Recommendation for a Council Decision abrogating Decision 2005/185/EC on the existence of an excessive deficit in the Czech Republic
Date: 2008-05-07
Institutions: European Commission
Subjects: Czechia, budget deficit, public debt, public finance, stability pact

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 7.5.2008 
SEC(2008) 571 final 

Recommendation for a  

COUNCIL DECISION 

abrogating Decision 2005/185/EC on the existence  
of an excessive deficit in the Czech Republic 

(presented by the Commission) 

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EXPLANATORY MEMORANDUM 

1. 

BACKGROUND 

Article 104 of the Treaty establishes that Member States should avoid excessive deficits and 
lays down a procedure for their identification and correction. The excessive deficit procedure 
(EDP)  is  further  specified  in  Council  Regulation  (EC)  No  1467/97  on  “speeding  up  and 
clarifying  the  implementation  of  the  excessive  deficit  procedure”1,  which  is  part  of  the 
Stability and Growth Pact. According to Article 104(2) of the Treaty, the Commission has to 
monitor  compliance  with  budgetary  discipline  on  the  basis  of  two  criteria,  namely:  (a) 
whether the planned or actual government deficit exceeds the reference value of 3% of GDP 
(unless either the deficit ratio has declined substantially and continuously and reached a level 
that comes close to the reference value; or, alternatively, the excess over the reference value is 
only  exceptional  and  temporary  and  the  ratio  remains  close  to  the  reference  value);  and  (b) 
whether government debt exceeds the reference value of 60% of GDP (unless the debt ratio is 
sufficiently diminishing and approaching the reference value at a satisfactory pace). 

In accordance with the Protocol on the excessive deficit procedure annexed to the Treaty, the 
Commission provides the data for the implementation of the EDP. As part of the application 
of this Protocol, Member States have to notify data on government deficits and debt and other 
associated variables twice a year, namely before 1 April and before 1 October, in accordance 
with Article 4 of Council Regulation (EC) No 3605/932,3. 

On 12 May 2004, the Commission initiated the EDP for the Czech Republic with the adoption 
of a report under Article 104(3), based on a general government deficit of 12.9% of GDP in 
20034 (5.9% of GDP excluding a major one-off operation related to imputed state guarantees). 
On  5  July  2004,  the  Council  decided,  on  a  recommendation  from  the  Commission,  that  the 
Czech Republic was in excessive deficit according to Article 104(6)5. At the same time, and 
also based on a Commission recommendation, the Council addressed recommendations under 
Article  104(7)  to  the  Czech  Republic  with  a  view  to  bringing  the  situation  of  an  excessive 
government deficit to an end, by 2008 at the latest.  

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OJ  L  209,  2.8.1997,  p.  6.  Regulation  as  amended  by  Regulation  (EC)  No  1056/2005  (OJ  L  174, 
7.7.2005, p. 5). 
OJ L 332, 31.12.1993, p. 7. Regulation as last amended by Regulation (EC) No 2103/2005 (OJ L 337, 
22.12.2005, p. 1). 
The most recent notification of the Czech Republic can be found at: 
http://epp.eurostat.ec.europa.eu/portal/page?_pageid=2373,58110711&_dad=portal&_schema=portal. 
SEC(2004) 575. In the meantime the 2003 deficit outturn has been revised downwards to 6.6% of GDP 
(no longer including any one-offs). 
OJ L 62, 9.3.2005, p. 20. 

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In view of the forecast of a marked budgetary slippage in 2007 and a continuing excess of the 
deficit over the reference value in 2008, based on budgetary plans proposed before the June 
2006 general election, the Council adopted a decision under Article 104(8) on 10 July 2007, 
based on a recommendation from the Commission, stating that the action being taken by the 
Czech Republic did not appear to be adequate to correct the excessive deficit by the deadline 
of  2008.  On  10  October  2007,  the  Council  issued  a  new  recommendation  under  Article 
104(7),  based  on  a  recommendation  from  the  Commission,  recommending  the  Czech 
Republic  to  further  contain  the  budgetary  deterioration  in  2007  and  confirming  the  original 
target year of 2008 to put an end to the excessive deficit situation. The Czech authorities had 
to  bring  the  deficit  below  the  3%  of  GDP  reference  value  in  a  credible  and  sustainable 
manner. To this end, on the basis of then available projections the Council recommended the 
Czech  authorities  to  ensure  an  improvement  in  the  structural  balance  (i.e.  the  cyclically-
adjusted balance net of one-off and other temporary measures) of at least ¾% of GDP in 2008 
compared  to  2007.  The  Council  set  a  deadline  of  9  April  2008  for  the  Czech  authorities  to 
take effective action. 

In addition, the Council invited the Czech Republic “to ensure that budgetary  consolidation 
towards its medium-term objective (MTO) for the budgetary position of a structural deficit of 
1% of GDP is sustained after the excessive deficit has been corrected and to achieve the MTO 
by the original deadline of 2012 at the latest.” 

Table 1: Adjustment endorsed by the Council on 10 October 2007 
% of GDP, unless indicated otherwise 
General government balance 
change in structural balance 
p.m.: Real GDP growth (%) 

2007 
better than -3.3 

2006 
-2.7 

6.0 

5.0 

2008 
deficit < 3 
at least ¾ 
4.9 

Notes: Structural balance = cyclically-adjusted balance excluding one-off and other temporary measures. 
Source: Council recommendation under Article 104(7), adopted on 10 October 2007, and Commission services’ 
Spring 2007 forecast 

taken  by 

the  action 

After the expiry of the deadline set by the Council, the Commission habitually makes a formal 
assessment  of 
the  Council’s 
recommendations, taking  into account the most recent Commission services’ forecasts. This 
represents  an  intermediate  assessment  of  whether  the  country  is  on  track  to  correct  the 
excessive deficit in time. In the case of the Czech Republic, this intermediate assessment is 
subsumed  under  and  replaced  by  the  current  document.  It  takes  into  account  the  Czech 
government’s note on corrective measures adopted under the EDP of April 20086. 

the  authorities 

in  response 

to 

According to Article 104(12), a Council decision on the existence of an excessive deficit is to 
be  abrogated,  on  the  basis  of  a  Commission  recommendation,  when  the  excessive  deficit  in 
the Member State concerned has, in the view of the Council, been corrected. 

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Letter of 10 April 2008 addressed by the Czech Minister of Finance to the Commissioner for Economic 
and Monetary Affairs. 

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2. 

RECENT DEFICIT DEVELOPMENTS 

The general government deficit reached a high of 6.6% of GDP in 2003. Thereafter, with the 
exception of 2005 (3½% of GDP), the general government deficit has not been above 3% of 
GDP. The nominal deficit developments since 2004 have been better than the recommended 
(nominal)  deficit  reduction  path  in  the  104(7)  recommendation  of  5  July  2004.  The 
improvement in the general government deficit has been due to better-than-expected revenues 
from higher-than-anticipated growth, which has exceeded 6% annually since 2005, as well as 
expenditure restraint. General government expenditure has fallen gradually as a percentage of 
GDP from 45% of GDP in 2004 to 42.4% of GDP in 2007. This is partly due to government 
consumption which has been lowered by about 2% of GDP and also diminishing costs related 
to the consolidation of the banking sector7. 

Based on data provided by the Commission (Eurostat), following the reporting by the Czech 
Republic before April 20088,9, the general government deficit stood at 1.6% of GDP in 200710 
which  is  significantly  below  the  target  of  4%  of  GDP,  set  in  the  March  2007  update  of  the 
convergence  programme.  In  the  outturn,  revenues,  as  a  percentage  of  GDP,  were  0.8%  of 
GDP  higher  than  projected  in  the  March  2007  convergence  programme,  and  government 
expenditure  was  1.8%  of  GDP  lower.  The  much  better-than-expected  outturn  appears  to 
mainly reflect containment of social expenditure, which was projected to rise by about 1% of 
GDP.  Other  elements  of  public  expenditure  including  compensation  of  employees  and 
intermediate consumption were also contained. In addition, growth turned out at 6.5% of GDP 
compared to 4.9% of GDP, as expected in the March 2007 convergence programme, and tax 
elasticities were better than predicted. 

Both revenues and expenditures were positively affected by a stronger than expected rise in 
employment.  Social  contributions  grew  more  than  anticipated  and  social  transfers  only 
increased marginally, as a percentage of GDP. 

Compared to 2006, the headline deficit declined by 1.1% of GDP, of which about one half is 
due  to  measures  taken,  as  illustrated  by  the  improvement  in  the  structural  balance,  and  the 
other half is thanks to stronger growth. Total expenditures decreased by 1.2% of GDP while 
total  revenues  decreased  by  0.2%  of  GDP.  The  improvement  in  2007  represents  an 
overachievement  of  the  Council’s  recommendation  to  “further  contain  the  budgetary 
deterioration” that was at the time expected for 2007. 

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10 

In  the  context  of  privatisation  of  the  banking  sector,  the  Czech  government  bore  much  of  the  costs 
related to non-performing loans, in particular, through the creation of the Czech Consolidation Agency. 
Over time, the proportion of these assets has declined.  
Eurostat News Release No 54/2008 of 18 April 2008. 
In accordance with Article 8g(1) of Regulation (EC) No 3605/93. 
Deficit ratios are usually revised – upwards or downwards – after the publication of the first outcome in 
the spring notification. For most EU Member States, the revisions are usually relatively small and on 
average insignificantly different from zero. For the Czech Republic, in view of the distance between the 
currently  reported  deficit  for  2007  and  the  deficit  reference  value,  there  is  a  low  probability  that  any 
potential future revision in government accounts will raise the 2007 deficit ratio to a level in excess of 
3% of GDP. 

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The overall reduction in government expenditure is reflected in the increase in the size of the 
reserve  funds  which  are  estimated  to  have  expanded  to  2¾%  of  GDP  (from  about  2%  in 
2006),  of  which  about  ¾%  of  GDP  is  non-EU  funds  related  expenditure  that  is  deferred 
expenditure which may swell future deficits. The other 2% are EU-funds related and backed-
up by revenues. 

In structural terms, the deficit decreased from 2.9% of GDP in 2006 to 2.3% of GDP in 2007 
due to continued government expenditure restraint including public sector wages. 

3. 

DEFICIT PROJECTIONS FOR 2008 AND BEYOND 

According to the Commission services’ spring 2008 forecast, the general government deficit 
is projected to decline further, reaching 1.4% of GDP in 2008 and, under a no-policy change 
assumption,  1.1%  of  GDP  in  2009.  This  is  due  to  the  balance  of  measures  included  in  the 
stabilisation package, approved on 19 September 2007, which is estimated to have a positive 
impact  amounting  to  around  0.3%  of  GDP  for  each  year  (see  box  I).  The  level  of  social 
transfers  is  expected  to  fall,  as  a  percentage  of  GDP,  in  2008  and  2009  as  a  result  of 
legislative  measures  in  the  stabilisation  package.  In  addition  to  legislative  measures,  the 
consolidation also relies on continuing public sector wage restraint and a reduction in public 
consumption as a percentage of GDP. Revenues are expected to remain stable as a percentage 
of  GDP,  although  the  range  of  tax  measures  occurring  at  the  same  time  makes  forecasting 
difficult. The Commission services’ deficit projections in the spring forecast are in line with 
the planned deficit reported in the spring notification (1.5% of GDP). 

Based on the Commission services’ spring 2008 forecast, the structural balance is expected to 
improve  from  -2¼%  of  GDP  in  2007  to  around  -2%  of  GDP  in  2008.  The  improvement  is 
lower  than  recommended  by  the  Council  (at  least  ¾%  of  GDP)  in  light  of  the  much  better 
headline deficit in 2007, underpinned by a structural improvement in 2007, of about ½% of 
GDP, which was not anticipated at the time of the recommendation. 

The  medium-term  objective  (MTO)  of  the  Czech  Republic  is  a  structural  deficit  to  1%  of 
GDP,  which  according  to  the  most  recent  convergence  programme  submitted  in  November 
2007 should be achieved by 2012. The Council opinion of 4 March 2008 on the programme11 
invited  the  Czech  authorities  to  “exploit  the  high  rate  of  growth  in  the  economy  by 
strengthening  the  pace  of  adjustment  so  as  to  build  a  safety  margin  against  breaching  the 
reference value as soon as possible, and achieve the MTO by 2012 at the latest”.  

Box I: Summary of measures in the stabilisation package of September 2007 

The stabilisation package has shifted the overall tax burden from direct to indirect taxation. 
From 1 January 2008, a 15% flat rate of personal income tax was introduced, albeit on an 
expanded base, which is planned to be further reduced to 12.5% in 2009. From 1 January 
2008, the corporate income tax rate was reduced from 24% to 21% and will decline further 
to 19% by 2010. Indirect taxes were increased in January 2008 through an increase in the 
lower  band  of  VAT  from  5  to  9  %,  increases  to  excise  taxes,  and  the  introduction  of  an 
environmental  tax  on  electricity,  natural  gas  and  solid  fuels.  A  ceiling  has  also  been 
introduced  on  the  maximum  base  for  payment  of  social  contributions  which  will  reduce 

11 

OJ C 74, 20.3.2008, p. 24. 

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revenue. 

The  stabilisation  package  introduced  new  legislation  aimed  at  reducing  expenditure  in 
primarily the area of social benefits, including child benefits, social care benefits, parental 
allowances, maternity benefits, foster care benefits, benefits for school supplies, and funeral 
benefits. In addition to fixed reductions, most social care benefits have ceased to be indexed 
to the minimum subsistence level, which in turn has been changed to a discretionary basis 
by the government. The stabilisation package also introduced service charges for healthcare 
services  from  January  2008.  This  includes  charges  for  medical  consultations,  prescription 
medicines, and hospitalisation. These changes are estimated to have a small positive impact 
on  government  revenues  by  generating  additional  income  and  reducing  expenditure  by 
lowering demand. 

The government tabled a proposal on 23 January 2008 to compensate churches for confiscated 
religious property (see box II). Pursuant to its approval by the Czech parliament, the financial 
compensation  will  be  registered  as  a  one-off  deficit-increasing  expenditure  amounting  to 
2.2%  of  GDP  in  the  year  in  which  the  government  liability  is  recognised,  though  most 
effective payment will be deferred over a very long period of 60 years. This transaction was 
not  considered  in  the  Commission  services’  spring  2008  forecasts  based  on  the  usual  no-
policy change assumption, since it was not clear whether and when the government proposal 
would be adopted by Parliament. This transaction was not considered either in the projections 
of  the  convergence  programme.  In  case  the  proposal  became  effective  in  2008  or  2009,  the 
government deficit (including this transaction) would on current projections be temporarily in 
excess of 3% of GDP for that year. 

Box II: The Czech proposal for compensation for the confiscation of religious property 

On 23 January 2008, the Czech Government tabled in parliament a proposal to compensate 
the  church  for  religious  property  confiscated  during  the  period  1948-1990.  Two  ways  of 
compensation are foreseen: restitution in kind and financial compensation when restitution 
in kind is no longer possible. According to the proposal, as far as the financial compensation 
is concerned, the churches will receive from the government 60 yearly cash instalments of 
CZK 4274.9 million (0.1% of the 2008 GDP). Given an annual interest rate of 4.85%, this 
corresponds  to  a  principal  of  CZK  83.0  billion  (2.2%  of  the  2008  GDP)  and  CZK  173.5 
billion of interest12. 

The  Czech  statistical  office  has  required  Eurostat  to  clarify  the  appropriate  accounting 
implications of the proposal for compensation. Eurostat clarified that the restitutions in kind 
have  no  impact  on  the  government  deficit.  When  the  returned  asset  is  the  same  as 
confiscated  in  the  past,  the  transaction  is  recorded  in  ESA  accounts  as  other  changes  in 
volume  without  any  direct  impact  on  the  government  revenue  and  expenditure  accounts. 
When the returned good is not the same, the restitution is booked as a capital transfer paid 
offset by negative investment. 

In  relation  to  the  financial  compensation,  Eurostat  clarified  that,  according  to  its 
interpretation  of  ESA  accounting  rules,  the  principal  to  be  paid  should  be  booked  as 
government expenditure when the legal act is approved, instead of when cash payments take 

12 

According to information provided by the Czech authorities, part of the compensation deal is also that 
state  support  to  churches  (e.g.  payment  of  priests’  salaries)  will  be  phased  out.  This  state  support 
amounts to CZK 1406 million (0.04% of GDP in 2008). 

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place.  Interest  will  be  booked  as  government  expenditure  over  the  60  following  years. 
Eurostat also clarified that the outstanding liability vis-à-vis the churches will be booked as 
accounts payable13. 

Therefore, in the year the Czech Parliament adopts the law and the latter enters into force, 
the  Czech  government  accounts  will  include  a  very  large  one-off  deficit-increasing 
transaction amounting to 2.2% of GDP. The fact that the liability vis-à-vis the churches will 
be booked as accounts payable means that it will not constitute government debt in the sense 
of Regulation (EC) No 3605/93. At the moment the expenditure is booked, the stock-flow 
adjustment will include an exceptionally large negative cash-accrual difference, which will 
be progressively offset over 60 years. 

4. 

DEBT DEVELOPMENTS AND PROJECTIONS 

Despite significant general government deficits since 2004, the increase of the level of debt 
has been largely contained. Due to record growth since 2005, and a substantial reduction in 
the general government deficit in 2007 compared to 2006, the level of government debt has 
decreased from 30.4% of GDP in 2004 to 28.7% of GDP in 2007.  

On the basis of the Commission services’ spring 2008 forecast, the debt ratio is expected to 
continue  on  a  downward  path  to  below  28%  of  GDP  in  2009,  due  to  continuing  fiscal 
consolidation and sustained macroeconomic growth. 

5. 

CONCLUSIONS 

Despite the expectation of a strong fiscal expansion in 2007, the general government balance 
improved  from  -2.7%  of  GDP  in  2006  to  -1.6%  of  GDP  in  2007.  This  was  due  in  part  to 
expenditure  savings  as  well  as  higher  growth.  The  structural  balance,  i.e.  the  cyclically-
adjusted balance net of one-off and other temporary measures, improved by ½% of GDP in 
2007. 

The Czech government has introduced a range of legislative measures, effective from 2008, 
with  the  aim  of  consolidating  public  finances  in  2008  and  2009,  including  through  the 
containment of social spending and the introduction of service charges for healthcare, which 
will  have  a  net  positive  impact  on  public  finances.  Combined  with  continuing  expenditure 
restraint, and a close monitoring of the impact on revenues of the wide range of tax measures 
implemented in 2008, these measures are expected to lead to a further reduction in the general 
government deficit. According to the Commission services’ spring 2008 forecast, the headline 
deficit  is  expected  to  improve  further  to  1.4%  of  GDP  in  2008  and,  on  a  no-policy  change 
basis, to 1.1% in 2009. This indicates that the deficit has been brought below the 3% of GDP 
ceiling in a credible and sustainable manner. 

General government gross debt declined from 29.4% of GDP in 2006 to 28.7% in 2007, well 
below the 60% of GDP reference value. According to the Commission services’ spring 2008 
forecast,  the  debt  ratio  is  expected  to  fall  further  to  below  28%  of  GDP  by  2009  (on  a  no-
policy change basis). 

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The Eurostat letter of 14 March 2008 providing ex ante advice to the Czech statistical office is available 
at:  http://epp.eurostat.ec.europa.eu/pls/portal/docs/PAGE/PGP_DS_GFS/PGE_DS_GFS_8/ADV%20-
%20CZ%20-%202008.1%20-%20CONFISCATED%20PROPERTIES.PDF 

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From  an  overall  assessment,  it  follows  that  the  excessive  deficit  situation  in  the  Czech 
Republic  has  been  corrected.  Accordingly,  the  Commission  recommends  to  the  Council  to 
abrogate its decision on the existence of an excessive deficit in the Czech Republic. 

Table 2: Budgetary developments, 2003-2009 

2003 2004 2005 2006

-3.0

-1.4 

-2.7 

-3.6 

-3.4 

2009 

2007 

% of GDP, unless indicated otherwise 
General government balance 
- Total revenues 
- Total expenditure 
Of which :  - interest expenditure 

-2.9 
-6.6 
40.7  42.2 41.4  41.0  40.8  39.8  40.7  39.5 
47.3  45.2 44.9  43.6  42.4  43.3  42.2  42.4 
1.3 
1.2 
5.3 
- gross fixed capital formation  4.5 
-1.7 
-5.5 
0.0 
0.0 
-3.4 
-5.5 
-2.2 
-4.4 
30.1  30.4 29.7  29.4  28.7  30.4  28.1  30.3 
5.0 
3.6 
1.4 
-3.0 

2008 
COM CP(2) COM  CP(2)  COM(3) CP(2)
-2.6 
-1.6 
38.1 
40.7 
1.2 
5.4 
-1.3 
0.0 
-2.8 
-1.6 
30.2 
5.1 
0.7 

-1.1 
40.7 
41.8 
1.1 
4.9 
0.0 
0.0 
-1.5 
-0.4 
27.2 
5.0 
1.1 

1.1 
5.0 
-1.5 
-0.2 
-2.9 
-1.7 

1.2 
4.9 
-2.4 
-1.1 
-2.1 
-1.0 

1.1 
4.8 
-0.3 
0.0 
-1.9 
-0.8 

1.2 
5.1 
-2.3 
0.0 
-4.1 
-2.9 

1.2 
4.8 
-0.4 
0.0 
-2.3 
-1.2 

1.2 
4.8 
-1.8
-0.7
-1.3
-0.1

Primary balance 
One-off and temporary measures 
Structural balance(1) 
Structural primary balance(2) 
Government gross debt 
Pm 
Pm 
(1) 
(2) 

Real GDP growth (%) 
Output gap 

Cyclically-adjusted (primary) balance excluding one-off and temporary measures. 
Cyclically-adjusted and structural balances and output gaps according to the programme as calculated by 
Commission services on the basis of the information in the programme. 
No-policy change assumption. 

(3) 
Sources: Commission services’ spring 2008 forecast (COM) and November 2007 update of the convergence 
programme (CP) 

6.4 
-0.8 

4.5 
-2.6

6.4 
0.8 

6.5 
2.0 

5.9 
1.8 

4.7 
1.4 

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Recommendation for a  

COUNCIL DECISION 

abrogating Decision 2005/185/EC on the existence  
of an excessive deficit in the Czech Republic 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  establishing  the  European  Community,  and  in  particular 
Article 104(12) thereof, 

Having regard to the recommendation from the Commission, 

Whereas: 

(1) 

(2) 

(3) 

By  Council  Decision  2005/185/EC14,  following  a  recommendation  from 
the 
Commission  in  accordance  with  Article 104(6)  of  the  Treaty,  it  was  decided  that  an 
excessive  deficit  existed  in  the  Czech  Republic.  The  Council  noted  that  the  general 
government deficit was 12.9% of GDP in 2003 (5.9% of GDP excluding a major one-
off operation related to imputed state guarantees), well above the 3% of GDP Treaty 
reference value.  

On  5  July  2004,  in  accordance  with  Article 104(7)  of  the  Treaty  and  Article  3(4)  of 
Council Regulation (EC) No 1467/97 of 7 July 1997 on speeding up and clarifying the 
implementation  of  the  excessive  deficit  procedure15,  the  Council  made,  based  on  a 
recommendation  from  the  Commission,  a  recommendation  addressed  to  the  Czech 
Republic with a view to bringing the excessive deficit situation to an end by 2008 at 
the latest. The recommendation was made public. 

In  view  of  the  forecast  of  a  marked  budgetary  slippage  in  2007  and  a  continuing 
excess of the deficit over the reference value in 2008, the Council adopted a decision 
under  Article  104(8)  on  10  July  2007,  based  on  a  recommendation  from  the 
Commission, stating that the action being taken by the Czech Republic did not appear 
to  be  adequate  to  correct  the  excessive  deficit  by  the  deadline  of  200816.  On  10 
October 2007, the Council issued a new recommendation under Article 104(7), based 
on  a  recommendation  from  the  Commission,  recommending  the  Czech  Republic  to 
further  contain  the  budgetary  deterioration  in  2007  and  reconfirming  the  excessive 
deficit had to be put to an end by 2008 at the latest, with a deadline of 9 April 2008 for 
the  Czech  authorities  to  take  effective  action.  On  the  basis  of  then  available 
projections the Council invited the Czech authorities to ensure an improvement in the 

14 
15 

16 

OJ L 62, 9.3.2005, p. 20. 
OJ  L  209,  2.8.1997,  p.  6.  Regulation  as  amended  by  Regulation  (EC)  No  1056/2005  (OJ  L  174, 
7.7.2005, p. 5). 
OJ L 260, 5.10.2007, p. 13. 

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structural  balance  (i.e.  the  cyclically-adjusted  balance  net  of  one-off  and  other 
temporary measures) of at least ¾% of GDP in 2008 compared to 2007. 

(4) 

(5) 

In accordance with Article 104(12) of the Treaty, a Council Decision on the existence 
of  an  excessive  deficit  is  to  be  abrogated  when  the  excessive  deficit  in  the  Member 
State concerned has, in the view of the Council, been corrected. 

In  accordance  with  the  Protocol  on  the  excessive  deficit  procedure  annexed  to  the 
Treaty, the Commission provides the data for the implementation of the procedure. As 
part  of  the  application  of  this  Protocol,  Member  States  are  to  notify  data  on 
government  deficits  and  debt  and  other  associated  variables  twice  a  year,  namely 
before  1  April  and  before  1  October,  in  accordance  with  Article  4  of  Council 
Regulation (EC) No 3605/93 of 22 November 1993 on the application of the Protocol 
on  the  excessive  deficit  procedure  annexed  to  the  Treaty  establishing  the  European 
Community17. 

(6) 

Based  on  data  provided  by  the  Commission  (Eurostat)  in  accordance  with  Article 
8g(1)  of  Regulation  (EC)  No  3605/93  following  the  notification  by  the  Czech 
Republic before 1 April 2008 and on the Commission services’ spring 2008 forecast, 
the following conclusions are warranted: 

– 

– 

– 

the  general  government  deficit  was  reduced  from  2.7%  of  GDP  in  2006  to 
1.6% of GDP in 2007, which is below the 3% of GDP deficit reference value. 
This  compares  with  a  target  of  4%  of  GDP  in  the  March  2007  convergence 
programme, 

while  tax  revenues  exceeded  expectations  due  to  higher-than-projected 
economic  growth,  the  deficit  reduction  in  2007  was  also  the  consequence  of 
expenditure  restraint,  in  particular  with  respect  to  the  compensation  of  public 
sector  employees  and  intermediate  consumption.  Most  of  the  expenditure 
savings are of a permanent nature. The improvement in the structural balance 
(i.e.  the  cyclically-adjusted  balance  net  of  one-off  and  other  temporary 
measures) is estimated at just above ½% of GDP in 2007, 

for 2008, the spring 2008 forecast projects the deficit to be reduced further, to 
1.4%  of  GDP,  driven  by  additional  expenditure  savings  measures,  legislative 
measures  to  reduce  social  expenditure  and  the  introduction  of  partial  health 
charges.  Revenue  as  a  percentage  of  GDP  is  expected  to  remain  broadly 
constant  on  the  back  of  a  wide  range  of  tax  measures  implemented  in  2008. 
The spring forecast is in line with the deficit target of 1.5% of GDP in the April 
fiscal notification. For 2009, the spring forecast projects, on a no-policy change 
basis,  a  further  decline  in  the  deficit  to  1.1%  of  GDP.  This  indicates  that  the 
deficit  has  been  brought  below  the  3%  of  GDP  ceiling  in  a  credible  and 
sustainable manner. The structural balance is projected to improve by almost ½ 
a percentage point of GDP in 2008 and again, on a no-policy change basis, in 
2009.  This  has  to  be  seen  against  the  need  to  make  progress  towards  the 
medium-term objective (MTO) for the budgetary position, which for the Czech 

17 

OJ L 332, 31.12.1993, p. 7. Regulation as last amended by Regulation (EC) No 2103/2005 (OJ L 337, 
22.12.2005, p. 1). 

EN 

10 

   EN 

 
                                                 
Republic is a structural deficit of 1% of GDP, to be reached by 2012 according 
to the November 2007 update of the convergence programme. 

– 

government  debt  remains  well  below  the  60%  of  GDP  reference  value.  It 
declined  from  29.4%  of  GDP  in  2006  to  28.7%  in  2007.  According  to  the 
spring 2008 forecast, the debt ratio is projected to fall further to below 28% by 
end-2009 (on a no-policy change basis). 

(7) 

In  the  view  of  the  Council,  the  excessive  deficit  in  the  Czech  Republic  has  been 
corrected and Decision 2005/185/EC should therefore be abrogated. 

HAS ADOPTED THIS DECISION: 

From  an  overall  assessment  it  follows  that  the  excessive  deficit  situation  in  the  Czech 
Republic has been corrected. 

Article 1 

Decision 2005/185/EC is hereby abrogated. 

Article 2 

Article 3 

This Decision is addressed to the Czech Republic. 

Done at ,  

For the Council 
The President 

EN 

11 

   EN