Recommendation for a COUNCIL RECOMMENDATION on the Czech Republic’s 2013 national reform programme and delivering a Council opinion on the Czech Republic’s convergence programme for 2012-2016
Date: 2013-05-29
Institutions: European Commission
Subjects: Czechia, budget deficit, budgetary equilibrium, competitiveness, corruption, educational reform, employment service, liberal profession, tax reform

EUROPEAN 
COMMISSION 

Brussels, 29.5.2013  
COM(2013) 353 final 

Recommendation for a 

COUNCIL RECOMMENDATION 

on the Czech Republic’s 2013 national reform programme  

and delivering a Council opinion on the Czech Republic’s convergence programme for 
2012-2016 

{SWD(2013) 353 final} 

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Recommendation for a 

COUNCIL RECOMMENDATION 

on the Czech Republic’s 2013 national reform programme  

and delivering a Council opinion on the Czech Republic’s convergence programme for 
2012-2016 

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 9(2) thereof, 
Having regard to the recommendation of the European Commission2, 
Having regard to the resolutions of the European Parliament3, 

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) 

(3) 

On  26  March  2010,  the  European  Council  agreed  to  the  Commission’s  proposal  to 
launch  a  new  strategy  for  growth  and  jobs,  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. 

On 13 July 2010, on the basis of the Commission's proposals, 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. 

On 29 June 2012, the Heads of State or Government decided on a Compact for Growth 
and  Jobs,  providing  a  coherent  framework  for  action  at  national,  EU  and  euro  area 
levels using all possible levers, instruments and policies. They decided on action to be 
taken  at  the  level  of  the  Member  States,  in  particular  expressing  full  commitment  to 
achieving the objectives of the Europe 2020 Strategy and to implementing the country-
specific recommendations. 

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OJ L 209, 2.8.1997, p. 1. 
COM(2013) 353 final. 
P7_TA(2013)0052 and P7_TA(2013)0053. 
Council Decision 2013/208/EU of 22 April 2013. 

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(5) 

(6) 

(7) 

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On  6  July  2012,  the  Council  adopted  a  recommendation  on  the  Czech  Republic’s 
national  reform  programme  for  2012  and  delivered  its  opinion  on  the  Czech 
Republic’s updated convergence programme for 2011-2015. 
On  28  November  2012,  the  Commission  adopted  the  Annual  Growth  Survey5, 
marking  the  start  of  the  2013  European  Semester  for  economic  policy  coordination. 
Also  on  28  November  2012,  the  Commission,  on  the  basis  of  Regulation  (EU)  No 
1176/2011, adopted the second Alert Mechanism Report6, 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  14  March  2013,  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  26  April  2013,  the  Czech  Republic  submitted  its  2013  convergence  programme 
covering  the  period  2013-2016  and,  on  17  April  2013,  its  2013  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  2013  convergence  programme  pursuant  to  Council 
Regulation  (EC)  No  1466/97,  the  Council  is  of  the  opinion  that  the  Czech  Republic 
has reduced the headline deficit by 1.4% of GDP from 2009 to 2012 due to substantial 
consolidation  efforts and that, based on  current expectations, it is on track to correct 
the  excessive  deficit.  The  macroeconomic  scenario  underpinning  the  budgetary 
projections in the programme is plausible. According to the convergence programme, 
real  GDP  growth  is  expected  to  be  at  0%  and  1.2%  in  2013  and  2014,  respectively, 
compared to -0.4% and 1.6 % in 2013 and 2014 respectively in the Commission 2013 
spring forecast. The objective of the budgetary strategy outlined in the programme is 
to  keep  the  general  government  deficit  below  the  3%  of  GDP  reference  value.  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  recommendation  of  2 
December  2009.  The  Commission  2013  spring  forecast  projects  the  government 
deficit  at  2.9%  and  3%  of  GDP  in  2013  and  2014,  respectively.  There  is  a  risk  of 
worse-than-expected  budgetary  outcome 
in  2013  stemming  from  additional 
corrections  in  EU  funds  reimbursements.  On  the  positive  side,  one-off  revenues 
related to the planned auction of new telecom frequency bands could result in a better-
than-expected budgetary outcome in 2013. The convergence programme confirms the 
previous medium-term objective of a deficit of 1% of GDP, which adequately reflects 
the requirements of the Stability and Growth Pact. The (recalculated) structural budget 
deficit  is  projected  to  increase  by  0.3%,  0.2%  and  0.5%  of  GDP  in  2014,  2015  and 
2016  respectively;  therefore  no  adjustment  towards  the  medium-term  objective  is 
foreseen  in  the  programme,  which  is  not  in  line  with  the  Stability  and  Growth  Pact. 
The  rate  of  growth  of  government  expenditure  complies  with  the  expenditure 
benchmark of the Stability and Growth Pact in 2014 but deviates by 0.3% and 0.5% of 
GDP  in  2015  and  2016  respectively.  According  to  the  convergence  programme,  the 

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COM(2012) 750 final. 
COM(2012) 751 final. 

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debt-to-GDP ratio is forecast to continue to increase over the programme period, albeit 
at a slowing pace, and to reach 51.9% of GDP in 2016.  

Swift  and  durable  recovery  is  hindered  in  the  Czech  Republic  by  repeated  cuts  in 
public  investment  expenditure.  Safeguarding  growth-enhancing  expenditure  with  a 
high multiplicative effect, including projects co-financed by EU funds, would not only 
help buttress recovery but could also contribute to tackling the long-term challenges. 
Substantial  growth  effects  could  follow  from  prioritising  expenditure  on  measures 
aiming  at  increasing  employment,  research  and  innovation,  education,  childcare 
facilities and infrastructure projects. At the same time, ensuring legality, regularity and 
efficiency of such spending is key. 

(10)  Limited progress  was  made  in  2012 on tax reform.  While  the  real  estate  transfer  tax 
was  increased,  no  steps  were  taken  to  raise  the  very  low  level  of  recurrent  property 
taxes.  Plans  to  introduce  a  CO2  tax  and  abolish  exemptions  from  excise  duties  on 
natural gas for heating have been dropped. The implicit tax rate on energy is below the 
EU average and vehicle circulation taxes remain very low. Structural challenges also 
remain in taxation of labour, in particular affecting low-income earners and part-time 
workers. Only marginal steps were taken to reduce discrepancies in the tax treatment 
of  employees  and  the  self-employed.  The  Czech  Republic  also  has  room  to  further 
improve  the  efficiency  of  its  tax  administration.  As  regards  personal  and  company 
income  taxes,  the  government  is  planning  to  establish  a  Single  Collection  Point  in 
2015,  which  could  effectively  streamline  the  tax  administration  and  help  reduce  the 
complexity of the current system. However, a drawback of the reform is that the tax 
bases for personal income tax, health and social contributions will not be harmonised, 
thereby leaving a large part of the potential benefits of the reform unexploited.  

(11)  The Czech Republic has a sustainability gap of 5.0 % of GDP, which is above the EU 
average.  This  gap  largely  reflects  the  projected  long-term  cost  of  ageing,  which  is 
driven by the expected increases in pension expenditure and in health and  long-term 
care  spending.  An  important  source  of  the  unsustainable  increase  in  pension 
expenditure lies in the slow rate at which the statutory retirement age is being raised, 
in particular for men. Ensuring that the statutory retirement age increases more rapidly 
compared  to  current  legislation  and  linking  it  to  life  expectancy  would  significantly 
strengthen the sustainability of the system. Moreover, an indexation formula based on 
prices, when implemented over the long run, would generate substantial savings and at 
the same time preserve the purchasing power of pensioners.  

(12)  Contrary to the 2012 country-specific recommendation, the government introduced a 
pre-retirement scheme in 2013, which offers the possibility of drawing a pension up to 
five  years  before  reaching  the  statutory  retirement  age.  The  pre-retirement  pensions 
are going to be paid from the (third) pension savings pillar. However, the pillar enjoys 
a  substantial  state  subsidy  through  direct  co-payments  and  tax  deductibility  of 
contributions.  Irrespective  of  whether  the  eligibility  criteria  for  gaining  access  to  the 
scheme  will  be  effectively  met  by  only  a  limited  number  of  persons,  as  the 
government  expects,  the  measure  allows  beneficiaries  to  use  the  previously  accrued 
public  subsidy  for  a  purpose  that  goes  against  policies  to  promote  longer  working 
lives.  

(13)  The  expected  increase  in  health  and  long-term  care  spending  also  provides  a 
substantial contribution to the cost of ageing and the large sustainability gap. Reforms 
aimed at improving the efficiency of the health system via cost containment and more 
market-oriented  solutions  have  been  implemented  in  recent  years  in  the  Czech 

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Republic. However, problems still exist. Compared to other Member States, the Czech 
healthcare system tends to be excessively centred on hospital care, which gives rise to 
inefficiencies.  There  is  scope  to  improve  the  provision  of  care  in  the  most  clinically 
appropriate  and  cost-effective  way,  for  example  by  moving  to  day-of-surgery 
admission and reducing inappropriate lengths of stay in acute care hospitals. 

(14)  Recent  OECD  projections  show  that  full  convergence  of  the  female  and  male 
employment  rates  would  halt  the  projected  decline  of  the  total  labour  force  and 
increase GDP per capita by as much as 16.5 % by 2030. The government has proposed 
a  draft  Act  on  22  May  2013  to  introduce  private  ‘child  groups’  led  by  professional 
nannies,  accompanied  by  tax  subsidies  for  care  providers  and  participating  families. 
This is a step in the right direction but is only a partial response to the issue. Despite a 
continued shortage of childcare facilities, in particular for under three year olds, there 
are no plans to increase budgetary support to public pre-school childcare facilities. The 
employability and labour market participation of disadvantaged people also remains a 
problem:  there  is  scope  for  increasing  the  efficiency  and  effectiveness  of  public 
employment services. 

(15)  The  2012  country-specific  recommendation  on  public  administration  specifically 
mentioned the need to increase the efficiency of public administration and step up the 
fight  against  corruption.  However,  only  limited  progress  has  been  made  in  adopting 
the  priority  legal  acts  under  the  Czech  anti-corruption  strategy  for  2011-12.  A  new 
anti-corruption  strategy  for  2013-14,  adopted  by  the  government  in  January  2013, 
needs to be followed up by the urgent adoption of outstanding priority acts, such as the 
Public  Servants  Act.  This  new  legislation  will  need  to  adequately  separate  political 
appointees  from  non-political  staff,  guarantee  independence  of  state  officials  and 
create  a  well-functioning  career  system  to  reduce  high  staff  turnover.  The  Czech 
Republic has made substantial progress in implementing the Public Procurement Act, 
which  came  into  force  in  April  2012.  However,  difficulties  in  implementing  the  Act 
have been reported by local authorities. As regards the implementation of EU funds, 
most  of  the  measures  included  in  the  action  plan  to  strengthen  the  management  and 
control system were implemented by the end of 2012. However, the Czech authorities 
will need to ensure continuous monitoring of the action plan.  

(16)  At  the  level  of  compulsory  education,  Czech  pupils  attain  broadly  average  results  in 
international  comparisons.  In  mathematics  and  science,  however,  the  education 
outcomes  have  worsened  rapidly  over  time.  The  Czech  authorities  have  responded 
with  a  set  of  measures  which  entails  the  development  of  minimum  education 
standards,  which  are  to  be  used  for  nationwide  testing  of  pupils.  However,  a  more 
integrated system should be developed, ensuring that pupils, teachers and schools that 
underperform  in  the  tests  receive  systematic  support  would  further  raise  the  level  of 
ambition of the reform. The main challenge facing the Czech higher education system 
is  to  ensure  that  the  rising  number  of  students  is  equipped  with  the  skills  needed  to 
succeed in the labour market. A reform of the Higher Education Act is being discussed 
to introduce differentiated funding arrangements and enhance accreditation. These are 
relevant and ambitious proposals, although their actual impact will depend on the final 
design  of  the  reform.  The  authorities  also  plan  to  adopt  revised  evaluation  standards 
for  funding  of  research  institutions.  Increasing  the  share  of  quality  indicators, 
including enhancing the collaboration with the business sector, would help the Czech 
research and innovation system reach a higher level of excellence. 

(17)  The  Czech  Republic  is  amongst  the  EU  Member  States  with  the  highest  number  of 
regulated  professions.  A  public  consultation  on  the  review  of  the  regulatory 

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framework  for  professions  was  conducted  in  2012  and  results  are  to  be  presented  in 
2013.  This  is  an  important  step  in  order  to  reduce  or  eliminate  barriers  to  those 
professions  for  which  regulation  is  not  proven  necessary  or  considered  excessive 
(including the length of mandatory traineeships) and for which an easier access could 
unlock  further  employment  and  growth.  Despite  improvements  in  recent  years,  the 
Czech Republic has still one of the highest energy intensity in the EU, in particular in 
the buildings and energy sector. 

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 (7) below. 

(19) 

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, 

HEREBY  RECOMMENDS  that  the  Czech  Republic  should  take  action  within  the  period 
2013-2014 to: 

1. 

2. 

3. 

4. 

Implement as envisaged the budget for the year 2013 so as to correct the excessive 
deficit in 2013 in a sustainable manner and achieve the structural adjustment effort 
specified  in  the  Council  recommendations  under  the  EDP.  For  the  year  2014  and 
beyond,  reinforce  and  rigorously  implement  the  budgetary  strategy,  supported  by 
sufficiently specified measures, to ensure an adequate fiscal effort to make sufficient 
the  medium-term  objective.  Prioritise  growth-enhancing 
progress 
expenditure  including  committing  on  time  remaining  projects  co-financed  with  EU 
funds under the current financial framework.  

towards 

Reduce  the  high  level  of  taxation  on  labour  by  shifting  taxation  to  areas  less 
detrimental  to  growth,  such  as  recurrent  taxes  on  housing  and  vehicle  circulation 
taxes.  Further  reduce  discrepancies  in  the  tax  treatment  of  employees  and  the  self-
employed. Improve tax compliance and reduce compliance costs by establishing the 
Single  Collection  Point and harmonising the tax bases for personal income tax and 
social and health contributions. 

Speed up the increase of the statutory retirement age compared to current legislation, 
introduce a clear link between the statutory retirement age and life expectancy, and 
revise  the  indexation  mechanism.  Accompany  the  increase  in  retirement  age  with 
measures promoting employability of older workers and reduce early exit pathways. 
In  particular,  remove  the  public  subsidy  for  the  pre-retirement  scheme.  Take 
measures  to  significantly  improve  cost-effectiveness  of  healthcare  expenditure,  in 
particular for hospital care. 

Take  measures  to  strengthen  the  efficiency  and  effectiveness  of  the  public 
employment  service.  Increase  significantly  the  availability  of  inclusive  childcare 
facilities with a focus on children up to three years old, and the participation of Roma 
children,  notably  by  adopting  and  implementing  the  law  on  private  childcare 
facilities and strengthening the capacities of public childcare facilities. 

7 

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

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5. 

6. 

7. 

Ensure implementation of the anti-corruption strategy for 2013-2014. Adopt a Public 
that  should  ensure  a  stable,  efficient  and  professional  state 
Servants  Act 
administration service. Improve the management  of EU  funds in view of the 2014-
2020  programming  period.  Strengthen  the  capacity  for  implementation  of  public 
tenders at local and regional level.  

Establish a comprehensive evaluation framework in compulsory education and take 
targeted measures to support schools that rank low in educational outcomes. Adopt 
measures  to  enhance  accreditation  and  funding  of  higher  education.  Increase  the 
share of performance-based funding of research institutions. 

Drawing on the on-going review, proceed with a reform of regulated professions, by 
reducing  or  eliminating  entry  barriers  and  reserves  of  activities  where  they  are 
unjustified. Take further measures to improve energy efficiency in the buildings and 
industry sectors.  

Done at Brussels,  

For the Council 
The President 

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