Recommendation for a COUNCIL RECOMMENDATION on the 2018 National Reform Programme of the Czech Republic and delivering a Council opinion on the 2018 Convergence Programme of the Czech Republic
Date: 2018-05-23
Institutions: European Commission, Secretariat-General
Subjects: Czechia, administrative formalities, budget deficit, economic policy, economic reform, educational reform, employment policy, pension scheme, public contract, stability programme

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   EUROPEAN COMMISSION  Brussels, 23.5.2018 COM(2018) 403 final  Recommendation for a COUNCIL RECOMMENDATION on the 2018 National Reform Programme of the Czech Republic  and delivering a Council opinion on the 2018 Convergence Programme of the Czech Republic  
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2018 National Reform Programme of the Czech Republic 

and delivering a Council opinion on the 2018 Convergence Programme of the Czech 
Republic 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Articles 121(2) and 148(4) thereof, 

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of 
the  surveillance  of  budgetary  positions  and  the  surveillance  and  coordination  of  economic 
policies1, and in particular Article 9(2) thereof, 
Having regard to the recommendation of the European Commission2, 
Having regard to the resolutions of the European Parliament3, 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

Having regard to the opinion of the Economic and Financial Committee, 

Having regard to the opinion of the Social Protection Committee, 

Having regard to the opinion of the Economic Policy Committee, 

Whereas: 

(1) 

(2) 

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2 
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4 

On 22 November 2017, the Commission adopted the Annual Growth Survey, marking 
the start of the 2018 European Semester of economic policy coordination. It took due 
account  of  the  European  Pillar  of  Social  Rights,  proclaimed  by  the  European 
Parliament, the Council and the Commission on 17 November 2017. The priorities of 
the  Annual  Growth  Survey  were  endorsed  by  the  European  Council  on  22  March 
2018.  On  22  November  2017,  on  the  basis  of  Regulation  (EU)  No  1176/2011,  the 
Commission also adopted the Alert Mechanism Report, in which it did not identify the 
Czech Republic as one of the Member States for which an in-depth review would be 
carried out. 
The 2018 country report for the Czech Republic4 was published on 7 March 2018. It 
assessed 
the  country-specific 
recommendations adopted by the Council on 11 July 2017, the follow-up given to the 

the  Czech  Republic's  progress 

in  addressing 

OJ L 209, 2.8.1997, p. 1. 
COM(2018) 403 final. 
P8_TA(2018)0077 and P8_TA(2018)0078 
SWD(2018) 202 final. 

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(3) 

(4) 

(5) 

(6) 

recommendations  adopted  in  previous  years  and  the  Czech  Republic's  progress 
towards its national Europe 2020 targets. 

On  30  April  2018,  the  Czech  Republic  submitted  its  2018  National  Reform 
Programme  and  its  2018  Convergence  Programme.  To  take  account  of  their 
interlinkages, the two programmes have been assessed at the same time. 

Relevant country-specific recommendations have been addressed in the programming 
of  the  European  Structural  and  Investment  Funds  for  the  2014-2020  period.  As 
foreseen in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament 
and  of  the  Council5,  where  it  is  necessary  to  support  the  implementation  of  relevant 
Council  recommendations,  the  Commission  may  request  a  Member  State  to  review 
and propose amendments to its Partnership Agreement and relevant programmes. The 
Commission has provided further details on how it would make use of that provision 
in  guidelines  on  the  application  of  the  measures  linking  the  effectiveness  of  the 
European Structural and Investment Funds to sound economic governance6.  

The  Czech  Republic  is  currently  in  the  preventive  arm  of  the  Stability  and  Growth 
Pact.  In  its  2018  Convergence  Programme,  the  government  plans  for  a  budgetary 
surplus in headline terms over 2018-2021. The medium-term budgetary objective — a 
structural deficit of 1.0% of GDP — continues to be met with a margin throughout the 
programme  period.  According  to  the  2018  Convergence  Programme,  the  general 
government debt-to-GDP ratio is expected to gradually decline to 29.9 % in 2021. The 
macroeconomic scenario underpinning those budgetary projections is plausible. Risks 
to  the  achievement  of  budgetary  targets  seem  broadly  balanced,  with  an  expected 
rebound  of  public  investment  and  further  growth  of  public  wages.  Based  on  the 
Commission  2018  spring  forecast,  the  structural  balance  is  forecast  to  decline  to 
around  0.9  %  of  GDP  in  2018  and  0.2  %  of  GDP  in  2019,  remaining  above  the 
medium-term  budgetary  objective.  Overall,  the  Council  is  of  the  opinion  that  Czech 
Republic is projected to comply with the provisions of the Stability and Growth Pact 
in 2018 and 2019. 

The Czech Republic continues to display medium fiscal sustainability risks in the long 
term.  While  the  costs  of  ageing  pose  a  challenge  for  healthcare  and  long-term  care, 
changes  in  the  pension  system  warrant  particular  attention.  Updated  projections  of 
age-related  expenditure  point  to  a  higher  increase  than  that  indicated  in  the  2015 
Ageing Report. Pension expenditure is expected to rise from 8.2 % of GDP in 2016 to 
10.9 % of GDP in 2070. This expected higher increase in pension expenditure mainly 
reflects  the  capping  of  the  retirement  age  at  65  years.  In  fact,  the  alignment  of  life 
expectancy with the statutory retirement age is not automatic; instead, the cap is to be 
reviewed every five years by the government, starting in  2019. Since it is  left to  the 
government's  discretion, the current pension expenditure projections do not  take into 
account these retirement age reviews. Moreover, the pension indexation is now more 
generous, taking into account 50 % of real wage growth rather than the previous 33 %. 
The impact of these changes on expenditure amounts to 2 percentage points of GDP in 
2070.  Further  changes  that  are  currently  being  discussed,  such  as  an  increase  in  the 

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Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 
laying  down  common  provisions  on  the  European  Regional  Development  Fund,  the  European  Social 
Fund, the  Cohesion Fund, the European Agricultural Fund for Rural Development and the European 
Maritime  and  Fisheries  Fund  and  laying  down  general  provisions  on  the  European  Regional 
Development  Fund,  the  European  Social  Fund,  the  Cohesion  Fund  and  the  European  Maritime  and 
Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320). 
COM(2014) 494 final. 

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(7) 

(8) 

(9) 

basic  pension  amount  and  higher  pensions  for  older  pensioners,  also  worsen  the 
sustainability  indicators.  As  regards  public  expenditure  on  health  care,  in  the  long-
term it is projected to increase by 1.1 percentage points of GDP, above the estimated 
average increase of 0.9 percentage point for the European Union. In this context, there 
are signs of inefficient use of resources in out-patient and in-patient care. 

The  new  fiscal  responsibility  law  in  place  since  the  beginning  of  2017  has 
significantly strengthened the Czech fiscal framework and established the independent 
fiscal  council.  A  draft  law  on  independent  audits  is  currently  in  the  interservice 
commenting  procedure  and  aims  to  address  the  outstanding  transposition  of  the 
Council Directive 2011/85/EU.  

The  Czech  National  Bank  can  set  recommendatory  macro-prudential  mortgage-
lending limits, but has limited sanctioning powers since it lacks the formal authority to 
enforce them. While the Czech banks comply with certain aggregate level limits, they 
have  not  fully  adhered  to  the  Czech  National  Bank's  2016  guidelines.  Binding 
legislative limits would likely increase the level of compliance among banks, ensuring 
financial  stability  and  reduced  risks  for  borrowers.  A  legislative  proposal,  amending 
the Act on the Czech National Bank, is expected to be discussed by the Parliament in 
2018. 

The  Czech  Republic  continues  to  face  challenges  in  improving  the  transparency  and 
efficiency of public procurement and preventing corruption. While certain steps  have 
been  taken  to  improve  the  public  procurement  framework,  the  level  of  competition 
remains a concern, as nearly half of all public tenders result in a single-bid procedure. 
At the same time, the enactment of the obligatory use of electronic procedures has the 
potential to boost transparency and efficiency. The Czech authorities have invested in 
the  National  Electronic  Tool,  which  should  become  increasingly  user-friendly  and 
reliable,  in  addition  to  private  platforms  serving  the  Czech  market.  There  is  still 
considerable  scope  for  removing  administrative  barriers  and  tapping  the  potential  of 
aggregated and strategic public procurement to get better value for public money. Both 
central and local authorities have started undertaking targeted initiatives to train staff 
involved  in  procurement  procedures.  Nonetheless,  setting  up  joint  procurement 
measures and acquiring specialist expertise in certain areas remain major challenges. 
In addition, corruption and bribery are ongoing concerns for businesses and the public. 
While several major reforms of the anti-corruption strategy were adopted, some areas 
remain unaddressed. 

(10)  While the performance of e-government remains below the European Union average, 
relevant  legislative  measures  have  been  adopted  in  order  to  ensure  the  increase  of 
accessibility  and  availability  of  these  services.  Certain  large-scale  initiatives  are 
expected to be introduced in 2018 but their success will depend on the ability of the 
authorities to raise awareness and provide user-friendly solutions. 

(11)  Certain  administrative  and  regulatory  burdens  are  holding  back  investment.  These 
mainly concern construction permits and tax complexity. It is acknowledged, however, 
that  the  authorities  adopted  an  amendment  to  the  Construction  Act,  which  simplifies 
the  building  permit  procedure  by  including  the  environmental  impact  assessment  in 
the  zoning  decision  or  in  the  joint  zoning  and  building  permit.  However,  it  remains 
unclear whether this could also streamline procedures for large infrastructure projects, 
since various other authorisations have not been included in this joint permit system. 
An  amendment  to  the  existing  law  regulating  the  construction  of  transport 
infrastructure is being discussed in the parliament. While changes have been made to 

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the tax system to improve tax collection, tax regulation and rates have moved up the 
list  of  concerns  as  problematic  areas  for  doing  business.  The  new  government  has 
indicated  possible  changes  in  order  to  increase  transparency  and  simplify  the  tax 
system,  including  the  ongoing  work  to  modernise  the  income  tax  legislation. 
Compliance  costs  have  increased  slightly  and  remain  above  the  European  Union 
average.  Although  bringing  in  additional  tax  revenues,  the  value  added  tax  control 
statement has increased the time needed to comply with tax requirements. Despite the 
significant  reduction  in hours  to  comply  with  the  tax  code compared  to  the  past,  the 
Czech  Republic  is  still  at  the  higher  end  of  the  scale.  Moreover,  new  reduced  value 
added tax rates might add to the complexity of the value added tax system, especially 
for small and medium sized enterprises. 

(12)  While  the  Czech  economy  is  shifting  towards  more  knowledge-intensive  activities, 
several  bottlenecks  still  hamper  the  development  of  a  well-performing  research  and 
innovation system. The  increase of business research and development investment is 
primarily driven by foreign direct investments. Research and development expenditure 
by domestic enterprises has declined over the last two years. Despite substantial public 
research and development investment, the Czech Republic underperforms in terms of 
the  quality  of  its  public  science  base.  Policy  measures  were  adopted  to  build  links 
between academia and businesses, and improve the performance of the public science 
base,  but  the  results  to  date  have  been  limited  and  the  reforms  are  yet  to  be  fully 
implemented.  Moreover,  the  governance  of  the  research  and  innovation  system 
remains fragmented. 

(13)  Quality  inclusive  education  and  training  are  of  primary  importance  in  view  of 
increasing bottlenecks on the Czech labour market. Education performance continues 
to  be  strongly  affected  by  the  socioeconomic  background  of  students.  Inclusive 
education measures are still to be fully implemented, in particular for Roma children. 
Shortages of qualified teachers, combined with demographic projections, indicate that 
it could become more challenging to recruit and retain teaching staff. The planned new 
career  system  for  teachers,  which  would  have  linked  continuing  professional 
development,  career  and  salaries,  was  not  adopted  by  the  Parliament.  Teachers' 
salaries remain low compared with those of other workers with tertiary education, but 
further  salary  increases  are  envisaged  in  the  next  years.  The  teaching  profession 
therefore remains relatively unattractive for talented young people. Finally, the success 
of the reform to make education more inclusive (introduced in 2016 with the support 
of  the  European  Social  Fund)  will  depend  on  the  availability  of  sufficient  and 
sustainable  national  funding,  further  teacher  and  teaching-assistant  training,  and 
raising public awareness of the benefits of inclusive education. 

(14)  The Czech Republic is experiencing strong labour market performance. Employment 
has risen steadily over the past six years and unemployment has fallen considerably. 
The  potential  of  women,  the  low-skilled  and  disabled  people  remains  nonetheless 
underutilised.  Against  the  background  of  labour  shortages,  there  is  clear  scope  for 
increasing their labour market participation. Employment and gender pay gaps remain 
high  despite  recent  measures  that  have  made  parental  leave  more  flexible  and 
increased  the  number  of  childcare  facilities.  The  employment  rate  among  women 
remains well below that of men. Motherhood still has a major impact on labour market 
participation, linked to the low availability of affordable childcare, long parental leave 
entitlements, low use of flexible working arrangements and the lack of long-term care 
facilities.  In  2016,  only  4.7  %  of  children  below  the  age  of  three  were  in  formal 
childcare.  Although  they  make  up  a  small  proportion  of  the  population,  the 

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employment rate of the low-skilled is well below that of the medium- and high-skilled. 
Similarly,  the  employment  rate  of  disabled  people  is  below  the  European  Union 
average, despite the record-low general unemployment rate and shortages in the labour 
market. This could motivate tapping into the unused potential of the disabled. Due to 
limited  capacity,  public  employment  services  currently  fall  short  in  providing 
jobseekers  with  personalised,  continuous  support.  Increasing  the  outreach  and 
activation capacities of public employment services, together with effective and well-
targeted  active  labour  market  policies  and  individualised  services,  would  help  boost 
the  participation  of  these  groups.  Upskilling  initiatives  (also  covering  digital  skills) 
could improve labour market access. 

In  the  context  of  the  2018  European  Semester,  the  Commission  has  carried  out  a 
comprehensive analysis of the Czech Republic's economic policy and published it in 
the  2018  country  report.  It  has  also  assessed  the  2018  Convergence  Programme  and 
the  2018  National  Reform  Programme  and 
the 
recommendations addressed to the Czech Republic in previous years. It has taken into 
account not only their relevance for sustainable fiscal and socioeconomic policy in the 
Czech  Republic  but  also  their  compliance  with  Union  rules  and  guidance,  given  the 
need to strengthen the Union’s overall economic governance by providing Union-level 
input into future national decisions.  

follow-up  given 

the 

to 

(15) 

(16) 

In  the  light  of  this  assessment,  the  Council  has  examined  the  2018  Convergence 
Programme and is of the opinion that the Czech Republic is expected to comply with 
the Stability and Growth Pact. 

HEREBY RECOMMENDS that the Czech Republic take action in 2018 and 2019 to: 

1. 

2. 

Improve  the  long-term  fiscal  sustainability,  in  particular  of  the  pension  system. 
Address  weaknesses  in  public  procurement  practices,  notably  by  enabling  more 
quality-based competition and by implementing anti-corruption measures. 

Reduce  the  administrative  burden  on  investment,  including  by  speeding  up  permit 
procedures  for  infrastructure  work.  Remove  the  bottlenecks  hampering  research, 
development  and  innovation,  in  particular  by  increasing  the  innovation  capacity  of 
domestic  firms.  Strengthen  the  capacity  of  the  education  system  to  deliver  quality 
inclusive  education,  including  by  promoting  the  teaching  profession.  Foster  the 
employment of women, the low-skilled and disabled people, including by improving 
the effectiveness of active labour market policies. 

Done at Brussels, 

For the Council 
The President 

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