Council Opinion of 18 January 2005 on the updated convergence programme of the Czech Republic, 2004-2007
Date: 2005-01-18
Institutions: Council of the European Union
Subjects: Czechia, economic convergence, multilateral surveillance, stability programme

1.4.2005

EN

Official Journal of the European Union

C 79/3

COUNCIL OPINION

of 18 January 2005

on the updated convergence programme of the Czech Republic, 2004-2007

(2005/C 79/02)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

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

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

On 18 January 2005 the Council examined the updated convergence programme of the Czech Republic,
which covers the period 2004 to 2007. The programme complies broadly with the data requirements of
the ‘code of conduct on the content and format of stability and convergence programmes’. In particular, in
spite of a revision in the data provided after the submission of the update, the expenditure and revenue
ratios are not fully consolidated in line with ESA95 statistical standards. Accordingly, the Czech Republic is
invited to achieve compliance with the data requirements.

The programme contains different scenarios for the macroeconomic and budgetary projections: a ‘baseline’
scenario, an ‘optimistic’ scenario and a ‘pessimistic’ scenario. The ‘baseline’ scenario is considered as the
reference scenario for assessing budgetary projections, because it reflects plausible growth assumptions.
This scenario expects real GDP growth to be 3,8 % in 2004. In 2005, real GDP is forecast to reach 3,6 %
and to accelerate slightly later on, reaching 3,8 % in 2007. The programme's projections for inflation
appear realistic.

On 5 July 2004, the Council decided that an excessive deficit existed in the Czech Republic and recom-
mended that this be corrected by 2008.

The programme aims at reducing the deficit from 5,2 % of GDP in 2004 (including one-off expenditures of
about 1,2 % of GDP) to below the 3 % of GDP reference value in 2008, in line with the Council recom-
mendation under Article 104(7). Compared with the May 2004 convergence programme, there is no
change in the deficit targets for 2005-2007 although GDP growth has been revised upward and the
budgetary outcome for 2004 (excluding one-offs) is better than expected. The programme targets a cut in
the general government deficit by 1,9 percentage points between 2004 and 2007 and a cut in the primary
deficit by 2,3 percentage points over the same period. The adjustment is foreseen to be gradual, by about
0,5 % of GDP annually, except in 2006, when the deficit improvement is planned to be almost 1 % of
GDP. Both revenues and expenditure are planned to fall over the programme period (as a percent of GDP),
with public investment is the only expenditure item expected to increase, from 4,2 % of GDP in 2003 to
4,6 % of GDP in 2007, well above the EU-average (2,4 % of GDP in 2004).

The risks to the budgetary projections in the programme appear broadly balanced. On the one hand, the
macroeconomic scenario suggests that revenues could be better than expected and that expenditures could
be lower than budgeted. Moreover, further risks to the budgetary targets linked to the state guarantees and
important expenditure cuts, particularly
debt assumption appear to be limited. On the other hand,
regarding government consumption, still have to be adopted in order to meet expenditure ceilings in 2006
and 2007. Also, the implementation of expenditure ceilings is subject to a risk ahead of the next regular
parliamentary elections scheduled for June 2006. In view of this risk assessment, the budgetary stance in
the programme seems sufficient to reduce the deficit to below 3 % of GDP by 2008 as envisaged in the
programme.

(1) OJ L 209, 2.8.1997, p. 1.

C 79/4

EN

Official Journal of the European Union

1.4.2005

The debt ratio is estimated to have reached 38,6 % of GDP in 2004, well below the 60 % of GDP Treaty
reference value. The programme projects the debt ratio to increase by 1,4 percentage points over the
programme period.

The Czech Republic appears to be at serious risk with regard to the long-term sustainability of the public
finances, on grounds of the very important projected budgetary costs of an ageing population. In particu-
lar, the strategy of fiscal consolidation outlined in the programme needs to be complemented with addi-
tional reforms to reduce the sustainability risks associated with the projected increase in pension and
health-care expenditures.

The economic policies outlined in the update are partly consistent with the country-specific broad
economic policy guidelines in the area of public finances. On the one hand, the programme is in line with
the reduction of the general government deficit recommended by the Council and the reduction is based
on legally binding medium-term expenditure ceilings. On the other hand, the implementation of the
recommended cuts of the wage bill of central government envisaged in the May convergence programme
is proving difficult and measures to control the deficits and debt of regional governments and municipali-
ties might not be sufficient. In addition, the programme does not present concrete steps to safeguard the
long-term sustainability of the public finances, specifically through the implementation of pension and
healthcare reforms.

In view of the above assessment, and in the light of the recommendations made by the Council under
Article 104(7), the Czech Republic is recommended to allocate higher-than-budgeted revenues to deficit
reduction and adhere strictly to the medium-term expenditure ceilings for central government, which
become legally binding from 2006. Furthermore, the Czech Republic is invited to step up the pension
reform and to undertake the reform of the healthcare system to improve the long-term sustainability of the
public finances.

Comparison of key macroeconomic and budgetary projections

2004

2005

2006

2007

Real GDP
(% change)

HICP inflation
(%)

General government
balance
(% of GDP)

Primary balance
(% of GDP)

Government gross debt
(% of GDP)

CP December 2004

COM autumn 2004

CP May 2004

CP December 2004

COM autumn 2004

CP May 2004

CP December 2004

COM autumn 2004

CP May 2004

CP December 2004

3,8

3,8

2,8

2,7

2,8

2,8

– 5,2

– 4,8 (1)

– 5,3

– 4,0

COM autumn 2004

– 3,6 (1)

CP May 2004

CP December 2004

COM autumn 2004

CP May 2004

– 4,1

38,6

37,8 (1)

38,4

3,6

3,8

3,1

3,2

3,1

2,6

– 4,7

– 4,7

– 4,7

– 3,3

– 3,3

– 3,4

38,3

39,4

39,7

3,7

4,0

3,3

2,6

2,9

2,2

– 3,8

– 4,3

– 3,8

– 2,3

– 2,9

– 2,4

39,2

40,6

41,0

(1) The Commission services forecast for 2004 did not include the imputed state guarantee of 0.8% of GDP.
Sources:
Convergence programme (CP); Commission services economic forecasts (COM)

3,8

n.a.

3,5

2,2

n.a.

2,2

– 3,3

n.a.

– 3,3

– 1,7

n.a.

– 1,7

40,0

n.a.

41,7