programme confirms the previous medium-term
budgetary objective (MTO) of a deficit of 1% of GDP, which adequately reflects
the requirements of the Stability and Growth Pact, to be reached in 2015. The
progress towards the MTO is 0.8% and 0.7% of GDP in 2014 and 2015 respectively,
based on the (recalculated) structural balance and the rate of growth of
government expenditure complies with the expenditure benchmark of the Stability
and Growth Pact. The budgetary projections of the programme are subject to
several risks. The law on financial compensation to churches, currently
discussed in Parliament, would increase the general government deficit by 1.5%
of GDP in the year of entry into force. More generally, the nature and extent
of the envisaged consolidation measures on both the revenue and the expenditure
side entails a significant risk for the sustainability of the fiscal adjustment
beyond the programme period. Budgetary adjustment has so far relied mostly on
across-the-board cuts, which affect also growth-enhancing expenditure.
Additional savings in public administration expenditures amounting to almost 1%
of GDP are planned for 2013 - 2015, but details are not sufficiently specified
in the programme. Finally, most of the planned revenue measures are of a
temporary nature and should expire in 2015. According to the programme, the
debt-to-GDP ratio is expected to peak at 45.1% of GDP in 2013 and decline
thereafter, mainly on account of the projected continuous improvement of the
primary balance.

(8)       In 2011, the Czech
authorities approved an increase in the reduced VAT rate and in excise duties
on tobacco; they also approved a major tax reform affecting labour taxation
which should enter into force in 2014. Further changes to the tax system were
agreed at government level in April 2012. Some concern environmental and
housing taxation, which are currently under-taxed. The proposed temporary
nature of provisions in labour taxation would create additional compliance
costs and reduce predictability for taxpayers. Furthermore, the low effective
taxation of the self-employed compared to employees on account of an extensive
recourse to lump-sums and tax deductibles would only be partly addressed by the
new proposals. Finally, the government adopted measures to combat fraud in the
area of VAT and fuel taxes and took first steps to introduce the single
collection point. However, tax compliance still remains an issue and the
current tax collection system is not based on an articulated and comprehensive
tax compliance strategy.

(9)       The Czech government
approved, and partly implemented, a reform of the pension system, aimed at
restoring fiscal sustainability and raising retirement savings. However, the
projected fiscal imbalances in the pension system are still high relative to
the EU average. An explicit link between the statutory retirement age and life
expectancy was not included in the reform. The capacity of the new funded
pillar to contribute to higher average pensions in the future depends on the proportion
of workers, especially of younger ones, participating in it and on the expected
rate of return over the long run. However, no measures were announced to
stimulate participation in this pillar and more guidance for potential savers
would be appropriate. Moreover, the new early retirement scheme proposed by the
government represents a major risk to credibility and ambition of the reforms
to achieve both an effective increase in the retirement age and adequate
pensions.

(10)     The overall unemployment
rate is below the EU average but women with children and other vulnerable
groups struggle to realise their potential in the labour market. An earlier
return from parental leave, which would prevent the loss in skills, is
contingent on greater availability of child care, especially for children below
the age of three. In this regard, the government eased the technical requirements
for setting up company-based kindergartens and envisages providing tax
incentives for a greater take-up of private child care, thereby partially
implementing the recommendations. However, as only 3 % of children younger
than 3 years attend formal child care (compared to 24 % in the EU-27,
2009), further measures are needed with a view to enhancing labour market
participation of parents with young children.

(11)     Several measures were
adopted to improve the performance of the public employment service (PES).
Regional labour offices were put under the responsibility of a new central
labour office and, as part of a broader social-benefits reform, the
responsibility for payment of non-insurance social benefits was transferred
from the municipalities to labour offices. However, the resulting increased
workload will put further strain on the PES staff, whose number declined by 12 %
in 2011. To improve placement services, a system for outsourcing employment
services to private agencies was introduced. However, the fee structure seems
inadequate. Further efforts are needed to ensure better quality and
effectiveness of training, job search assistance and individualised services.
The necessary means and incentives need to be provided. Efficiency assessment
should be introduced to improve the targeting if interventions and funding of
activation programmes are to be linked to performance.

(12)     There is still ample scope
for improving the efficiency of public administration, despite recent
improvements in some areas, such as e-government services and the reduction of
the administrative burden for businesses. With respect to the anti-corruption
strategy, the adoption of the new Public Procurement Act, in force since April
2012, has been the main achievement. Nevertheless, proper enforcement and
implementation will be crucial for its credibility and effectiveness. The issue
of anonymous share holding has not been addressed yet. The Public Servants Act
is still under preparation but needs to be adopted without delay in order to
provide the administration with the necessary stability. Furthermore,
irregularities in public procurement and sub-optimal functioning of the
management and control systems for public administration have been important
sources of problems with implementation of the EU Funds.

(13)     The Czech economy needs to
mobilise factors facilitating the transition to growth based on innovation,
higher value added and human capital because opportunities for further real
convergence based on capital-intensive growth seem rather limited. A reform of
tertiary education is currently being discussed. Although it includes an overhaul
of the current accreditation process, it is not sufficiently precise on the key
issue of quality evaluation standards and, given the absence of systematic data
collection and analysis, it lacks support from the academic community. In the
wake of the worsening achievements of Czech pupils, the government has
undertaken steps to ensure minimal learning outcomes and embarked on a strategy
of nation-wide computer-based testing. However, these measures are too narrow
to effectively increase the quality and equity of compulsory education.

(14)     In the context of the
European Semester, the Commission has carried out a comprehensive analysis of
the Czech Republic’s economic policy. It has assessed the convergence programme
and national reform programme. It has taken into account not only their
relevance for sustainable fiscal and socio-economic policy in the Czech
Republic but also their compliance 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. Its recommendations under the
European Semester are reflected in recommendations (1) to (6) below.

(15)     In the light of this
assessment, the Council has examined the Czech Republic’s convergence programme,
and its opinion[7]
is reflected in particular in recommendation (1) below,

HEREBY RECOMMENDS that the Czech
Republic should take action within the period 2012-2013 to:

1.           Ensure planned progress
towards the timely correction of the excessive deficit. To this end, fully implement
the 2012 budget and specify measures of a durable nature necessary for the year
2013 so as to achieve the annual average structural adjustment specified in the
Council recommendation under the Excessive Deficit Procedure. Thereafter,
ensure an adequate structural adjustment effort to make sufficient progress
towards the medium-term objective, including meeting the expenditure benchmark.
In this context, avoid across-the-board cuts, safeguard growth-enhancing
expenditure and step up efforts to improve the efficiency of public spending. Exploit
the available space for increases in taxes least detrimental to growth. Shift
the high level of taxation on labour to housing and environmental taxation. Reduce
the discrepancies in the tax treatment of employees and the self-employed. Take
measures to improve tax collection, reduce tax evasion and
improve tax compliance, including by implementing the Single Collection Point
for all taxes.

2.           Introduce further changes
to the public pension scheme to ensure their long-term sustainability.
Reconsider plans to allow an earlier exit from the labour market. Ensure broad
participation of younger workers in the envisaged funded scheme to improve adequacy
of pensions.

3.           Take additional measures
to significantly increase the availability of affordable and quality pre-school
childcare facilities.

4.           Strengthen public employment
services by increasing the quality and effectiveness of training, job search
assistance and individualised services, including of outsourced services.

5.           Adopt and implement as a
matter of urgency the Public Servants Act to promote stability and
effectiveness of the public administration to avoid irregularities. ensure adequate
implementation of the new Public Procurement Act. Address the issue of
anonymous share holding. Ensure correct implementation of EU Funds and step up
the fight against corruption.

6.           Adopt the necessary
legislation to establish a transparent and clearly defined system for quality
evaluation of higher education and research institutions. Ensure that the
funding is sustainable and linked to the outcome of the quality assessment. Establish
an improvement-oriented evaluation framework in compulsory education.

Done at Brussels,

For
the Council

The
President

[1]               OJ L 209, 02.08.1997, p. 1

[2]               COM(2012)303 final

[3]               P7_TA(2012)0048 and P7_TA(2012)0047

[4]               Council Decision 2012/238/EU of 26 April 2012

[5]               COM(2012) 68 final.

[6]               Cyclically adjusted balance net of one-off and
temporary measures, recalculated by the Commission services on the basis of the information provided in the programme, using
the commonly agreed methodology.

[7]               Under Article 9(2) of Council Regulation (EC) No
1466/97.