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
Date: 2012-05-30
Institutions: European Commission
Subjects: Czechia, administrative reform, budget deficit, budgetary equilibrium, corruption, educational reform, employment service, pension scheme, pre-school education, public expenditure, retirement conditions

EUROPEAN COMMISSION 

Brussels, 30.5.2012  
COM(2012) 303 final 

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 

{SWD(2012) 303 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 
policies1, and in particular Article 5(2) thereof, 

Having regard to the recommendation of the European Commission2, 
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) 

(2) 

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 
to  boost  Europe’s  potential  for  sustainable  growth  and 
competitiveness. 

is  needed 

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 States4, which together form the ‘integrated guidelines’. Member States were 
invited  to  take  the  integrated  guidelines  into  account  in  their  national  economic  and 
employment policies. 

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4 

OJ L 209, 02.08.1997, p. 1 
COM(2012)303 final 
P7_TA(2012)0048 and P7_TA(2012)0047 
Council Decision 2012/238/EU of 26 April 2012 

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(3) 

(4) 

(5) 

(6) 

(7) 

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. 

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  Report5,  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. 

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. 

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. 

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  balance6,  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 

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COM(2012) 68 final. 
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. 

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(8) 

(9) 

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. 

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. 

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 

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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 opinion7 is reflected in particular in recommendation 
(1) below, 

7 

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

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

1. 

2. 

3. 

4. 

5. 

6. 

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. 

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. 

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

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

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.  

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 

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