COMMISSION STAFF WORKING DOCUMENT Assessment of the 2014 national reform programme and convergence programme for CZECH REPUBLIC Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on Czech Republic’s 2014 national reform programme and delivering a Council opinion on Czech Republic’s 2014 convergence programme
Date: 2014-06-02
Institutions: European Commission
Subjects: Czechia, budget deficit, economic convergence, economic growth, economic recovery, economic reform, economic stabilisation, financial control, public debt, social situation, stability programme, structural adjustment













EUR-Lex - 52014SC0404 - EN











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52014SC0404

COMMISSION STAFF WORKING DOCUMENT Assessment of the 2014 national reform programme and convergence programme for CZECH REPUBLIC Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on Czech Republic’s 2014 national reform programme and delivering a Council opinion on Czech Republic’s 2014 convergence programme /* SWD/2014/0404 final */









CONTENTS
Executive summary. 3
1............ Introduction. 4
2............ Economic situation and outlook. 5
3............ Challenges and assessment of the
policy agenda. 7
3.1......... Fiscal policy and taxation. 7
3.2......... Financial sector 16
3.3......... Labour market, education and social
policies. 17
3.4......... Structural measures promoting growth and
competitiveness. 21
3.5......... Modernisation of public administration. 28
4............ Conclusions. 30
Overview table. 31
Annex... 35
Executive summary
The Czech Republic’s economic recovery is
gaining ground. According to the Commission 2014 spring forecast, GDP growth
is expected to reach 2% this year after two years of recession. The unemployment
rate, which fell moderately to 6.8% at the end of last year, is forecast to
decrease further reaching 6.6% in 2015. Youth unemployment has also slightly
decreased recently and remains below the EU average. In
the first half of this year, the export-oriented sectors are expected to lead
the way out of the prolonged recession with domestic demand progressively
taking over as the main growth driver thereafter.
Inflation is projected to remain at very low levels this year because of a
large cut in regulated electricity prices and to increase only moderately in
2015. 
Overall, the Czech Republic has made
limited progress in addressing the 2013 country-specific recommendations. Key reforms largely stalled in the second half of 2013, given the
political context. Some progress was made towards improving the fiscal
position, tax compliance and the quality of compulsory education and research
institutions. Limited progress was made in most other areas, notably in terms
of enhancing the performance of the public employment service and ensuring the
availability of childcare services, in implementing the anti-corruption
strategy, strengthening the implementation of public tenders, improving the
management of EU funds, de-regulating the service sector and on increasing
energy efficiency. Some country-specific recommendations remain unaddressed.
Specifically, no progress has been made in reducing the high level of taxes on
labour and in buttressing the long-term sustainability of public finances. The
Public Service Act and the reform of higher education have also yet to be
adopted.
The key challenge for the Czech Republic is to end a protracted period of subdued growth and to reignite the stalled
income convergence process. To this end, domestic
drivers of growth need to be strengthened while ensuring that public finances
are firmly placed on a sustainable trajectory. Measures with high growth
potential in the short term include prioritising public investment in
infrastructure, while ensuring efficient absorption of EU funds, and improving
public administration. Rapidly activating untapped potential supplies of
labour, notably by groups facing barriers to enter the labour market, and
reaping benefits from the quickly expanding R&D base would also raise
income and strengthen domestic demand. These challenges are rightly recognised
by the policy plans submitted by the Czech Republic. The updates of the
national reform programme and of the convergence programme contain relevant and
ambitious measures. Overall, delivering sustainable growth in the long term
requires reforms in following areas:

 Public finances: Despite a
     significant improvement in the headline general government deficit in
     2013, the Czech Republic's budgetary strategy from 2015 onwards does not
     comply with the Stability and Growth Pact. Moreover, significant cuts in
     public investment over the past four years undermine the country's growth
     potential. The key challenge for the Czech taxation system is to ensure
     that it is more supportive of growth and to improve the efficiency of tax
     collection. Furthermore, the high pension and health care costs
     associated with the Czech Republic’s ageing population pose a risk to the
     long-term sustainability of its public finances that need to be addressed
     with particular attention.
 Education: The weak points of
     compulsory education include the evaluation framework and the strong impact of socio-economic background on performance. For higher education, in an environment of rapidly rising
     enrolment rates and limited budgetary resources, the main challenge
     remains to achieve quality learning outcomes and to improve labour-market
     relevance of graduates’ skills.   
 Innovation: Important steps have
     been taken recently to develop research infrastructure and support
     innovative firms. However, the performance of domestic drivers of
     knowledge-based growth — in both public and private institutions — remains
     weak. Particularly worrying is the extremely low participation of business
     in co-funding public research.
 Energy efficiency and access to regulated professions: Despite a slowly decreasing trend, the energy intensity of the
     Czech economy remains very high. There is significant potential for energy
     efficiency improvements which would also increase energy independence and
     promote efficient allocation of resources. The Czech Republic reports one
     of the highest levels of regulated professions in the EU and the regulation
     of professional services is very strict. The pace of opening up of
     regulated professions has been slow so far with little impact on the
     service sector. 
 Public administration: In
     international surveys, corruption is perceived as an important obstacle
     for business. An unstable and inefficient public administration has
     negative repercussions for the country’s growth and competitiveness and for
     the absorption of EU funds.
 Labour market: Despite the comparatively
     high overall employment rate, some groups remain significantly
     underrepresented in the labour market and struggle to find jobs. This
     concerns particularly women with small children, youth, older people, low-skilled and disabled persons. For
     women, the impact on employment of motherhood is one of the largest in the
     EU, which is largely due to limited access to affordable childcare and
     limited take-up of part-time work. The scope and effectiveness of services
     provided by labour offices could be improved, as the rates of activation
     of registered unemployed remain one of the lowest in the EU.
1.        
Introduction  

In
May 2013, the Commission proposed a set of country-specific recommendations
(CSRs) for economic and structural reform policies for the Czech Republic. On the basis of these recommendations, the Council of the European Union
adopted seven CSRs in the form of a Council Recommendation in July 2013. These
CSRs concerned public finances, the tax system, the pension system, healthcare,
the labour market, the performance of public administration, education,
regulated professions and energy efficiency. This staff working document (SWD)
assesses the state of implementation of these recommendations in the Czech Republic.
The
SWD assesses policy measures in light of the findings of the Commission’s
Annual Growth Survey 2013 (AGS)[1] and the third annual Alert Mechanism Report
(AMR),[2] which were published in November 2013. The
AGS sets out the Commission’s proposals for building the necessary common
understanding about the priorities for action at national and EU level in 2013.
It identifies five priorities to guide Member States to renewed growth:
pursuing differentiated, growth-friendly fiscal consolidation; restoring normal
lending to the economy; promoting growth and competitiveness for today and
tomorrow; tackling unemployment and the social consequences of the crisis; and
modernising the public administration. The AMR serves as an initial screening
device to determine whether macroeconomic imbalances exist or risk emerging in
Member States. The AMR found positive signs that macroeconomic imbalances in Europe are being corrected. To ensure that a complete and durable rebalancing is achieved,
16 Member States were selected for a review of developments in the accumulation
and unwinding of imbalances. These in-depth reviews were published on 5 March
2014, along with a Commission Communication.[3]
The Czech Republic was not subject to the in-depth review in 2014.
Against
the background of the 2013 Council Recommendation, the AGS and the AMR, the Czech Republic presented its national reform programme (NRP) and its convergence programme on
16 and 28 April 2014 respectively. These programmes provide detailed
information on progress made since July 2013 and on the government’s future
plans. The information included in these programmes provides the basis for the
assessment made in this staff working document.
The
programmes submitted underwent an open consultation process. Preparation of the
national reform programme involved several consultations with representatives
of the Czech parliament, social partners, regional authorities, academia and
other stakeholders. Before adoption by the government, both programmes were
submitted to and discussed in the committees of the Czech parliament.

2.        
Economic situation
and outlook

Economic situation
The
recovery is gaining some ground in the Czech economy, following two years of
negative growth.
The recession in 2012 and 2013 took a toll on domestic demand. While private
consumption expenditure was negatively affected by decreases in real disposable
income of households, gross capital formation slowed down due to recurrent cuts
in public investment and increased risk aversion on the part of businesses. Overall,
GDP decreased by 0.9% in 2013. The unemployment rate stabilised at around 7%. In
November 2013, the Czech National Bank loosened its monetary policy stance by
weakening the koruna, and has signalled its intention to maintain this policy
at least throughout 2014.
Economic outlook
The recovery is expected to strengthen in 2014, sustained by the
improving global economy. However,
the income gap vis-à-vis the EU average is projected to remain broadly
unchanged in 2014-15. Export-oriented
sectors (including industry) are likely to be the main drivers of growth in
2014, while rebalancing towards domestic drivers should follow in 2015, along
with strengthening confidence in both the corporate and household sectors. The
labour market deterioration is expected to have bottomed out in 2013 and the
unemployment rate is projected to gradually decrease. Despite the central
bank’s foreign exchange interventions, inflation is likely to remain subdued in
2014 due to the diminishing impact of past increases in indirect taxes and to a
large drop in regulated electricity prices. Stronger domestic demand is
expected to stoke up inflation in 2015.
The
macroeconomic outlook underlying the convergence programme and national reform
programme is plausible. Both strategic documents
share the same economic outlook. According to the convergence programme, real
GDP growth is expected to reach 1.7% in 2014 and 2.0% in 2015, compared to 2.0%
projected for 2014 and 2.4% projected for 2015 in the Commission 2014 spring
forecast. The macroeconomic scenario presented in the two programmes does not
include estimates of the macroeconomic impact of structural reforms. 
Box 1:
Stalled convergence
In the decade before the 2008
crisis, the Czech Republic enjoyed the longest period of uninterrupted growth
in its history and was praised for its success in
attracting foreign direct investment (FDI) and for its favourable labour-market
outturns. Compared to some other central and eastern European (CEE) countries,
convergence of the Czech economy to the EU-15 was, however, somewhat slower
(see Figure 1). Moreover, in the post-2008 period, the economy has been in the
doldrums longer than other countries in the region and the process of catching up
with the EU average is projected to broadly stagnate in 2014-15. This overall unimpressive economic
performance raises questions about the country’s growth prospects in the medium
term.
Drivers of growth in the
Czech economy and other CEE countries were broadly similar despite their different starting positions back in the 1990s.
The inflow of foreign direct investment was the most distinctive factor shaping
growth in the majority of CEE countries, and was an appropriate choice for
countries that needed to recapitalise and move up the technological ladder.
However, room for catching up based on the accumulation of production factors
(including foreign capital) was more limited in the Czech economy compared to
other CEE countries because of the higher level of development it had reached
in the 1990s. Therefore, other essential prerequisites for growth, such as
quality institutions, innovation and economic policies, gained relative
importance. Despite favourable labour market developments, relatively strong
real GDP growth and the absence of sizeable macroeconomic imbalances in the
pre-crisis period, progress on structural reforms in these areas has been limited
(see sections 3.3-3.5 of this document). As a consequence, real convergence was
slow, in particular when measured by net national disposable income per capita,
a proxy of material living standards (see Figure 2). Looking ahead, the Czech
working-age population is projected to shrink by 6% by 2020 and to continue
falling thereafter, which is likely to be an additional drag on growth. This
heightens the importance of progressing with the reform agenda in order to
restart convergence.
Figure
1: GDP per capita relative to EU-15          Figure 2: Convergence in living
standards
Source:
Eurostat. Figure 1 shows GDP per capita in comparable prices (PPS) relative to
the EU-15 average. Figure 2 shows the change in net national disposable income
per capita in comparable prices (PPS) relative to the EU-15 between 1995 and
2012.

3.        
Challenges and assessment of the policy agenda
3.1.                
Fiscal policy and taxation

Budgetary developments and debt
dynamics
The objective of the convergence
programme is to keep the general government deficit below the 3% of GDP
reference value in 2014-2017 and to pursue a neutral fiscal policy after 2015. The programme mentions the medium-term budgetary objective (MTO),
which is set at a structural deficit of 1% of GDP. The MTO reflects the objectives
of the Stability and Growth Pact. According to the programme and based on the
recalculated structural balance[4],
the MTO will be achieved in 2014 but the structural balance is projected to
deteriorate thereafter so that achievement of the MTO is not foreseen within
the programme period. 
The headline general government deficit
reached 1.5% of GDP in 2013, which is a significantly better outcome compared
to the 2.8% of GDP target envisaged in the 2013 programme. A combination of several factors accounted for this improvement. A
fall in public investment of 12% against a projected increase of 4% was the
dominant factor on the expenditure side. Furthermore, savings were achieved in
interest expenditure and in social transfers. On the revenue side, higher-than-projected
revenue was recorded in taxes on production, social contributions as well as in
property income (reflecting strong performance of some state-controlled
companies). The final budgetary outcome was also influenced by discretionary
measures amounting to approximately 1% of GDP (see Box 2). Overall, the 2013
budget was implemented in line with the 2013 country-specific recommendation,
but the sizeable retrenchment of public investment goes against the
recommendation to prioritise growth-enhancing expenditure. 
The programme envisages an increase in
the headline general government deficit to 1.8% of GDP in 2014. This is a significantly lower target compared to the 2.9% of GDP
foreseen in the 2013 programme. The difference compared to the target included
in last year's programme can be explained mainly by the base effect, i.e.
lower-than-expected deficit in 2013. Expenditure-to-GDP ratio is projected to
remain broadly stable. The main factor driving expenditure growth in 2014 is
the projected surge in public investment by almost 30%, because of a
significant increase in EU-funded investment projects towards the end of the
2007-2013 programming period. The impact on the deficit is however limited to
national co-financing (0.2% of GDP according to the programme). The
revenue-to-GDP ratio is expected to decrease by 0.3 pp to 40.6% which is driven
by the deficit-increasing effect of discretionary measures as well as by the
fact that the main revenue categories such as VAT, PIT and the social security contributions
will be affected by the expected subdued growth in private consumption and in
the compensation of employees. The fiscal projections in the programme also
include a one-off revenue from the sale of newly released frequency ranges
amounting to 0.2% of GDP. The Commission 2014 spring forecast projects a
slightly higher deficit of 1.9% of GDP, which is mainly due to a higher
expected government consumption as both the public sector wage bill and the
intermediate consumption are forecast to grow more dynamically than envisaged
in the programme. The recalculated structural balance is projected to
deteriorate by 0.9 pp to -1 % of GDP, which is similar to the -1.1% of GDP
projected in the Commission Forecast. 
The programme envisages an increase of
the headline general government deficit to 2.3% of GDP in 2015 and a gradual
decline to 1.7% of GDP in 2017. These headline
targets are significantly lower than those foreseen in the previous year's
programme. This can be explained by the above mentioned base effect from 2013
and, to a lesser extent, by the differences in the planned discretionary
measures. In 2015 specifically, the authorities plan to cancel the previously
adopted tax reform and introduce other measures instead, notably changes to the
personal income tax, a second reduced VAT rate and higher indexation of
pensions (see Box 2 for more details). The overall effect of the planned
discretionary measures will be deficit-increasing and amounts to approximately
0.2% of GDP according to the programme. The Commission 2014 spring forecast
projects a headline general government deficit of 2.4% of GDP in 2015 but there
are significant differences in the composition of revenue and expenditure as
the Commission Forecast does not include the new discretionary measures
announced in the programme. The envisaged improvement of the general government
headline deficit in the later years of the programme reflects for most part the
expected improvement in macroeconomic conditions. Both the revenue and the expenditure
ratios are projected to fall but there are no specific discretionary measures
underpinning these trends. The recalculated structural balance is expected to
deteriorate by 0.6 pp to -1.6% of GDP in 2015, stabilise at -1.6% of GDP in
2016 and deteriorate further to -1.9% of GDP in 2017. The Commission 2014 spring
forecast expects the structural deficit to reach 1.9% of GDP in 2015. 
     || Box 2: Main budgetary measures ||   
   || Revenue || Expenditure ||   
   || 2013 ||   
   || ·      Increase in the both VAT rates and in excise duties (+0.4% of GDP) ·      Changes in personal income tax and health insurance contributions (+0.2% of GDP) ·      Increase in the property transfer tax and other revenue (+0.1% of GDP) || ·      Lower indexation of pensions (-0.2% of GDP) ·      Reduction in subsidies for renewable energy (-0.1% of GDP) ||   
   || 2014 ||   
   || ·      Increase in excise duties on tobacco (+0.1% of GDP) ·      Expiry of special tax on photovoltaic power plants (-0.2% of GDP) || ·      Changes in sickness benefit payment system (+0.1% of GDP)   ||   
   || 2015 ||   
   || ·      Changes in personal income tax (-0.1% of GDP) ·      Introduction of a second reduced VAT rate (-0.1% of GDP) ·      Increase in excise duties on tobacco (+0.1% of GDP) ·      Changes in social security contributions (+0.2% of GDP) || ·      Higher indexation of pensions (+0.1% of GDP) ·      Increase in social transfers (+0.1% of GDP) ·      Increase in the public sector wage bill (+0.1% of GDP)   ||   
   || 2016 ||   
   || ·      N.a. || ·      Increase in the public sector wage bill (+0.1% of GDP) ||   
   || 2017 ||   
   || ·      N.a. || ·      N.a. ||   
   || Note: The budgetary impact in the table is the impact reported in the programme, i.e. by the national authorities. A positive sign implies that revenue / expenditure increases as a consequence of this measure. ||   
   
There are several risks to the budgetary
outlook as presented by the programme. Based on the
experience from the past four years when public investment was repeatedly much
lower than expected, there is high uncertainty about future development of
public investment. This concerns mainly the domestic public investment which
should increase moderately by about 3% per year according to the programme. A more
dynamic rebound in domestic public investment can however not be excluded as
certain public entities may have postponed their investment projects and thus
built up reserves for a future increase in their investment activity. On the
other hand, the EU-funded investment may not increase as much as projected because
the programme scenario is based on a rather optimistic assumption about the
absorption capacity. This in turn would imply lower national co-financing.
Secondly, the forecast does not include a one-off expenditure related to a
possible renewal of a lease contract for fighter jets. According to the
programme, the contract is likely to be concluded in 2015 with an estimated
potential deficit-increasing impact of 0.5% of GDP. 
The Czech Republic corrected the
excessive deficit in 2013 in line with the Council recommendation but the
projected fiscal effort from 2015 onwards does not comply with the Pact. The headline general government deficit was firmly below the 3% of
GDP threshold in 2013 and the Commission 2014 spring forecast confirms the
durability of the correction of the excessive deficit. The annual average
structural effort in the period 2010-2013 amounted to 1.4% of GDP while the annual
adjusted average structural effort was 1.7% of GDP. Both values are
significantly above the minimum annual average fiscal effort of 1% of GDP
required by the Council recommendation. The recalculated structural balance is
expected to reach -1% of GDP in 2014 implying that the Czech Republic should reach its MTO this year. According to the information provided in the
programme, the growth rate of government expenditure, net of discretionary
revenue measures will not exceed the reference medium-term rate of potential
GDP growth (1.6%) in 2014. The deterioration of the recalculated structural
balance by 0.6 pp in 2015 indicates a risk of significant deviation from the
MTO. The growth rate of government expenditure is projected to exceed the
reference medium-term rate of potential GDP growth (1.6%) by 0.3 pp in 2015 pointing
to a risk of deviation. The most important factor causing the difference
between the two indicators is the difference between the apparent revenue
elasticity and the standard one. As the former is lower than the latter by
almost 0.3 pp, the cyclical adjustment overestimates the cyclical component of
revenues and implies a larger deterioration of the structural balance in 2015
than would otherwise be the case. Based on the Commission 2014 spring forecast,
both indicators suggest a risk of significant deviation. The difference with
the programme scenario lies in different assumptions on policies and
discretionary measures in 2015, as explained above. In conclusion, based on the
assessment of the programme and the Commission forecast, with the structural
balance as a reference, including an analysis of expenditure net of
discretionary revenue measures, a risk of significant deviation from the MTO is
to be expected in 2015. Furthermore, the recalculated structural balance is
expected to deviate from the MTO also in 2016 and 2017 as the recalculated
structural balance is projected to remain unchanged in 2016 and deteriorate by
0.3 pp in 2017 against the required annual structural adjustment of 0.5% of
GDP.
The debt-to-GDP ratio is projected to
fall temporarily by 1.1 pp to 44.9% of GDP in 2014 and to increase to 46% of
GDP in 2015. Since the debt
ratio is below the reference rate of 60% of GDP, the debt reduction benchmark
is not applicable. The programme expects the debt-to-GDP ratio to increase to
47.1% of GDP in 2016 and stabilise at the same level in 2017. The contribution
of the primary balance is projected to increase in 2015 and fall thereafter
while the contribution of interest expenditure remains stable. The improvement
in the ratio in 2014 is mainly due to discrepancies between the cash and
accrual approach expected in the programme scenario. The interest risk and the
currency risk seem broadly contained, given the relatively low share of
short-term and variable debt and of foreign-denominated debt. The full
implementation of the convergence programme would put debt on an increasing
path by 2030. The debt-to-GDP ratio would be above the 60% of GDP reference
value in 2030. 
Box 3: Excessive deficit procedure for
the Czech Republic  
On 2 December 2009, the Council decided that an
excessive deficit existed in the Czech Republic. The most recent Council
Recommendation under Article 126(7) TFEU was adopted on the same date. The
Council recommended that the Czech Republic’s authorities should put an end to the
present excessive deficit situation by 2013. In particular, the Czech Republic
was recommended to implement the deficit-reducing measures in 2010 as planned
in the draft budget law for 2010; to ensure an average annual fiscal effort of
1 % of GDP over the period 2010-13; and to specify the measures necessary
to achieve the correction of the excessive deficit by 2013, cyclical conditions
permitting, and accelerate the reduction of the deficit if economic or
budgetary conditions turn out better than expected at the time. In addition, in
order to limit risks to the adjustment, the Czech Republic was recommended to
rigorously enforce its medium-term budgetary framework and to improve
monitoring of budget execution throughout the year to avoid expenditure overruns
compared to budget and multiannual plans. Furthermore, the Council invited the
Czech authorities to implement reforms with a view to raising potential GDP
growth and reforms conducive to enhancing the quality of public finances, in
particular reforms improving the efficiency and effectiveness of public
spending. In addition, the Council invited the Czech authorities to continue
with the necessary pension and healthcare reforms.
The year following the correction of the
excessive deficit, the Czech Republic will be subject to the preventive arm of
the Pact and should ensure sufficient progress towards its MTO. 
An
overview of the current state of excessive deficit procedures is available on: http://ec.europa.eu/economy_finance/economic_governance/sgp/deficit/index_en.htm.
Fiscal framework
The implementation of the current fiscal
framework has been rather weak and stronger rules are necessary. The main features of the current fiscal framework include an
expenditure rule for central government and multiannual fiscal planning. Nominal expenditure ceilings are set on a rolling tri-annual basis
and can be adjusted only in specifically defined cases which are enumerated in
the Budgetary Rules Act. However, enforcement of the expenditure
ceilings has been weak, and they have been revised upwards several times.
Levels other than the central government are insufficiently integrated in the
expenditure rule as local and regional government
budgets are not part of the medium-term budgetary targeting. In addition, coordination
between the different layers of government has been insufficient. There are no strict
rules concerning local and regional government debt.
Work on a comprehensive reform of the
fiscal framework began in 2011 but its adoption and implementation is still uncertain. In 2012, the government approved a constitutional act on fiscal
responsibility introducing major changes to the current fiscal framework. One year
later, it approved an implementing act on fiscal responsibility rules. However,
parliament has not adopted these proposals yet and the form in which they will
be adopted is unclear. Adoption of the relevant legislation ensuring compliance
with Council Directive 2011/85/EU on budgetary frameworks has also been
delayed. In particular, the requirement to ensure independent monitoring of
compliance with numerical fiscal rules has not been fulfilled. As for the
requirements of the Directive adopted so far, cash-based fiscal data are made
available on a monthly basis for the six state funds, and improvements have
been made in the area of forecasting. The government has recently approved the
Treaty on Stability, Coordination and Governance, which is an important
political step, though its ratification by the parliament remains pending. The
Czech government is also prepared to create the necessary conditions for adopting
the euro.
Long-term sustainability
The Czech Republic appears to face medium fiscal
sustainability risks in the long-term. These are primarily
related to the projected ageing costs contributing with 4.0 pp. of GDP over the
very long run, in particular due to the pension and health components. The
pension expenditure contribution to the long-term sustainability gap amounts to
2.2% of GDP over 2016-60 (i.e. some 1.4 pp higher than the EU average). The
increase in the ratio of pension expenditure to GDP in 2010-60 is projected to
be 2.7 pp[5]
(i.e. 1.1 pp higher than the EU average). The long-term sustainability gap[6], showing the adjustment
effort needed to ensure that the debt-to-GDP ratio is not on an ever-increasing
path, is at 5.3% of GDP. Risks would be higher in the
event of reverting to the higher structural primary balance deficits observed
in the past, such as the average for the period 2004-2013. It is therefore
appropriate for Czech Republic to continue to implement measures that reduce
government debt and further contain age-related expenditure[7] growth to contribute to the sustainability of public finances in
the medium and long term.  The medium-term
sustainability gap[8],
showing the adjustment effort up to 2020 required to bring debt ratios to 60%
of GDP in 2030, is at 0.6% of GDP which implies a medium risk. This is
primarily a result of the structural primary balance in 2015 and the ageing
costs that are only partially mitigated by the debt level.
In
2013, the Czech Republic received a CSR concerning the long-term sustainability
of pensions. The Czech Republic was invited to take
steps to increase the effective retirement age by aligning the statutory retirement
age to changes in life expectancy, review the indexation mechanism, promote the
employability of older workers and remove the public subsidy for the
pre-retirement scheme. The analysis in this staff
working document leads to the conclusion that there has been no progress on measures
taken to address this recommendation.
The
standard pension indexation mechanism has not been revised and the temporarily
lower indexation of pensions introduced in 2013 will be terminated in 2015, a
year earlier than planned. The standard indexation
mechanism which was in place until 2012 links pension indexation to increases
in aggregate consumer price index plus a third of the real wage growth. The
2014 national reform programme announces plans to go back to this indexation
mechanism as a rule as of 2015 while at the same time a discretionary increase
of 1.8% is proposed for 2015 in order to preserve purchasing power of
pensioners. This implies a negative budgetary impact in the short term and does
not address the sustainability challenge that prompted the country-specific
recommendation. The standard indexation mechanism, while not excessively
generous in EU comparison, does not sufficiently limit pension expenditure in
the long term. Substantial savings would have to found in other parts of the
budget if this indexation formula is preserved.  Even though the employment rate
of people over 55 is rising, limited progress has been made in promoting the employability
of older workers. Most measures taken in this area focus on stimulating labour
demand, public information campaigns and learning centres for seniors, and do
not address workers’ motivation to invest in keeping their labour-market skills
up-to-date. The national reform programme 2014 reports measures with a
potential to increase the employability of older workers in a form of a social
insurance and income tax allowance for people above 50 and working pensioners
respectively. 
Going
forward, the authorities plan to introduce a revision mechanism aligning the
retirement age to changes in life expectancy. This
mechanism would address part of the country-specific recommendation and could
help to shield the pension system from unexpected changes in life expectancy.
It is, however, only a partial response to the sustainability challenge because
it does not address the current size of the sustainability gap. Other risks
related to the financial balance of the pension system (such as the proportion of
the working age population) are outside its scope. Furthermore, according to the
2014 national reform programme, the retirement age would not change automatically
based on the review’s findings which lowers the credibility of the measure. No
further changes to the pension system are planned in the short term. Elimination
of the public subsidy for the pre-retirement scheme, also called for in the country‑specific
recommendation, is not expected. However, the scheme has been used relatively
little so far and so does not pose immediate fiscal risks.
The
government has recently announced plans to abolish the fully funded statutory
pillar but no details are provided in the national reform programme. The pillar was created in 2013 and has attracted less than 2% of the
labour force so far, partly because participation is conditional on topping up
the present level of contributions with a further 2% of salary, which may be
more difficult for some workers under the current economic circumstances. The
fully funded statutory pillar has also suffered from a lack of strong and
lasting commitment across the political spectrum, which seems to be an
important precondition for a long-term pension reform.
In
2013, the Czech Republic received a CSR concerning the cost-effectiveness of public
spending on healthcare, in particular in hospitals. There has been no progress
on this recommendation. Projected long-term health
spending is a matter of concern and poses a risk to long-term sustainability.
The contribution of healthcare expenditure to the long-term sustainability
gap amounts to 1.1% of GDP over 2016-60 (i.e. some 0.2 pp higher than the EU
average). The increase in the ratio of healthcare expenditure to GDP in 2010-60
is projected to be 1.7% pp[9]
(i.e. 0.5 pp higher than the EU average).[10]

The
sources of inefficiencies in the in‑patient sector are manifold and stem
largely from poor governance of the healthcare system. Public procurement suffers from the absence of a pooled purchasing
approach and irregular practices are reported, in particular for medical
devices. There are various reported public-hospital cases[11] where prices for
medical devices such as radiotherapy equipment by far exceeded the market
price. More generally, capital investment planning also seems to be inefficient
and not systematic. These are also signs of insufficient supervision over insurance
funds and healthcare providers. The contract policy between facilities and
insurance funds lacks transparency. Furthermore, hospital management faces a limited
risk of default or wage cuts, which gives rise to moral hazard. In addition,
many facilities do not meet reporting standards and information to secure
better cost and quality control is therefore insufficient, which does not allow
the diagnosis-related group (DRG) funding model to work properly.
The
existing in‑patient care infrastructure shows excess capacity, while out‑patient
care remains over-utilised. Plans to transform
acute hospital-bed capacity into long-term care beds and to improve integrated
care practices have not been implemented. Necessary care coordination has been
insufficient. Furthermore, the in‑patient acute-care bed-occupancy rate has
been decreasing in the last decade. Related to this, there is a risk that
current high care‑utilisation rates in the out‑patient sector will increase
further if no measures are taken to streamline unnecessary consultations and
especially referrals to specialist care. The envisaged abolishment of most of
the regulatory fees in the outpatient sector only aggravates the absence of
care coordination mechanisms and increases overconsumption. The 2014 national
reform programme seeks to introduce measures with a potential to improve the cost-effectiveness
of healthcare expenditure. There are plans to cut the overhead costs of the insurance
funds and to foster price competition for healthcare providers by promoting the
transparency of the contract policy between insurance funds and facilities. The
envisaged more cost-based allocation of public health contributions among
insurance funds intends to create level playing field. Finally, there are plans
to strengthen the supervision over both the public health contributions system and
insurance funds. However, a comprehensive action plan comprising well-designed
incentive structures, that could address the lagging cost-effectiveness of the
system and its weak governance, is missing.
Tax
system
The key challenge for the Czech taxation
system is to make it more supportive of growth, simpler and more predictable,
and to make tax collection more efficient and user‑friendly at the same time. The overall level of taxation in the Czech Republic is relatively
low in comparison to the rest of the EU, but labour taxation remains high,
notably due to the elevated social-security contributions. Especially low-income
earners face a high tax burden. There is still some potential to shift away
from labour taxation to other kinds of tax, such as environmental and recurrent
housing taxes, which are both relatively low. Structural problems also remain
within the labour taxation area, where large differences persist in the tax
treatment of employees and the self-employed. Furthermore, the tax system is
very complex, which puts a significant burden on taxpayers. Finally, there is
scope for further improvements in tax compliance, in particular in the area of
indirect taxes and taxes paid by the self-employed.
In 2013, the Czech Republic received a CSR
concerning taxation. In particular, the Czech
Republic was invited to reduce the high level of labour
taxation by shifting tax 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, and improve tax compliance and
compliance costs by setting up the single collection point and harmonising the
tax bases for personal income tax and social and health contributions. The analysis in this staff working document leads to the conclusion
that there has been limited progress on measures takes
to address this recommendation and that tax-related challenges remain relevant.
No progress has been made in reducing
the high level of labour taxation. Labour taxation
increased in 2013 as a result of temporary consolidation measures affecting
both the personal income tax and social security contributions. In 2011, the Czech Republic adopted a comprehensive tax reform which was to enter into force as of 2015
and would reduce the total tax burden on labour. However, recent plans to
abolish the reform before its entry into force imply that overall labour
taxation is likely to remain high in the foreseeable future. In the 2014 national
reform programme, the government announced plans for a new revenue-neutral
labour-tax reform, which is planned to be introduced in 2016 and includes
changes in both the tax base and the tax rates and introduction of a permanent second
tax bracket for high‑income earners. 
As concerns the structure of labour
taxation, there is a need for lowering the tax burden on low-income earners. The unemployment rate among low-skilled people is four times higher
than the national average and the tax wedge on low-income earners is above the
simple EU average[12].
Given low earners’ unsatisfactory employment situation, a reduced tax burden (including
through lower social-security contributions for employers) could contribute to
improving their labour-market prospects. The 2014 national reform programme reports
plans to temporarily lower the social security contributions for disadvantaged
groups such as older workers, women with young children or the long-term
unemployed, but specific proposals are not yet available.
Significant discrepancies in the tax
treatment of employees and the self-employed remain. Some changes in the taxation of the self-employed were introduced
in 2013, but the overall effect is expected to be limited as these measures do
not sufficiently address the main problems. According to a recently published
study,[13]
the self-employed pay on average 27% less in taxes than employees. The two main
explanations of this discrepancy are large flat-rate deductions for expenses
and a low tax base, and these have been in place for several years now and
remain unchanged. Another but related problem is bogus self-employment and
widespread under‑reporting of taxable income. The convergence programme includes
plans for introducing a cap on flat-rate expenses
deductions in the category eligible for 60% deduction as of 2016. A review
comparing taxation of the self-employed with that of employees is being conducted
which could lead to further changes in this area. At the same time, the national reform programme announces plans to harmonise the tax bases
for income taxes, health and social security contributions which according to
the Czech authorities should further reduce the discrepancies in the tax
treatment. Concrete details are however not yet available. 
The recurrent tax on housing and the
vehicle circulation tax remain unchanged. The
recurrent property tax is the one of lowest in the EU and represents only 0.2 %
of GDP in revenue. In addition, the debt bias in housing taxation[14] remains relatively
high. Although the Czech Republic increased the real-estate transfer tax in
2013, no changes have been made to the recurrent property tax and no measures
are currently planned in this area. Similarly, no changes have been made to the
vehicle circulation tax. The Czech Republic is only slightly below the EU
average as concerns the contribution of environmental taxation to GDP. While
transport fuel taxes are among the highest (6th highest in the EU), the
implicit tax rate on energy remains below the EU average and earlier plans for
introducing a carbon tax have been dropped. There is therefore some scope for
an increase in green taxes, in particular in the area of pollution and resource
taxation,[15]
not only from the public revenue perspective but also in terms of environmental
goals.
The Czech Republic put in place several
measures to improve tax compliance, in particular in the area of VAT. According to a recently published study,[16] the VAT compliance gap
in the Czech Republic was around 23 % on average between 2000 and 2011, the 8th
highest in the EU. On top of the measures implemented from 1 January 2013,[17] the Czech authorities
introduced compulsory electronic VAT returns in 2014 and amended the act on
fuels (in force since October 2013), introducing a compulsory deposit for fuel
distributors. While the overall effectiveness of these measures has yet to be
evaluated, recent tax collection statistics suggest a positive impact on indirect
tax receipts. The 2014 national reform programme envisages further measures
(i.g. digitalisation of tax collection, a lower limit for cash payments,
potential broadening of the reverse charge mechanism) to improve tax
compliance. Moreover, the administrative
cooperation with other Member States’ revenue authorities can be further
improved to tackle cross-border VAT fraud. The Czech Republic tends to reply
late to requests for information coming from other Member States and makes
limited use of multilateral controls in the field of VAT.[18] 
Limited progress was achieved in the
area of tax administration. The Czech Republic further
strengthened electronic systems for submitting tax returns, but administrative
costs per net revenue collection are still at one of the highest levels in the
EU, and the country ranks second highest in terms of the time needed to comply
(in particular for labour and consumption taxes)[19]. A Single Collection
Point (SCP) for income taxes, health and security contributions and customs planned
for 2015 was abolished. The 2014 national reform programme mentions the
authorities' intention to retain some features of the SCP concept and present a
new proposal aiming at simplifying the tax collection, including the
above-mentioned harmonisation of tax bases. In this context, the planned
introduction of a second reduced VAT rate for medicines, books and baby food as
of 2015 goes against the idea of simplifying the tax system as it introduces
additional complexity. 

3.2.                
Financial sector

Having weathered the period of
economic decline since 2008 remarkably well, the banking sector remains well-capitalised, with a comparatively
high average return on assets. The key financial
soundness indicators and stress tests conducted by the Czech National Bank confirm
the resilience of the Czech banking sector against deterioration of the real
economy and external risks. In the third quarter of 2013, the share of
non-performing loans amounted to 5.2 %, the capital adequacy ratio was well
above 16 % and the return on equity reached almost 18 %, the second highest in
the EU. The loans-to-deposit ratio of slightly above 73 % suggests that the
credit supply is unlikely to be considered a major factor in access to
financing. In 2013, the Czech Republic did not receive a
CSR in this area.
The SME access-to-finance index for the Czech Republic has shown a continuous, albeit small, improvement between 2007 and 2012.[20] However, this masks two opposite developments.
While access to debt financing provided by banks is perceived to have
increased substantially between 2007 and 2012 and is seen as comparatively easy
and affordable, access to equity financing is considered to have worsened
considerably. As a consequence, the SME access-to-finance index ranks the Czech Republic as the Member State with the least accessible equity financing and the country suffers from a lack
of early-stage financing programmes for SMEs through the equity channel. The official projects of a seed/venture
capital fund financed through EU funds have been stalled and will be revisited
in the 2014-20 programming period. The act on investment companies and
investment funds[21], effective since 2014, may lead to greater involvement of private
investors in funding SMEs at different stages of their development.

3.3.                
Labour market[22], education and social policies

Using the potential of the labour force better and improving the
quality, equity and labour-market relevance of education could support the
Czech economy’s growth prospects in the medium and long term. The overall labour market situation in the Czech Republic has proved to be relatively strong, with the unemployment rate
at 7 % in 2013. Nevertheless, relatively low
unemployment rates exist in parallel with under-used labour potential, a
situation that points to a number of structural challenges. The high employment
impact of motherhood, caused by limited access to affordable childcare
facilities, adversely affects women’s career progress. The participation rate
of disadvantaged people, notably of young people, older workers, the low-skilled
and long-term unemployed, remains low, in part due to ineffective public employment
services. Moreover, there are concerns about the quality, equity and labour‑market
relevance of the education system at all levels. Roma
people in particular still face obstacles to social inclusion and labour-market
access.
In 2013, the Czech Republic received CSRs
concerning labour-market and education policies. In
particular, the Czech Republic was invited to take additional steps to
strengthen the efficiency and effectiveness of the public-employment service,
significantly increase the availability of inclusive childcare facilities with
a focus on children up to three years old, and increase the participation of
Roma children, set up a comprehensive evaluation framework in compulsory
education and put in place targeted measures to support schools that rank low
in educational outcomes, and adopt measures that enhance accreditation and
funding for higher education. The analysis in this staff working document leads
to the conclusion that the Czech Republic has made limited progress on measures
taken to address these recommendations.
Labour market
Despite the relatively high overall employment
rate, there are specific groups that remain under‑represented in the labour
market or struggle to find jobs. This concerns
primarily women with children up to three years of age, young people, older people,
the low‑skilled and people with disabilities. The particular reasons for their
high unemployment levels differ. For women, data show that the impact of
motherhood on employment was one of the most significant in the EU in 2012,
which is due to limited access to affordable childcare facilities and
comparatively low take-up of part-time work. Access to
childcare facilities remains among the lowest in Europe: only 5 % of children up to three years of age are cared for
in formal childcare, compared to 30 % in the EU.[23] The long spells out of work and difficulty
in returning to work adversely affect women’s career progress, as evidenced by the
large gender-employment gap and pay gap (both 4th largest in the EU[24]). Women are also generally disadvantaged in employment due to
labour market discrimination; vertical and horizontal gender segregation[25] is still present in different sectors of the labour market.[26] As regards youth and elderly workers, their respective unemployment
rates are below the EU average, but both groups also show below-average
participation rates. Young people’s participation rate is low largely due to
rapidly increasing enrolment in education or training[27]. The youth unemployment rate stabilised in 2013 at the level of
18.9, however the NEET (Not in Education, Employment or
Training) rate has been growing (by 0.8 pp between 2011
and 2013), and some regions still experienced persistent challenge of high
youth unemployment. The draft Youth Guarantee Implementation Plan (YGIP)
presented by the Czech authorities remains very general and offers limited information.
Older workers tend to leave the labour market relatively early due to the still
low pensionable age. The participation rates of low‑skilled and other disadvantaged
groups, in particular the Roma, remain low in part due to a lack of targeted
public employment services[28] as well as due to social barriers.
Limited progress has been made in
increasing the availability of inclusive childcare facilities. The draft law on child groups was approved by
the government in January 2014. The law creates less demanding conditions for
establishing private child groups as compared to those for public childcare
facilities, and introduces tax incentives to provide and to take up this form
of care. This measure is a relevant step in the right direction, but its
effectiveness will depend on the level of incentives included in the final
version of the law.[29] Monitoring the quality of service will be essential to tackling the
educational element of this form of pre‑school education and might influence
the effective use of those facilities. No progress has been made as regards
public childcare services. The future of the few remaining public nurseries is
uncertain as they are expected to be taken over by professional private
child-minders recognised under the Trade Licensing Act.
The 2014 national reform programme presents
several relevant measures for 2014 and 2015 that should further improve the
availability of childcare services. The authorities
plan to provide municipalities with additional resources, partly co-financed by
EU funds, to enable them to build additional childcare facilities. With a view
to mitigating the differences between children entering compulsory education, it
is planned that the last year of pre-school education will be made compulsory,
which is also a step towards improving the inclusiveness of pre-school
education.[30] While the outlines of these measures are yet to be specified in
detail, if implemented with an adequate level of ambition they have the
potential to improve the participation rate of women with young children in the
labour market.
Limited progress has been made in
response to the recommendation to strengthen the efficiency and effectiveness
of the public-employment service. Most importantly,
the public employment service (PES) offices were reinforced with some 1 000
workers in 2013-14. The majority of posts were earmarked for counselling the unemployed,
assisting employers, and tackling undeclared work. Some
initial steps have also been taken to improve the quality of services provided
by the PES, and these go in the right direction.
However, the PES suffers from a lack of long-term strategic direction. For
instance, a flagship project on payment cards that help to efficiently disburse
social benefits was prematurely ended and a new IT system caused major delays
in disbursing social benefits in 2013 before it was removed because of flaws in
the tendering process. The difficulties in setting up
an efficient data processing system for the PES might hamper the proper design
of active labour market policies (ALMPs).
ALMPs remain under-funded and do not
adequately target those furthest away from the labour market. Rates of activation of registered unemployed people remain one of the lowest in the EU. Most
importantly, the scope and effectiveness of individualised and targeted
services provided by labour offices is not adequate. Those most difficult to
employ do not receive relevant educational and counselling assistance. The
monitoring of PES performance is not evidence-based and deficient. However,
some work has been carried out to improve ALMPs. One positive development was
the increased number of people who were re-trained in 2013. Further measures
were introduced in the follow-up to the 2012 reform of the PES, but they are not
expected to bring tangible results before 2015. In particular, European Social Fund projects started in 2013 aim to create a coherent methodology for
improving the work with labour-office clients, establish an efficient system of
human resource management and improve the current system of training staff,
strengthen advisory and consultancy services to foreigners, and strengthen
cooperation with employers with a focus on monitoring vacancies and employers’
needs. A task force is planned, and will tackle the
remaining weaknesses, including work to develop ways to more effectively
monitor and implement activation programmes.
Education
The
quality, equity and labour-market relevance of the Czech education system is a
matter of concern in view of the need to strengthen the essential drivers of
growth. According to the latest PISA (Programme for international student assessment)
results, the Czech Republic has achieved significant progress in decreasing the
proportion of low-achievers compared to the previous test round. The results of the 2012 PISA survey confirm that the
performance of Czech pupils is strongly linked to their socio-economic
background and to participation in early-childhood education. The 2014 national reform programme refers to the on-going work in
view of amending the Education Act towards inclusive education with individual
support for children with specific needs to enable their integration into
mainstream education. The teacher population is ageing
rapidly and the profession is not attractive salary-wise.[31] The early school leaving rate remained very
low in 2013,[32] with Roma pupils accounting for a high proportion of early school
leavers. In higher education,[33] the main challenge remains to ensure the quality and labour-market
relevance of graduates’ skills, in view of the rapidly rising enrolment rates
and limited resources. Public expenditure on education is below the EU average
and its recent increase (from 4.5 % of GDP in 2008 to 4.8 % in 2012) is almost
fully accounted for by higher R&D grants. 
Some
progress has been made on the 2013 recommendation to establish a comprehensive
evaluation framework in compulsory education and to put in place targeted
measures to support schools that rank low in educational outcomes. The considerable autonomy of schools coupled with unequal
performance between and within schools makes improvement-oriented evaluation
and feedback particularly relevant. Some measures have been put in place to set
up the evaluation framework. For instance, the authorities introduced a
modified state curriculum for primary education, notably amending mathematics
courses and introducing a second foreign language, and are developing minimal
education standards to provide more specific guidance (and an assessment base)
for schools. Also, a new career system for pedagogical staff is being
developed, and should establish a link between performance and salaries. The effectiveness
of this measure to attract and retain talented young people in the profession
is, however, conditional on increasing the overall amount of financing
available for salaries and on measures to improve the quality of teachers’
initial training, including the development of practical teaching skills. The
2014 national reform programme envisages introduction of a career system which
is intended to attract talented professionals through i.a. financial incentives
but concrete measures and their fiscal impact are not specified. 
The
assessment and follow-up phases of the evaluation framework in compulsory
education remain a weak point. The nation-wide
computer-based testing of pupils was tested twice. The 2014 national reform
programme confirms the usage of the testing for external evaluation purposes,
although only a sample testing instead of an annual nation-wide one is foreseen
for the time being. The testing could help identify problems and provide useful
feedback but, crucially, its effectiveness will depend firstly on the level of
support offered to underperforming schools and teachers, and secondly on the
intensity of its usage. The support provided to low‑performing schools and
teachers is expected to take the form of recommendations issued by the Czech
Schools Inspectorate. Additional resources (financial or human) are not
envisaged. Moreover, the impact of these recommendations will also depend on
governance issues, notably regarding responsibilities and capacities of
headmasters and municipalities (which are founding bodies of schools).[34]
No
progress has been made on strengthening accreditation and funding in higher
education. Political instability delayed the
adoption of the revised Act on Higher Education. The 2014 national reform
programme announces the submission of amendments to the Act to the government
by September 2014. It is not clear at this stage what the final content of the
amendments will be. In their previous version, regarding accreditation, the
reform proposal planned to decrease the reliance on ex-ante criteria (such as
the number of professors) and move towards surveillance based on internal
quality-assurance systems. They also envisaged multi-annual contracts with
public higher-education institutions (HEIs) and differentiated funding
according to the profile of study programmes. If these elements remain in the
amendments to be adopted and if the reform is effectively implemented, it would
allow HEIs to focus on their strengths (e.g. offering quality
profession-oriented bachelor programmes or more academic master degrees or
research programmes). This would contribute to improving the quality and labour
market relevance of higher education and help reduce the high proportion of
students going on to take master’s degrees. Setting the level of financial
incentives so as to induce the targeted distribution of study programmes across
the envisaged profiles will be a key factor in the reform’s effectiveness. It
is not clear to what extent the amendments will solve governance issues within universities. Funding of HEIs’ education activities has only marginally increased
in 2014 in nominal terms, and the same is expected for 2015, implying a
decrease in funding as a percentage of GDP. 
Social policies
Poverty and social exclusion indicators for the Czech Republic are among the lowest in the EU. The key
challenge is to tackle social exclusion among the Roma population, which
continues to face obstacles to effective participation in the labour market,
social services and mainstream education.[35] Problems in the most deprived areas have escalated, provoking
clashes between the Roma and parts of the neighbouring majority population.
Funding earmarked for supporting Roma inclusion has been decreasing. In 2013,
the Czech Republic did not receive a CSR in this area.
Some steps have been taken to fight
social exclusion among Roma and to integrate
groups with a high incidence of poverty or social exclusion.[36] Ensuring the adequate participation of Roma children in mainstream
early-childhood and primary education is a key tool in preventing their future
social exclusion[37]. The proportion of Roma children in practical schools (schools with
adapted educational programmes for children with mild mental disability) has so
far decreased only marginally, but new assessment and diagnostic tools are
being developed to avoid placing socially-disadvantaged children in such
schools, and regular monitoring of the proportion of Roma pupils in schools was
introduced in 2013. The Equal Opportunities Action Plan, which was adopted in
2012 and aims to improve equality in the education of Roma children, is being
implemented, albeit at a slow pace. A specific Roma integration strategy for
2014 and beyond is currently being drafted. 
In the Czech Republic, an above-average
incidence of poverty or social exclusion is reported for the unemployed,
single-parent families with at least one child, and households with three or
more children. In January 2014, the government
approved a comprehensive 2014-20 Strategy on Social Inclusion, following a
strategy on preventing and tackling homelessness (up to 2020) from October
2013. These strategies represent a step in the right direction as they provide a
complex approach to fighting poverty, combining access to housing, social
services, access to health services and other elements. However, social housing
remains deficient and steps taken in this area are not yet satisfactory.  

3.4.                
Structural measures
promoting growth and competitiveness

Over the past decade, the Czech Republic has started to lag behind
in terms of the quality of several key growth enablers. The performance of its R&D sector and the quality of the business
environment and transport infrastructure is suboptimal and foundations for
sustainable and green growth remain relatively weak. According to the 2014
Innovation Union Scoreboard, the Czech Republic has a status of a ‘moderate
innovator’ which is not fully line with its strong innovation potential. Productivity
growth is further hindered by a number of intertwined challenges, ranging from
weak performance of the scientific research and its rare spill‑overs to the
private sector, complex regulation and relatively weak competition in the
service sector,[38]
high compliance costs for businesses, high energy intensity and low energy
efficiency of the industry-based economy, to the poor quality of rail and road
transport infrastructure.
In 2013, the Czech Republic received CSRs concerning the funding of
research institutions, regulated professions and energy efficiency. The analysis in this staff working document leads to the conclusion
that the Czech Republic has made some progress on the funding of research
institutions and limited progress in the areas of regulated professions and
energy efficiency.
Box 4:
Potential impact of structural reforms on growth – a benchmarking exercise
Structural reforms are crucial for boosting growth. It is therefore
important to know the potential benefits of these reforms. Benefits of
structural reforms can be assessed with the help of economic models. The Commission
uses its QUEST model to determine how structural reforms in a given Member
State would affect growth if the Member State narrowed its gap vis-à-vis the
average of the three best EU performers on key indicators such as the degree of
competition in the economy or labour market participation. Improvements on
these indicators could raise GDP by about 5.3% in a 10-year period. Some
reforms could have an effect even within a relatively short time horizon. The
model simulations corroborate the analysis of Section 3.4, according to which
the largest gains would likely stem from increased competition, e.g. through
reducing entry barriers for regulated professions and improving the business
environment. The simulation also supports the analysis in Sections 3.1 and 3.3
and shows that gains could be achieved through increasing labour market
participation of women and older workers.
Table:
Structural indicators, targets, and potential GDP effects[39]
Source:
Commission services. Note: Simulations assume that all Member States undertake
reforms which close their structural gaps by half. The table shows the
contribution of each reform to total GDP after five and ten years. If the
country is above the benchmark for a given indicator, we do not simulate the
impact of reform measures in that area; however, the Member State in question can still benefit from measures taken by other Member States.[40] *The long-run effect of increasing
the share of high-skilled labour in the population could be 1.1% of GDP and of
decreasing the share of low-skilled labour could be 0.1%. ** EU average is set
as the benchmark.
Research and innovation
The Czech economy shows significant weaknesses in terms of how
domestic drivers of knowledge-based growth perform.
One of the current big challenges is therefore to accelerate the emergence of
domestic innovation leaders in the national innovation system, which has so far
been dominated by a few large foreign affiliates. Foreign affiliates are
estimated to account for 60% of all business expenditure on R&D. This is closely
linked to the need to upgrade the science sector, with a view to radically
improving the quality and relevance of its science and technology output.[41] Equally
worrying is the lack of genuine science-business cooperation and knowledge transfer,
as evidenced by the extremely low level of co-funding provided for public
research by businesses. Accelerating the modernisation of national research
systems is a priority area in the 2014 Annual Growth Survey.
Some progress was made in increasing the proportion of funding
allocated on the basis of the quality and relevance of output. A revised methodology for evaluating research in 2013-15 was adopted
in 2013, but the changes are minor, the evaluation itself suffers delays, and
it is still only a short-term solution. Its results might come too late to
influence the budget allocation in 2015. For the longer term, the development
of a new methodology expected to influence budget allocation starting in 2017
has not started yet. It remains crucial to ensure that this new methodology
offers the right incentives to public researchers to strive for excellence,
address societal challenges, and cooperate with the business sector.
Several steps have been taken to develop research infrastructure,
support innovative firms and, more recently, establish long-term partnerships
between the science community and the business sector. In April 2013, the national research, development and innovation
(RDI) policy for 2009-15 was updated to evaluate progress achieved in reforming
the research system, and to improve the supply of skills, knowledge transfer
and the innovative capacity of the business sector. The Technology Agency of
the Czech Republic, created in 2012 to support applied research and
science-business cooperation (notably through its competence centres), continues
to unfold a rich portfolio of support programmes to implement the RDI priorities
revised by the government in 2012.[42]
These efforts are being largely supported by EU funds allocated to R&D,
which reached 0.3% of GDP in 2012 and have become one of the main sources of R&D
funding in the Czech Republic[43].
As a result, the level of public funding injected into the national innovation
system is currently quite high by EU standards. In 2012, the sum of national
and EU funding of R&D amounted to 1.01% of GDP) and business expenditure on R&D is gradually catching up. However,
these initiatives and efforts are not yet translating into a visible
improvement of the quality and relevance of scientific output which would
support the emergence and development of more domestic innovation leaders. This
weak performance is attributed to misaligned incentives embodied in the current
approach to evaluating public research and allocating funding. The complexity
of Czech research and innovation policy may also play a role.[44] Another
important milestone is the recent extension of the R&D tax incentives,
which will cover research activities outsourced by businesses to public
research institutions as of January 2014. This is a step towards fostering
cooperation between academia and the business sector.
Business environment
The business environment in the Czech Republic ranks low in international comparisons,[45] in particular in the areas of the costs of paying taxes and
perceived corruption. At the same time, some
progress has been made on simplifying start-ups and on enforcing contracts. As
pointed out in Section 3.1, the time businesses need to comply with tax returns
is still excessively high, despite a recent decrease. The customs duties are
also time-consuming. The country has significant
potential to improve its performance in terms of time taken to process imports
and exports resulting in a reduction of business costs and trade facilitation[46]. Many surveys, studies and international comparative indicators also show
a high perception of corruption as negatively affecting businesses operating in
the Czech Republic (see Section 3.5). Perceived
corruption seems to be affected by a lack of transparency regarding the
ownership of firms. The new citizens’ code effective from 2014 introduces a new
form of ownership (trust) with limited transparency about the users and beneficiaries
of revenues from property, including shares. This step seems to go against the
changes in anonymous shareholding adopted in May 2013. The
  Czech Republic also scores poorly on protecting investors (22nd place in the
EU‑27), and there is scope for improvement in how easy it is to obtain
construction permits.[47] 
Although recent data show that a relatively long time
is needed to start up a business,[48]
some progress has been achieved in this regard. Two
important reforms entered into force in 2014, and are expected to improve the Czech Republic’s ranking. A new act on commercial corporations
abolishes the minimum capital requirements for a limited liability company and
an act on public registers of legal and natural persons enables faster
registration of entities in the Commercial Registry and related registries. On
the negative side, contract enforcement remains cumbersome and costly in EU
comparison.[49]
However, in 2014 the Czech Republic introduced measures
aimed at simplifying and speeding up the proceedings for executing and enforcing
judgments. By 2013, the time to complete insolvency proceedings had fallen by
4.4 years compared with 2008, while the recovery rate of creditors in the Czech Republic more than tripled over the past six years.
The Czech Republic has made limited
progress on the recommendation to reform the regulated professions. The country reports one of the highest levels of regulated
professions in the EU and the regulation of professional
services is stricter than the EU average. This is the case for all professions (accountants, lawyers,
architects) and engineers covered by the OECD Indicators of Product Market
Regulation (PMR). In 2012, the Czech authorities
announced a comprehensive reform of the regulatory framework to reduce the
number of regulated professions. While around 50 professions have been opened up through non‑legislative
measures since then, the number of regulated professions remains high (around
340 in April 2014). The sluggish pace of implementing
the reform does not allow for a substantial impact on
the service sector. No systemic assessment of the necessity and adequacy of the
remaining regulated professions has been conducted yet, and the same holds true
for the definition of the economic and qualitative
aspects of the deregulation process. While the 2014 national reform programme foresees
neither of those, it plans to reduce the number of regulated professions, or
mitigate entry barriers, by 25%, taking as a reference point the number 345 in
October 2013.
Energy, climate and resource
efficiency
As only
limited progress has been achieved to improve energy efficiency in the
buildings and industry sectors, the potential
for energy savings remains substantial.[50]
Despite following a slow declining trend, the energy intensity[51] of the Czech economy
remains very high amounting to approximately 250%[52] of the EU average and
the fourth highest in the EU. While the energy intensity in transport is
increasing with no known policy approaches to slow down or stop this trend, the
energy intensity of industry has improved since 2001 but was still among the
highest in the EU in 2011. However, the observed
decrease in the energy intensity is caused at large by restructuring and only
to a small part by better energy efficiency of production processes within
industrial sectors. The challenges regarding energy
efficiency are partly due to non-existence of a dedicated administrative body
concentrating expertise in the field and, possibly, also to neglecting benefits
of energy efficiency improvements and their positive impact on industry's
competitiveness. The Czech authorities do not foresee the introduction of effective
binding energy efficiency measures such as binding targets for energy service
providers or energy taxes. In addition, measures such as improvement of the
legal and fiscal framework for the provision of specific investment schemes and
energy performance contracting are not currently contemplated and incentivising
of private investment in energy efficiency is limited.  
On the positive side, several measures
have been put in place to promote energy efficiency, in particular in the
buildings sector and in production, transfer and consumption of energy. Some funding to promote energy efficiency has been provided from EU
Funds to co-finance several programmes (i.g. Eko-energie). Besides that, the
national budget has been supporting several domestic programmes. The “New Green
Savings” programme was approved in November 2013 offering grants for a total
amount of approx. EUR 1.1 billion, highly dependent on the sale of emissions
allowances. Overall, public resources earmarked for energy efficiency improvements
appear to be insufficient in light of the uncertainty related to revenues from
sale of the emission allowances. Given these limitations, the macroeconomic
impact of energy efficiency measures presented in the 2014 national reform
programme seems overstated. The complete and timely transposition and effective
implementation of the Energy Efficiency Directive (due in June 2014) would
provide additional tools to promote energy efficiency. In 2013, the Czech Republic notified its national indicative energy target and the 3rd National Energy
Efficiency Action Plan is currently being examined by the Commission to assess
the progress. 
Regarding renewable energy, all
operational support for new renewables installations in the electricity sector
has been stopped except for small hydroelectricity.
Moreover, the special levy on private producers have been extended further
aggravating the situation of investors in the sector and leading to more limited
investments. Although the original level of support for private activity in
this area may have been excessive for a certain period, these de facto
retroactive changes to the support scheme for renewables have been highly
detrimental to market confidence and practically stopped all further
developments. Moreover, based on the recent legal provisions in force since
2014, the support for all newly installed renewable energy sources of electricity
has been abolished. As regards the necessity to expand and renew the
electricity grid both on a transmission and a distribution level there have
been insufficient efforts to reduce lead times, which remain unacceptably long. 
Low air quality,
insufficient water management and frequent floods give rise to significant
economic, health and environmental costs. Although
the national reform programme 2014 recognises that the quality of the
environment is an important aspect of citizens' well-being, the measures listed
are basically those already announced and awaited from the past. The Czech Republic is among the Member States that suffer most from the impacts of bad air
quality.[53]
The country also still has to meet the basic obligations stemming from the EU acquis
in the area of water management, as well as to ensure that the investments made
in water infrastructure over recent years are economically viable. Moreover,
the Czech Republic has suffered from several severe floods in the last decade,[54] which created
significant costs[55]
and disrupted the national economy. However, it failed
to reduce the risk of floods through nature-friendly and cost-effective
measures.
The performance of the waste management
system is not improving as fast as it needs to. The performance of municipal waste treatment in the Czech Republic is under the EU average, with low recycling and high landfill rates.[56] No relevant national strategies have been formulated to divert
waste from landfills. The recycling rates are not directly addressed in the
Waste Act and the target of 50 % of recycled material by 2020 will be hard to
meet unless significant efforts are made. Furthermore,
greenhouse gas emissions (GGE) from waste have been growing. Still, the
national GGE target remains within reach. As mentioned in
Section 3.1, there are options for an increase in
environmental taxes, notably in the area of pollution and resource taxation, which
would help reach both public-revenue and environmental goals.
Transport
The relatively underdeveloped transport
infrastructure and obsolete vehicle fleet[57]
continue to be detrimental to the environment and economic growth. Insufficient investment in the maintenance and reconstruction of
the transport network has led to deficiencies in safety and capacity, as well
as to a higher environmental burden. Progress in modernising the transport system has been rather limited so far, partially
due to low efficiency and effectiveness of some of the infrastructure projects. The rail network is in rather poor
technical condition, which makes it a less attractive alternative to road
transport.[58]
Although certain railway connections have been opened
to private operators, competition is still low[59]
owing to some persisting obstacles. These include
limited public tendering of public-service contracts, technical and safety
regulations and operational barriers[60] which reflect i.a. lack of a fully independent regulator and also
the price structure opacity of the incumbent. The opaque structure creates
risks of cross-subsidisation and predatory pricing. The
2014 national reform programme recognises the weaknesses of the transport
system and rightly identifies the challenges. The government adopted two
strategic documents in 2013: the Transport Policy for 2014-20[61] that identifies the main challenges of the sector and proposes measures
to tackle them, and the Transport Sector Strategies -
2nd Phase that sets priority projects in transport infrastructure. However, the
latter document has been criticised for not being consistent enough with the
challenges identified and has not been approved by the Commission, which
requested its further development.

3.5.                
Modernisation of public administration

The quality and efficiency of the public
administration is still a challenge, with negative repercussions on the growth
performance of the Czech economy. According to the 2014
EU Anti-Corruption Report,[62]
71 % of Czech businesses consider that corruption is a major obstacle to doing
business, and 69 % point to patronage and nepotism as obstacles. These are one
of the highest figures in the EU. The World Economic Forum analysis concludes
that the perception of public-fund diversion is also one of the highest in the
EU.[63] Lobbying is not regulated, and the procedures for financing
political parties and election campaigns are not sufficiently transparent.
Prosecution of corruption in the private sector is almost non‑existent.[64] Inefficient and unstable public
administration under continuous political influence has a negative impact on
the country’s competitiveness, as well as on the implementation of EU funding.  
In 2013, the Czech Republic received a CSR
concerning public administration. In particular,
the Czech Republic was invited to implement the anti-corruption strategy, adopt
the Public Servants Acts, improve the management of EU funds and strengthen the
capacity for the implementation of public tenders. The analysis in this document
leads to the conclusion that the Czech Republic has made limited progress on
measures taken to address these recommendations.
Progress in the fight
against corruption has been limited. In the 2013 country-specific
recommendation, the Czech authorities were asked to ensure implementation of
the anti‑corruption strategy for 2013-14, but so far this has been hampered by
the absence of clear political commitment and ownership. The strategy itself
provides a detailed assessment of corruption and covers a wide range of
policies and measures, but in a rather fragmented way without a clear
longer-term vision. Implementation of the major reforms, which were already included
in the previous strategy (2011-12) and were moved to the current one, has been
significantly delayed, and key legislation has not been adopted.  The key
reform areas include transparency of ownership of firms, independence of the
state prosecution, conflicts of interest, freedom of information, creation of
specialised courts, regulation of lobbying, the Public Service Act, financing
of political parties, extension of powers of the Supreme Audit Office,
protection of whistle-blowers, and a reform of parliamentary immunity.   
A Public Service Act ensuring a stable,
efficient and professional state administration service has not been adopted. In 2013, the draft of a new law on the civil service was adopted by
the government and sent to parliament, but due to political circumstances as
well as its low quality, the proposal was finally dropped. A new draft Public
Service Act was prepared instead, building on the existing law which was
adopted back in 2002 but never entered into force in its entirety. The draft is
currently under discussion in parliament. Some crucial aspects are still
unclear, namely those related to remuneration, demarcation lines between
political and administrative posts, and a transparent recruitment and career
system. The provisions ensuring
the independence of regulatory and similar bodies deserve scrutiny. Institutional
capacity and efficient public administration are two of
the key pre-requisites for drawing EU funds in the new programming period
2014-20. The government has stated that the adoption of
the Public Service Act is one of its key priorities and plans the entry into
force for 1 January 2015.
Limited progress has been made on
improving the implementation of EU funds, in line with the 2013 recommendation. The measures of the action plan of 2012
to strengthen the management and control system of the implementation structure
for the European Regional Development Fund (ERDF) and the Cohesion Fund (CF)
continued to be implemented in 2013. Nevertheless, corrections had to be
applied for some programmes in 2013, because of expenditure incurred before the
action plan. Moreover, the error rates (again concerning expenditure before
2013), reported by the audit authority for several programmes at the end of
2013, are rather high. This might result in stopped payments for some
programmes in 2014 and the need to apply further corrections. The main sources
of irregularities continued to be deficiencies in public procurement
procedures. Moreover, several programmes suffered or will suffer substantial
de-commitments due to a non-fulfilment of n+3/n+2 rules at the end of 2013 (one
of the highest in the EU) which lead to a net loss of funds for the Czech
Republic. Problems continue to appear in the management of the funds, because
of a weak public administration in general, insufficient separation between
political and non-political staff and related conflicts of interest, complex
implementation structures and lengthy public procurement procedures.
Limited progress has been made on
measures taken to address the need to strengthen the capacity for implementing
public tenders at local and regional level. In
April 2012, a substantially amended Public Procurement Act introduced
additional transparency safeguards through stricter rules for publishing
tenders and public contracts to mitigate corruption-related risks.
Nevertheless, implementation of the new rules has proven rather difficult, in
particular due to the still‑inadequate administrative capacity and lack of
guidance or training for staff responsible for applying the rules. The
administrative capacity of the Office for the Protection of Competition (UOHS),
in charge of supervising implementation of the public procurement rules, is
still insufficient despite recent reinforcement. This leads to unnecessary
delays in the implementation of projects, including those co-funded by the EU. A
further strengthening of the UOHS’s administrative capacity and provision of
better guidance would speed up and smooth the public procurement process.
New public procurement rules in force
since 2014 are a step backwards, as they may reduce transparency. In late 2013, an amendment to the 2012 Act was adopted, increasing
the financial thresholds above which public contracts are subject to public
procurement rules. Apart from failing to provide the necessary stability and
continuity in public procurement, the new amendment appears to go against the
changes adopted in 2012 by removing some of the transparency safeguards and
loosening the public procurement rules. In this context, transposition of the
new public procurement directives due in April 2016 and preparation for the
transition to e-procurement are an ideal opportunity for a strategic, systemic
and in-depth review of the Czech public procurement system.  

4.        
Conclusions

The growth
performance of the Czech economy in recent years has been subdued and a
transition towards domestic drivers of growth will be required going forward. The current growth model of the Czech economy has been one of rapid
accumulation of production factors, especially capital, and of strong export
orientation. The build-up of fixed capital was supported by high inflows of
foreign capital, attracted by cheap but relatively skilled labour and the
proximity to the economic core of the EU. However, room for catching up based
on the accumulation of production factors (including foreign capital) is
limited, and redirecting the economy towards domestic drivers of growth is
therefore needed. The crucial elements of this process include boosting
education and training, strengthening institutions, supporting innovation, and
unleashing the full potential of the labour supply, while ensuring long-term
fiscal and financial stability. All of these issues were addressed in the 2013 country-specific
recommendations.
The analysis
in this staff working document leads to the conclusion that the Czech Republic has made limited progress in addressing the 2013 country-specific
recommendations. Some progress has been made in the
area of public finances. The excessive deficit was sustainably corrected in
2013 and the MTO is expected to be reached in 2014 but the projected fiscal
effort from 2015 onwards does not comply with the Stability and Growth Pact.
In the area of taxation, the Czech Republic implemented some measures to
improve tax administration and tax collection, however many issues remain
unaddressed. The government has announced several reforms in the area of
taxation but these have not been sufficiently detailed at this stage. No progress
has been made on improving the long-term sustainability of public finances and on
increasing the cost-effectiveness of healthcare expenditure. On labour market
issues, the Czech Republic put in place some measures to improve the
effectiveness and efficiency of the public employment service as well as to
increase the availability of inclusive childcare facilities, but more work is
necessary to address the remaining labour-market challenges. Progress in the
area of education has been limited, as the Czech authorities partially
addressed the quality of compulsory education but failed to adopt a reform of
tertiary education. Concerning research and development policies, several steps
have been taken to develop research infrastructure, support innovative firms
and, more recently, establish long-term partnerships between the science community
and the business sector. The quality of the public
administration is still a pressing challenge as progress in the fight against
corruption has been only limited and the key reform of the public service has
not been adopted. Limited progress has been made with
regard to the reform of regulated professions, the number of which remains
high. Finally, the Czech Republic has made limited progress on energy
efficiency by implementing several programmes financed from public sources and
aimed mainly at improving the energy efficiency of buildings. A national 2020
energy efficiency target was set at the end of 2013.
Challenges
identified in last year’s staff working document and reiterated in the Annual
Growth Survey thus remain valid. The policy plans
submitted by the Czech Republic address these challenges, and there is broad
coherence between the updates of 2014 national reform programme and the 2014
convergence programme. The national reform programme confirms the Czech Republic’s commitment to addressing shortcomings in the areas of labour market, education,
business environment, public administration including fight against corruption,
transport, energy efficiency and climate change and R&D and innovation. The
convergence programme shows the Czech Republic’s commitment to complying with
the recommendations of the Excessive Deficit Procedure, in line with the
Stability and Growth Pact. 

Overview
table
 
 2013 commitments || Summary assessment[65] 
 Country-specific recommendations (CSRs) 
 CSR 1: 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, in order to ensure an adequate fiscal effort to make sufficient progress towards the medium-term objective. Prioritise growth enhancing expenditure including committing on time remaining projects co financed by EU funds under the current financial framework. || The Czech Republic has made some progress in addressing CSR 1: ·         The recommendation on the correction of the excessive deficit was fully addressed. The excessive deficit has been sustainably brought below the 3% of GDP threshold in line with the Council recommendation. ·         Some progress in budgetary strategy for 2014 and beyond. The MTO was reached in 2014 but a deviation from it is expected in 2015 and beyond according to the convergence programme. ·         Limited progress in prioritising growth enhancing expenditure including committing on time remaining projects co-financed by EU funds. Public investment dropped by 12% in 2013. A significant increase is planned for 2014 but this depends crucially on the expected realisation of the remaining EU-funded projects. The de-commitment of EU Funds was one of the highest in the EU in 2013. 
 CSR 2: 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. || The Czech Republic has made limited progress in addressing CSR 2: ·         No progress in reducing the high level of taxation on labour. No changes have been made to labour taxation in the past year. The reform planned for 2015 will be significantly modified. ·         No progress in increasing the recurrent tax on housing and vehicle circulation taxes. No changes have been implemented in these two areas. No reforms have been announced. ·         Limited progress in reducing discrepancies between employees and the self-employed. No changes have been implemented in the past year, except for the rather minor measures in force since the beginning of 2013. Some measures are announced for 2015 and 2016. ·         Some progress in improving tax compliance. Measures were put in place mainly in the area of VAT compliance and a new act on fuels was adopted in October 2013. ·         Limited progress in reducing compliance costs. Electronic tax submission has been strengthened, but tax bases have not been harmonised and the single collection point will not be implemented in 2015 as originally planned. 
 CSR 3: Increase the effective retirement age by aligning retirement age or pension benefits to changes in life expectancy, and review 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. || The Czech Republic has made no progress in addressing CSR 3: ·         No progress in increasing the effective retirement age. The planned path for the pensionable age remained unchanged, rising slowly, in particular for men. The indexation mechanism has not been reviewed.   ·         Limited progress in accompanying the increase in retirement age with measures promoting the employability of older workers. Some measures have been taken but for the most part they do not address the motivation of workers to invest in keeping their labour-market skills up-to-date. ·         No progress in removing the public subsidy for the pre-retirement scheme. Elimination of the subsidy is not expected. ·         No progress in improving the cost-effectiveness of healthcare expenditure. Plans to streamline hospital-bed capacity and to improve integrated care practices have not been implemented. 
 CSR 4: Take additional efforts 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 provision of childcare services and strengthening the capacities of both public and private childcare services. || The Czech Republic has made limited progress in addressing CSR 4: ·         Limited progress in taking additional steps to strengthen the efficiency and effectiveness of PES. The PES was reinforced, but it suffers from a lack of a long-term strategic direction. ·         Limited progress in significantly increasing the availability of inclusive childcare facilities with a focus on children up to three years old, and on increasing the participation of Roma children. A draft law on child groups was approved by the government but its effectiveness will depend on the level of incentives included in the final version. 
 CSR 5: Ensure implementation of the anti-corruption strategy for 2013-14. Adopt a Public Servants Act that should ensure a stable, efficient and professional state administration service. Improve the management of EU funds in view of the 2014-20 programming period. Strengthen the capacity for implementation of public tenders at local and regional level. || The Czech Republic has made limited progress in addressing CSR 5: ·         Limited progress in implementing the anti-corruption strategy. Minor anti-corruption measures have been put in place but the main reforms outlined in the strategy have not been implemented. ·         No progress in adopting the Public Servants Act. Its adoption has been significantly delayed and is now under discussion in parliament. ·         Limited progress in improving the management of EU funds. The measures included in the 2012 action plan continued to be implemented in 2013. ·         Limited progress in strengthening the capacity for implementing public tenders. Administrative capacity of some public bodies has been strengthened but it remains insufficient and guidance and training for staff responsible for applying the public procurement rules is insufficient. 
 CSR 6: 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. || The Czech Republic has made limited progress in addressing CSR 6: ·         Some progress in setting up a comprehensive evaluation framework in compulsory education. Some measures have been put in place. ·         No progress in adopting measures to improve accreditation and funding of higher education. Political instability delayed the adoption of the revised Act on Higher Education that had been announced for 2013. ·         Some progress in increasing the proportion of performance-based funding of research institutions. A revised methodology for evaluating research in 2013-15 was adopted in 2013 but the changes are minor and the evaluation itself has been delayed. 
 CSR 7: Drawing on the ongoing 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. || The Czech Republic has made limited progress in addressing CSR 7: ·         Limited progress in introducing a reform of regulated professions. Only around 40 professions were opened up in 2013 and the number of regulated professions remains high. ·         Limited progress in improving energy efficiency. An indicative national energy efficiency target was set and national energy efficiency measures announced in 2013. The measures are non-binding and depend heavily on public funding. 
 Europe 2020 (national targets and progress) 
 Policy field target || Progress achieved 
 Employment rate target: 75 % by 2020 || The employment rate continues to rise and reached 72.5% in 2013. The increase is mainly due to the rising employment rate of older workers, which is related to the ongoing increase in the pensionable age. 
 R&D target (public expenditure only): 1 %   R&D intensity (overall) in 2013: 1.88 % of GDP || The rapid increase of R&D intensity since 2010 is due to an increase of both public and private R&D expenditure. The additional funding comes mainly from foreign affiliates and from EU funds. The new government is considering setting an R&D intensity target. With regard to recent trends, an ambitious but at the same time reasonable national target would be in the range of 2.5 % to 3 % of GDP in 2020. 
 Greenhouse gas (GHG) emissions national target: +9 % (compared to 2005 emissions, Emissions Trading Scheme  (ETS) emissions not covered by this national target) || The non-ETS greenhouse gas emissions dropped by 7 % between 2005 and 2012 According to the latest national projections and taking into account existing measures, it is expected that the target will be achieved. 
 2020 Renewable energy target: 13 %   Share of renewable energy in all modes of transport: 10 % || The share of renewable energy in the overall basket increased by an average of around 0.5 pp per year in 2004-11, and reached 9.4 % in 2011 (Eurostat, March 2014). The increase is even steeper for the share of renewables in all modes of transport, which increased by an average of around 0.7 pp per year between 2005 and 2012, and peaked at 5.6 % in 2012 (Eurostat data). If these trends continue, it will be possible for the Czech Republic to reach the 2020 targets. 
 National indicative Energy efficiency target for 2020: savings of final energy consumption of 47.84 PJ (13.29 TWh) || The Czech Republic notified the Commission of its target in April 2013 and submitted a report on national measures to meet the target and to comply with Article 7 of the EED. The target is to reach a level of 39.6 Mtoe in primary consumption and 25.3 Mtoe in final energy consumption by 2020. The 3rd National Energy Efficiency Action Plan is currently being examined by the Commission to assess the progress. 
 Early school leaving target: 5.5 % || The proportion of early leavers from education and training (percentage of the population aged 18-24 with at most lower secondary education and not in further education or training) decreased from 5.5 % in 2012 to 5.4 % in 2013, effectively below the target. The high proportion of Roma among early leavers (72 %) needs to be closely monitored. 
 Tertiary education target: 32 % || The increase continued, from 25.6 % in 2012 to 26.7 % in 2013. Based on current tendencies and demographic trends, the national figure is likely to be met. Efforts to improve quality and labour market relevance are needed. 
 Target on the reduction of population at risk of poverty or social exclusion in number of persons: Maintaining the number of persons at risk of poverty or social exclusion at the level of 2008 (15.3 % of the total population) with efforts to reduce it by 30 000. || The number of people at risk of poverty or social exclusion has marginally increased and reached 1 580 ths. in 2013. This is marginally above the target value for 2020 (which itself is not very ambitious). 

Annex

Standard tables
Table I. Macroeconomic indicators
Table II. Comparison
of macroeconomic developments and forecasts
Table III.
Composition of the budgetary adjustment
Table IV. Debt
dynamics
Table V.
Sustainability indicators
Table VI. Taxation
indicators
Table VII. Financial
market indicators

Table VIII. Labour market and social indicators
Table IX. Product
market performance and policy indicators
Table X. Green
growth
Indicators used in box 4 on potential impact on growth of structural
reforms
Final goods sector
mark-ups: price cost margin, i.e. the difference
between the selling price of a good or service and its cost. Final goods
mark-ups are proxied by the mark-ups in selected services sectors (transport
and storage, post and telecommunications, electricity, gas and water supply,
hotels and restaurants and financial intermediation but excluding real estate
and renting of machinery and equipment and other business activities[66]). 
Source: Commission services estimation using the methodology of
Roeger (1995) based on EUKLEMS 1996-2007 data. 
Entry costs: cost of starting a business in the intermediate sector. The
intermediate sector is proxied by the manufacturing sector in the model. 
Source: starting business costs in % of income per capita, 2012
data. Doing Business Database. www.doingbusiness.org 
Implicit consumption
tax rate:  defined as total taxes on consumption
over the value of private consumption. In the simulations it is used as a proxy
for shifting taxation away from labour to indirect taxes; the implicit
consumption tax-rates are increased (halving the gap vis-à-vis the best
performers) while labour tax-rates are reduced, so that the combined impact is 
ex-ante budgetary neutral.
Source: European Commission, Taxation trends in the European Union,
2013 edition, Luxembourg, 2013, 2011 data.            
Shares of
high-skilled and low-skilled: share of high skilled
workers are increased, share of low-skilled workers are reduced (halving the
gap vis-à-vis the best performers). Skill definitions: Low-skilled correspond
to ISCED 0-2 categories, high-skilled correspond to scientists (in mathematics
and computing, engineering, manufacturing and construction). The remainder is
medium-skilled. 
Source: 2012 data or latest available, EUROSTAT. 
Female
non-participation rate: percentage of female that
do not work/search for a job (non-active female population/female of a working
age)
Source: 2012
data or latest available, EUROSTAT.
Low-skilled male
non-participation rates: percentage of low-skilled
male that do not work/search for a job (non-active low-skilled male population/
male of a working age)
Source: 2012
data or latest available, EUROSTAT.
Elderly
non-participation rates (55-64y): it is the
percentage of the elderly population (55-64ys) that do not work/search for a
job (non-active elderly population/55-64y population)
Source: 2012
data or latest available, EUROSTAT.
ALMP: Active Labour Market Policy expenditures in % GDP over the share
of unemployed in the population. 
Source: 2011
or latest available data. EUROSTAT   
Benefit replacement
rate:  % of a worker's pre-unemployment income that
is paid out by the unemployment scheme.  
Source: average of net replacement rates over 60 months of
unemployment, 2012 data, OECD, Benefits and Wages Statistics. www.oecd.org/els/benefitsandwagesstatistics.htm.
[1] COM(2013) 800 final.
[2] COM (2013 790 final.
[3] Aside from the 16 Member States identified in the AMR, Ireland was also covered by an in-depth review, following the Council’s conclusion that it
should be fully integrated into the regular surveillance framework after
successfully completing its financial assistance programme.
[4] Cyclically adjusted balance net of one-offs and temporary measures,
recalculated by the Commission services on the basis of the information
provided in the programme, using the commonly agreed methodology
[5] Data on the contribution of pension expenditure to long-term
sustainability and the increase in the ratio of pension expenditure to GDP,
based on the Fiscal Sustainability Report 2012, the Ageing Report
2012 and updates to Commission forecasts.
[6] See Table V in the Annex. The long-term sustainability gap (S2)
indicator shows the immediate and permanent adjustment required to satisfy an
inter-temporal budgetary constraint, including the costs of ageing.
[7] Ageing costs comprise long-term projections of public age-related
expenditure on pension, health care, long term care, education and unemployment
benefits. See the 2012 Ageing Report for details.
[8] See Table V in the Annex. The medium-term sustainability gap (S1)
indicator shows the upfront adjustment effort required, in terms of a steady
improvement in the structural primary balance to be introduced until 2020, and
then sustained for a decade, to bring debt ratios back to 60% of GDP in 2030,
including financing for any additional expenditure until the target date,
arising from an ageing population.
[9] Data on the contribution of healthcare to long-term sustainability
and the increase in the ratio of healthcare expenditure to GDP, based on the Fiscal
Sustainability Report 2012, the Ageing Report 2012 and updates to Commission
forecasts.
[10] Both the average number of acute-care beds
(5 beds per 1 000 inhabitants vs. 3.6 in the EU on average) and average acute-care
length of stay (6.8 days vs. 6.1 in the EU on average) are high compared to the
EU average. A record-low proportion of day cases in the total number of discharges
(2 % vs. an EU average of 26 %)[10] is also reported. These
findings raise concerns about the incentive structure and cost-effectiveness in
the in‑patient sector.
[11] Study on Corruption in the Healthcare Sector,
HOME/2011/ISEC/PR/047-A2, October 2013.
[12] At 39.3% (2012), the tax wedge on low-income earners (67% of
average wage) is above the simple EU average of 37.7%. At 50% of the average
wage, it is also above the EU average (36.2%, EU average: 34.1%). Source: DG
ECFIN Tax and Benefits Indicators Database
[13] See Dusek, Kaliskova, Munich (2013): ‘Kdo a kolik odvádí do
společné kasy? Zdanění příjmů ze zaměstnání a podnikání v českém systému’,
IDEA.
[14] The tax deductibility of mortgage interest payments favours the use
of debt. This type of tax relief contributes to increasing both housing prices
and debt leverage.
[15] 5th lowest in the EU in 2012.
[16] See TAXUD (2013): Study to quantify and analyse
the VAT gap in the EU-27 Member States.
[17] A new concept of ‘unreliable taxpayer’, a requirement to use
verified bank accounts for all business transactions, and an obligation for
newly-registered VAT payers to submit tax returns on a monthly basis.
[18] European Commission (2014) Commission Staff Working Document
accompanying the Report on the application of Council Regulation (EU) No
904/2010 concerning administrative cooperation and combating fraud in the field
of VAT 
[19] The PricewaterhouseCoopers
Paying Taxes 2013 report (p. 98) and the World Bank Doing Business
Report 2014 state that it takes 413 hours to comply with tax requirements
in the Czech Republic, compared to the OECD average of 173 hours.
[20] European Commission (DG ENTR), SME Access-to-Finance Index
[21] No 240/2013 Coll.
[22] For further details, see the 2014 Joint
Employment Report, COM(2013)801, which includes a scoreboard of key employment
and social indicators.
[23] Eurostat Labour Force Survey data (2012). Data for children older
than three are higher, but still below the EU average.
[24] The unadjusted gender pay gap; Eurostat 2012 data.
[25] Horizontal segregation is understood as under- (or over-)
representation of a certain group in occupations or sectors not ordered by any
criterion, whereas vertical segregation is understood as under- (or over-) representation
of a clearly identifiable group of workers in occupations or sectors ordered on
the basis of specific attributes.
[26] The index on gender segregation in economic sectors was at 21.2% in
2011 and decreased to 21% in 2012. The EU-28 average was 18.7% in 2012.
[27] The youth participation rate decreased from 46% in 1998 to 30% in
2011, while it stayed broadly unchanged in the EU-15 (fluctuating around 46 %).
Over the same period, the proportion of students in the 15-24 age group
increased from 46% in 1998 (equal for both men and women), to 62% for men and
69% for women in 2011 (50% for men and 52% for women in the EU-15). Taking into
account changes in the size of the population, the increase in the number of
students closely tracks the number of young workers who left the labour market.
[28] While low-skilled workers constitute a relatively small part of the
labour force (less than 10%), they face a high risk of unemployment and their
employment rate is much lower than the EU average, at 21.1% in 2012 (EU
average: 44.5%).
[29] This is the lesson from the ongoing European Social Fund project
which initially aimed to create 7 500 places in corporate childcare facilities,
but by January 2014 contracted less than 700 places, largely due to low demand
on the part of employers.
[30] According to Roma Education in Comparative Perspective (Brüggemann,
2012), only 28% of Roma children aged 3-6 attended formal childcare in 2011,
compared with the national average of 74% (Eurostat).
[31] OECD Education at a Glance, 2013.
[32] See the overview table in Section 4 for more information on the EU-2020
target for early school leaving.
[33] See the overview table in Section 4 for more information on the EU-2020
target for higher education.
[34] Recommendations to this effect can be found in the 2014 report of
the Czech Schools Inspectorate ‘Posouzení systému evaluace a monitoringu v
České republice’.
[35] The number of
socially-excluded Roma is estimated at about 80 000-100 000, which represents
around a third of all Roma living in the Czech Republic. Among the countries
with significant Roma minorities, the Czech Republic has one of the highest
number of reported instances of discrimination against Roma: 74% of Roma say
they have been discriminated against while looking for a job and 41%
experienced discrimination at work; only 24% of Roma are in employment. See: Fundamental
Rights Agency Roma Pilot survey 2011.
[36] See the overview table in Section 4 for more information on the EU-2020
target for poverty.
[37] 23% of Roma
children up to the age of 15 attend special schools/classes only for Roma, one of
the highest proportion in the EU. Source: FRA Roma Pilot survey 2011.
[38] OECD Indicators of Product Market Regulation (PMR), which measure
the degree to which policies promote or inhibit competition in areas of the
product market where competition is viable, indicate that regulation in
professional services is stricter than the average for the EU countries
represented in the OECD. This is the case for all professional services
included in the PMR (accountants, lawyers, architects and engineers). For retail
trade, the Czech Republic applies relatively strict conditions on licences
needed to engage in commercial activity, and maintains an above-average degree
of price control. Most network services have been deregulated, but there is
still only limited competition in the electricity market (with a high degree of
public ownership and of vertical integration) and in the postal, rail and
airline markets (with a high degree of public ownership).
[39] Final goods sector
mark-ups is the difference between the selling price of a good/service and its
cost. Entry cost refers to the cost of starting a business in the intermediate
sector. The implicit consumption tax rate is a proxy for shifting taxation away
from labour to indirect taxes. The benefit replacement rate is the % of a worker's pre-unemployment income that is
paid out by the unemployment scheme. For a detailed explanation of indicators see
Annex.
[40] For a detailed explanation of the transmission mechanisms of the reform scenarios
see: European Commission (2013), "The growth impact of structural
reforms", Chapter 2 in QREA No. 4. December 2013. Brussels;
http://ec.europa.eu/economy_finance/publications/qr_euro_area/2013/pdf/qrea4_section_2_en.pdf
[41] Only 5.6% of all Czech scientific publications score amongst the
10% most-cited publications worldwide (EU average: 11%; the Czech Republic ranks 20th). Similarly, the number of patents produced remains very low by
international standards, reaching only 0.84 (Patent Cooperation Treaty) patents
per billion purchasing power standard (EU average: 1.98; the Czech Republic
ranks 18th).
[42] In 2014, it is launching two new programmes to support the
verification of R&D results in terms of their practical application and
their subsequent commercial use (GAMA) and to fund joint international projects
with third countries (DELTA).
[43] However, Czech participants in the 7th
Framework Programme for Research and Technological Development still receive a
share of the total EC funding (0.67%) which is markedly lower than the share of
the Czech Republic in total EU expenditures on R&D (1.07%)
[44] Czech innovation policy is defined by a set of intertwined strategic
documents, governed by three government bodies, and implemented through a wide
set of support actions, ranging from applied research programmes run by the
Technology Agency, R&D tax incentives, project-based funding,
competitive-based institutional funding, and operational programmes under EU funds.
[45] According to the World Bank’s Doing Business Report 2014,
the Czech Republic ranks 75th out of 189 countries when it comes to how easy it
is to do business. In addition, the OECD Indicators of Product Market Regulation
(PMR) show excessive complexity of regulatory procedures, in particular
regarding the issuance of licences and permits, and an above-average
administrative burden imposed on start-ups.
[46] World Bank. (2013). Doing Business 2014: Understanding Regulations
for Small and Medium-Size Enterprises. Washington, DC: World Bank Group.
[47] For construction permits, the Czech Republic ranks 15th in the EU-27,
with a very high number of procedures (33 vs. 14 in the EU on average), though with
relatively little time needed to obtain one (120 vs. 174 days in the EU on
average).
[48] According to the World Bank’s Doing Business Report 2014, it
takes 20 days to start up a business in the Czech Republic, while according to
European Commission data the time needed is 15 days — http://ec.europa.eu/enterprise/policies/sme/business-environment/start-up-procedures/progress-2012/index_en.htm.
[49] According to the World Bank’s Doing Business Report 2014, the
Czech Republic ranks 22nd in the EU-27 with a slightly below‑average number of
procedures (27 vs. 32), but with a relatively high number of days needed (611
vs. 566) and very high claiming costs (33 vs. 22%).
[50] According to the national notifications required under the Energy
Efficiency Directive.
[51] Energy efficiency is commonly measured by energy intensity, i.e.
amount of energy needed to produce one unit of GDP. However, it is acknowledged
that this measure has limitations as energy consumption is influenced also by
other factors than only the efficiency of its use.
[52] 356 kgoe/1000 € compared to EU average of
143 kgoe/1000 € in 2012, Eurostat.
[53] The Czech Republic’s current non-compliance
with EU standards on air quality limits is responsible for over 1 500 premature
deaths nationally.
[54] 12 in the 2002-13 reference period.
[55] EUR 4.1 million for the six floods for
which data were available.
[56] Around 60% of municipal waste generated in the Czech Republic is still landfilled, while the current rate of recycling stands at 16% for
municipal waste. Source: Municipal waste management in the Czech Republic, (Eurostat data for 2012). 
[57] The density of highways per 1000 people in the Czech Republic is
around half of the EU average (ESTAT, 2011); about 54% of the passenger cars in
the country is over 10 years old , as compared to, for example, around 36% in
Germany (UNECE, 2012).
[58] Use of rail passenger transport has been steadily decreasing — from
8 million passenger-km in 1995 to 6.7 million passenger-km in 2011, a 16%
decrease (ITF, 2011).
[59] The market share of all but the principal railway undertakings in
passengers rail transport is at 3% (RMMS, 2012).
[60] e.g. the incumbent is allowed to charge
commissions of up to 25% of new entrants’ ticket sales for running the
nationwide ticketing systems; OECD Economic survey 2014
[61] Ministry of Transport (2013), The Transport Policy of the Czech Republic for 2014–20 with the Prospect of 2050.
[62] The EU Anti-Corruption Report 2014,
COM(2014) 38 final.
[63] World Economic
Forum, Global Competitiveness Reports (2012-13; 2013-14).
[64] Only eight cases in 2010-12. The EU Anti-Corruption Report 2014,
COM(2014) 38 final.
[65] The following categories are used to assess progress in
implementing the 2013 country-specific recommendations: 
No progress: The Member State has neither announced nor adopted any measures to
address the CSR. This category also applies if a Member State has commissioned
a study group to evaluate possible measures. 
Limited progress: The Member State has announced some measures to address the CSR,
but these measures appear insufficient and/or their adoption/implementation is
at risk. 
Some progress: The Member State has announced or adopted measures to address the
CSR. These measures are promising, but not all of them have been implemented
yet and implementation is not certain in all cases. 
Substantial progress: The Member State has adopted measures, most of which have been
implemented. These measures go a long way in addressing the CSR. 
Fully addressed: The Member State has adopted and implemented measures that address
the CSR appropriately.
[66] The real estate sector is excluded because of statistical difficulties
of estimating a mark-up in this sector. The sector renting of machinery and equipment
and other business activities is conceptually part of intermediate goods
sector.