Recommendation for a COUNCIL RECOMMENDATION on the economic, social, employment, structural and budgetary policies of Czechia
Date: 2026-06-03
Institutions: European Commission, Reform and Investment Task Force
Subjects: Czechia, budget policy, defence policy, economic policy, economic recovery, economic reform, employment policy, energy policy, social policy, stability pact

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  EN 

   EUROPEAN COMMISSION  Brussels, 3.6.2026  COM(2026) 203 final  Recommendation for a COUNCIL RECOMMENDATION on the economic, social, employment, structural and budgetary policies of Czechia {SWD(2026) 203 final}  
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the economic, social, employment, structural and budgetary policies of Czechia 

THE COUNCIL OF THE EUROPEAN UNION, 

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

Having regard to Regulation (EU) 2024/1263 of the European Parliament and of the Council 
of  29 April 2024  on  the  effective  coordination  of  economic  policies  and  on  multilateral 
budgetary  surveillance  and  repealing  Council  Regulation  (EC)  No  1466/97  (1),  and  in 
particular Article 3(3) thereof, 

Having regard to the recommendation of the European Commission, 

Having regard to the resolutions of the European Parliament, 

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) 

Regulation  (EU)  2024/1263  specifies  the  objectives  of  the  economic  governance 
framework,  which  aims  at  promoting  sound  and  sustainable  public  finances, 
sustainable  and  inclusive  growth  and  resilience  through  reforms  and  investments,  as 
well  as  preventing  excessive  government  deficits.  The  Regulation  stipulates  that  the 
Council  and  the  Commission  conduct  multilateral  surveillance  in  the  context  of  the 
European Semester in accordance with the objectives and requirements set out in the 
Treaty  on  the  Functioning  of  the  European  Union  (TFEU).  The  European  Semester 
includes, in  particular, the formulation and the surveillance of the implementation  of 
country-specific recommendations. 

(2) 

On  16 July 2025,  the  Commission  adopted  its  proposal  for  a  regulation  establishing 
the European Fund for economic, social and territorial cohesion, agriculture and rural, 
fisheries and maritime, prosperity and security for the period 2028-2034 and amending 
Regulation (EU) 2023/955 and Regulation (EU, Euratom) 2024/2509 (2). The proposal 

1 

2 

EN 

Regulation 

Regulation  (EU)  2024/1263  of  the  European  Parliament  and  of  the  Council  of  29 April 2024  on  the 
effective  coordination  of  economic  policies  and  on  multilateral  budgetary  surveillance  and  repealing 
Council 
ELI: 
http://data.europa.eu/eli/reg/2024/1263/oj). 
Proposal  for  a  Regulation  of  the  European  Parliament  and  of  the  Council  establishing  the  European 
Fund  for  economic,  social  and  territorial  cohesion,  agriculture  and  rural,  fisheries  and  maritime, 
prosperity  and  security  for  the  period  2028-2034  and  amending  Regulation  (EU)  2023/955  and 

(EC)  No 

2024/1263, 

30.4.2024, 

1466/97 

(OJ 

L, 

1 

  EN 

 
 
(3) 

(4) 

(5) 

(6) 

aims to increase the effectiveness of Union funding by reducing the fragmentation of 
the  financial  architecture  and  to  support  Member  States  in  the  coordination  of  their 
economic policy in line with Article 175 TFEU.  

On  25 November 2025,  on  the  basis  of  Regulation  (EU)  No  1176/2011,  the 
Commission  adopted  the  2026  Alert  Mechanism Report,  in  which  it  did  not  identify 
Czechia as one of the Member States for which an in-depth review would be needed. 
The  Commission  also  adopted  a  recommendation  for  a  Council  recommendation  on 
the  economic  policy  of 
the  euro  area,  a  recommendation  for  a  Council 
recommendation on human capital in the European Union, and a proposal for the 2026 
Joint  Employment  Report,  which  analyses  the  implementation  of  the  Employment 
Guidelines  and  the  principles  of  the  European  Pillar  of  Social  Rights.  The  Council 
adopted  the  Recommendation  on  the  economic  policy  of  the  euro  area  (3)  on 
21 April 2026, and the Joint Employment Report and the Recommendation on human 
capital on 9 March 2026. 

On  29 January 2025,  the  Commission  published  the  Competitiveness  Compass,  a 
strategic  framework  that  aims  to  boost  the  Union’s  global  competitiveness  over  the 
next  five  years.  It  identifies  the  three  transformational  imperatives  of  innovation, 
decarbonisation  and  competitiveness,  and  security  as  critical  pillars  for  sustainable 
economic  growth.  The  European  Semester  is  aligned  with  the  Competitiveness 
Compass,  ensuring  that  Member  States’  economic  policies  are  consistent  with  the 
Commission’s  strategic  objectives,  creating  a  unified  approach 
to  economic 
governance that fosters sustainable growth, innovation and resilience across the Union. 

In  2026,  the  European  Semester  for  economic  policy  coordination  continues  to 
develop  alongside  the  final  stage  of  the  Recovery  and  Resilience  Facility  (RRF) 
implementation (4). Recovery and resilience plans (RRPs), along with cohesion policy 
funding, have been essential for delivering on the policy priorities under the European 
Semester, as the plans were required to effectively address all or a significant subset of 
challenges identified in the relevant country-specific recommendations issued in recent 
cycles and programmes funded by the European cohesion policy were required to take 
country-specific recommendations into account. As the RRF approaches the end of its 
lifetime,  it  remains  essential  to  sustain  the  reforms  and  investments  supported  and 
implemented  under  the  RRF,  in  particular  those  that  contribute  to  addressing 
challenges identified in the country-specific recommendations. 

in 

addressing 

On  3 June 2026,  the  Commission  published  the  2026  country  report  for  Czechia.  It 
assessed  Czechia’s  progress 
country-specific 
recommendations  and  took  stock  of  Czechia’s  implementation  of  the  RRP.  On  the 
basis  of  that  analysis,  the  country  report  identified  the  most  pressing  challenges 
Czechia is  facing.  It  also  assessed  Czechia’s progress  in  implementing the European 
Pillar  of  Social  Rights  and  in  achieving  the  Union  headline  targets  on  employment, 
skills  and  poverty  reduction,  as  well  as  progress  in  achieving  the  United  Nations 
Sustainable Development Goals.  

relevant 

the 

3 
4 

Regulation (EU, Euratom) 2024/2509 - COM(2025) 565 final. The proposed Regulation is currently the 
subject of negotiations with the co-legislators.  
OJ C, C/2026/2434, 28.4.2026, ELI: http://data.europa.eu/eli/C/2026/2434/oj. 
Regulation  (EU)  2021/241  of  the  European  Parliament  and  of  the  Council  of  12 February 2021 
(OJ  L  57,  18.2.2021,  p.  17,  ELI: 
establishing 
http://data.europa.eu/eli/reg/2021/241/oj). 

the  Recovery  and  Resilience  Facility 

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(7) 

(8) 

(9) 

On  21 January 2025,  the  Council,  upon  the  assessment  and  recommendation  of  the 
Commission, adopted a Recommendation endorsing the national medium-term fiscal-
structural  plan  of  Czechia  (5).  The  plan  covers  the  period  from  2025  until  2028  and 
presents  a  fiscal  adjustment  spread  over  four  years.  The  Council  recommended  the 
following  maximum  growth  rates  of  net  expenditure:  4.5%  in  2025,  2.5%  in  2026, 
2.6%  in  2027  and  2.9%  in  2028,  which  correspond  to  the  maximum  cumulative 
growth rates calculated by reference to the base year of 2023 of 10.1% in 2025, 12.9% 
in 2026, 15.8% in 2027 and 19.2% in 2028.  

from 

recommendation 

Russia’s  war  of  aggression  against  Ukraine  and  its  repercussions  constitute  an 
existential  challenge  for  the  European  Union.  The  Commission  has  invited  Member 
States  to  request  the  activation  of  the  national  escape  clause  of  the  Stability  and 
Growth Pact in a coordinated manner to support the EU efforts to achieve a rapid and 
significant  increase  in  defence  spending  (6)  and  this  proposal  was  welcomed  by  the 
European Council of 6 March 2025. Following the request of Czechia, on 8 July 2025 
the  Council,  upon  a 
the  Commission,  adopted  a 
Recommendation  allowing  Czechia  to  deviate  from  the  recommended  maximum 
growth  rates  of  net  expenditure  (7).  The  period  when  the  national  escape  clause  is 
activated  (2025-2028)  allows  Czechia  to  reprioritise  government  expenditure  or 
increase  government  revenue  so  that  lastingly  higher  defence  expenditure  would  not 
endanger fiscal sustainability in the medium term.  
On  30 April 2026,  Czechia  submitted  its  2026  Annual  Progress  Report  (8)  on 
adherence  to  the  recommended  maximum  growth  rates  of  net  expenditure  and  the 
implementation  of  reforms  and  investments  responding  to  the  main  challenges 
identified  in  the  European  Semester  country-specific  recommendations.  The  Annual 
Progress  Report  also  reflects  Czechia’s  biannual  reporting  on  the  progress  made  in 
implementing  its  recovery  and  resilience  plan  in  accordance  with  Article  27  of 
Regulation (EU) 2021/241.  

(10)  Real  GDP  growth  in  2025  was  2.6%  and  HICP  inflation  stood  at  2.3%.  The 
Commission  Spring  2026  Forecast  projects  real  GDP  to  grow  by  1.8%  in  2026  and 
2.4% in 2027, and HICP inflation to stand at 2.7% in 2026 and 2.8% in 2027. 
(11)  Based  on  data  provided  by  Eurostat  (9),  Czechia’s  general  government  deficit 
increased  from  2.0%  of  GDP  in  2024  to  2.1%  of  GDP  in  2025.  The  increase  in  the 
deficit  in  2025  mainly  reflects  higher  public  investment  and  increased  government 
subsidies to  renewable energy sources.  Based on policy measures known by the cut-
off  date  of  the  forecast,  the  Commission  Spring  2026  Forecast  projects  a  deficit  of 
2.8% of GDP in 2026 and 2.9% of GDP in 2027. The increase in 2026 mainly reflects 
the full phase-out of the tax on energy companies’ windfall profits and the government 
taking over the payment of the renewable energy levy from electricity consumers. The 

5  Council  Recommendation  of 21 January 2025  endorsing  the  national  medium-term  fiscal-structural  plan  of 

Czechia, (OJ C, C/2025/666, 10.2.2025, ELI: https://eur-lex.europa.eu/eli/C/2025/666/oj). 

6  Communication from the Commission, 'Accommodating increased defence expenditure within the Stability 

and Growth Pact’, Brussels, 19.3.2025, C(2025) 2000 final. 

7  Council Recommendation of 8 July 2025 allowing Czechia to deviate from the maximum growth rates of net 
expenditure  as  set  by  the  Council  under  Regulation  (EU)  2024/1263  (Activation  of  the  national  escape 
clause), (OJ C, C/2025/3962, 20.8.2025, ELI: http://data.europa.eu/eli/C/2025/3962/oj). 

8  The  2026  Annual  Progress  Reports  are  available  on:  https://economy-finance.ec.europa.eu/economic-and-

fiscal-governance/stability-and-growth-pact/preventive-arm/annual-progress-reports_en. 

9  Eurostat-Euro Indicators, 22.4.2026. 

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increase of the deficit in 2027 mainly reflects decreasing capital transfers from the EU, 
broadly offset by a decline in spending on social benefits and public investment. 
(12)  Based  on  the  Commission’s  estimates,  the  fiscal  stance  (10),  which  includes  both 
nationally and EU financed expenditure, was broadly neutral in 2025. It is projected to 
be expansionary, by 0.7% of GDP, in  2026, and  contractionary, by 0.6% of GDP  in 
2027. 

(13)  Based on data provided by Eurostat (11), Czechia’s general government debt increased 
from  43.3%  of  GDP  at  the  end  of  2024  to  44.3%  of  GDP  at  the  end  of  2025.  The 
increase  in  the  debt  ratio  in  2025  mainly  reflects  the  debt-increasing  stock-flow 
adjustment  and,  to  a  lesser  extent,  the  negative  primary  balance,  partly  offset  by 
nominal  GDP  growth.  Based  on  policy  measures  known  at  the  cut-off  date  of  the 
forecast,  the  Commission  Spring  2026  Forecast  projects  the  debt-to-GDP  ratio  to 
increase to 45.8% by the end of 2026 and to further increase to 47.2% by the end of 
2027. The increase in 2026 and 2027 mainly reflects the negative primary balance and, 
to a lesser extent, the debt-increasing stock-flow adjustment, partly offset by nominal 
GDP growth. 

(14)  Based on Eurostat data (12), total general government defence expenditure in Czechia 
amounted  to  1.2%  of  GDP  in  2025.  According  to  the  Commission  Spring  2026 
Forecast, it is projected at the same level in 2026. This corresponds to an increase of 
0.3 percentage points of GDP compared to the reference year 2021. 

(15)  The  Union  continues  to  face  risks  of  energy  supply  disruptions  and  elevated  price 
volatility,  exacerbated  by  geopolitical  tensions  which  affect  global  oil  and  gas 
markets.  Experience  from  the  2022–2023  energy  crisis  has  shown  that  broad  and 
untargeted  measures  entail  large  fiscal  costs  and  are  socially  and  economically 
inefficient. Since the outbreak of the war in the Middle East in February 2026, Czechia 
has  adopted  fiscal  policy  measures  to  mitigate  the  impact  of  high  energy  prices  on 
households and firms (13), namely an untargeted reduction in excises on diesel with an 
expiry date on 31 May 2026. According to the Commission Spring 2026 Forecast, the 
fiscal cost of this measure is projected to amount to less than 0.1% of GDP in 2026. 
According to Commission estimates, if this measure were to remain in force until end-
2026, its fiscal cost would amount to 0.1% of GDP in 2026. 

(16)  Based on the Commission’s calculations, net expenditure in Czechia grew by 4.9% in 
2025 and 6.0% cumulatively over 2024 and 2025. The net expenditure growth in 2025 
is  above  the  recommended  maximum  growth  rate,  corresponding  to  a  deviation  of 
0.2%  of  GDP  in  annual  terms.  When  considering  2024  and  2025  together,  the 
cumulative  growth  rate  of  net  expenditure  is  below  the  recommended  maximum 
growth rate (14).  

10  The  fiscal stance is defined as a  measure of the  annual change in the underlying budgetary position of the 
general government. It aims to assess the  economic impulse  stemming from fiscal policies,  both those that 
are  nationally financed and those  that are  financed by the EU budget. The fiscal stance is measured as the 
difference between (i) the medium-term potential growth and (ii)  the change in primary expenditure net of 
discretionary revenue measures and including expenditure financed by non-repayable support (grants) from 
the Recovery and Resilience Facility and other Union funds. 

11  Eurostat-Euro Indicators, 22.4.2026. 
12  Eurostat, government expenditure by classification of functions of government (COFOG). 
13  This reflects the situation at of the cut-off date of the Commission’s Spring 2026 Forecast (4 May 2026). 
14  As Czechia benefits from flexibility under the national escape clause, the assessment of compliance focusses 

on the latter comparison. 

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(17)  Based  on  the  Commission’s  calculations,  net  expenditure  in  Czechia  is  projected  to 
grow  by  6.4%  in  2026,  and  12.7%  cumulatively  over  2024,  2025  and  2026.  The 
projected  net  expenditure  growth  in  2026  is  above  the  recommended  maximum 
growth  rate,  corresponding  to  a  deviation  of  1.5%  of  GDP  in  annual  terms.  When 
considering 2024, 2025 and 2026 together, the projected cumulative growth rate of net 
expenditure  is  below  the  recommended  maximum  growth  rate,  with  a  deviation  of 
0.1%  of  GDP  in  cumulative  terms.  However,  the  projected  deviation  is  within  the 
flexibility  of  the  national  escape  clause  based  on  current  projections  for  defence 
spending. 

(18) 

In  2024,  Czechia  adopted  legislative  reforms  addressing  the  long-standing  country-
specific recommendation on pensions. However,  risks to  fiscal  sustainability remain. 
Czechia's  old-age  dependency  ratio  (the  proportion  of  older  people  to  working-age 
people) is projected to increase rapidly after 2030. The government recently proposed 
to increase pension indexation to half of the growth in real wages (instead of currently 
one third of the growth in real wages) and, in addition, to increase pension indexation 
for older retirees. As of 2025, working pensioners are entitled to a discount on social 
insurance,  and  the  government  recently  proposed  to  increase  their  earnings-related 
pension component. Further encouraging older workers to stay in employment would 
help decrease risks to fiscal sustainability. 

(19)  Persistent  structural  deficits  and  spending  pressures  underscore  the  need  for  better-
quality  public  finances.  Czechia  faces  low-to-medium  risks  associated  with  fiscal 
sustainability.  However,  given  medium-  to  long-term  spending  pressures,  such  as 
those  coming  from  the  ageing  population,  climate  change  and  the  challenges  to  the 
economic  growth  model,  further  reforms  are  needed  to  boost  competitiveness, 
productivity and sustainability. The government faces challenges in prioritising public 
finances and putting expenditure to its most productive use, making the tax and benefit 
systems  more  efficient,  especially  in  the  labour  market  and  social  security,  and 
improving  the  quality  of  services,  including  in  education  and  healthcare.  On  the 
expenditure  side,  Czechia  is  one  of  the  few  Member  States  with  no  established 
practice  of  performance-based  budgeting  or  spending  reviews.  The  government  has 
committed to prioritise efficient and transparent use of public funds, aligned with the 
state  budget  and  strategic  investments.  Nevertheless,  there  is  no  intention  yet  to 
continue with the recently piloted performance-based budgeting and spending reviews. 
Czechia  would  benefit  from  moving  away  from  the  traditional  input-based  budget 
structure  to  a  performance-oriented  system  that  integrates  performance  information 
into  budgetary  decision-making,  including  through  the  systematic  use  of  spending 
reviews  and  outcome-based  indicators.  This  would  also  require  a  robust  institutional 
and  legislative  framework  ensuring  that  the  findings  of  spending  reviews  and 
performance  information  are  systematically  reflected  in  budgetary  decision-making, 
expenditure prioritisation and the design of public policies. 

(20)  The systematic, meaningful and timely involvement of local and regional authorities, 
social partners, civil society and other relevant stakeholders remains essential in order 
to  ensure broad ownership  for the successful implementation  of the Union’s funding 
instruments, as well as in the context of the European Semester. 

(21)  The implementation of cohesion policy programmes, which encompasses support from 
the  European  Regional  Development  Fund  (ERDF),  the  Just  Transition  Fund  (JTF), 
the  European  Social  Fund  Plus  (ESF+)  and  the  Cohesion  Fund  (CF)  in  Czechia,  is 
above the average pace at EU level, both in terms of project selection and payments. It 
is important to keep current momentum, while maximising the impact of investments 

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on the ground. Czechia is already taking action under its cohesion policy programmes 
to boost competitiveness and growth. It is essential to ensure that the new investments 
identified  by  Czechia  in  its  mid-term  review  of  the  cohesion  policy  funds,  notably 
those linked to the five priorities identified in the Mid-Term Review Regulation (15), 
are deployed rapidly and effectively. 

(22)  Czechia  faces  several  challenges  related  to  public  administration,  decarbonisation, 
labour market, education, capital markets, innovation and business environment.  

(23)  Czechia’s  business  environment  is  hindered  by  the  public  administration’s  low 
capacity. In particular, the public administration struggles to attract, retain and develop 
talent. For example, salaries in the public administration have been declining both in 
real terms and compared to the private sector for almost a decade. For managerial, IT 
and expert positions in  Prague, the difference with the private sector is  around 46%. 
The  stability  of  managerial  roles  in  the  central  administration  is  also  very  low,  with 
over  40%  of  the  nominally  non-political  top-level  management  replaced  after  each 
change of government. Often, dismissals are classified as reorganisation, which limits 
legal protections. A legislative proposal to reform the civil services has been tabled in 
Parliament. As no impact assessment is available, its effects  are difficult  to assess at 
this  stage.  Limited  administrative  capacity  also  persists  in  disadvantaged  regions 
(Karlovarský, Ústecký and Moravskoslezský) which face structural challenges related 
to economic development and human capital, hindering regional competitiveness and 
growth.  The  capacity  of  public  administration  could  be  increased,  for  example, 
through better communication of work opportunities, better selection and development 
of  managers,  more  flexible  as  well  as  higher  salaries,  especially  for  managerial  and 
expert  roles,  increased  legal  protection  for  senior  civil  servants  at  the  central 
administration and reduced administrative burden.  

(24)  Czechia’s  fragmented  municipal  governance  and  outdated  municipal  tax  assignment 
rules  fail  to  incentivise  economic  development,  do  not  accurately  reflect  the  cost  of 
services provided by municipalities of different sizes, hamper territorial cohesion, and 
generate  large,  uninvested  savings.  Czechia  has  the  smallest  municipalities  amongst 
OECD countries. This also includes Prague, the capital city, which is responsible for 
more  than  25%  of  the  national  GDP  and  splintered  into  57  municipalities. 
Additionally, the legal framework for inter-municipal cooperation is underdeveloped, 
blocking  municipalities  from  delegating  their  responsibilities  in  areas  such  as  spatial 
planning  and  transport  to  municipal  associations.  Czechia's  municipalities  also  have 
the  highest  savings  relative  to  GDP  in  the  EU.  Besides  fragmentation,  these  high 
savings are the result of the tax assignment rules (rozpočtové určení daní). These rules 
allocate the large majority of revenue by the number of permanent residents. However, 
they  insufficiently  incentivise  economic  development  (especially  construction)  and 
inaccurately reflect the real cost of the services provided by regional centres. 

(25)  Spatial planning and permitting processes remain complex and slow, placing a major 
constraint on the business environment, competitiveness and raising costs of economic 
and commercial development. They also indirectly raise the costs of energy (due to the 
slower construction of energy infrastructure), make it harder for people to move closer 
to their work (due to less affordable housing) and hold back digital transition (due to 

15 

Regulation  (EU)  2025/1914  of  the  European  Parliament  and  of  the  Council  of  18 September 2025 
amending  Regulations  (EU)  2021/1058  and  (EU)  2021/1056  as  regards  specific  measures  to  address 
strategic challenges in the context of the mid-term review. 

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slow roll-out of key digital infrastructure). For example, Czechia has one of the lowest 
coverages in the EU of very high-capacity networks and fibre to the premises. Spatial 
planning  rules  are  particularly  burdensome  in  large  cities,  where  updating  an  urban 
plan  can  take  over  a  decade.  The  situation  could  be  improved  by,  for  example, 
reallocating  responsibilities  for  spatial  planning  between  the  state  and  municipalities 
and  differentiating  planning  requirements  for  small  and  large  settlements.  On 
construction permitting,  some progress  has been  made, particularly  with  the creation 
of  the  specialised  authority  for  public  infrastructure  and  on  digitalisation.  However, 
there  is  still  little  evidence  of  faster  permitting  approvals.  Further  improving 
digitalisation,  including  on  interoperability,  and  the  capacity  and  management  of 
construction offices could accelerate the process.  

(26)  Housing  affordability  is  low  and  declining.  Over  the  last  decade,  Czechia’s  house 
price  to  income  ratio  has  been  growing  at  the  third-highest  pace  in  the  EU. 
Affordability is particularly low in cities, where 11.2% of people pay more than 40% 
of their income on housing. For people earning less than 60% of the median income 
this rate is 43.4%. Social housing availability is one of the lowest in the EU, and over 
160 000  people  are  affected  by  homelessness  and  housing  exclusion.  The  current 
housing  taxation  framework  does  not  provide  the  right  incentives  to  address  the 
situation.  The  revenue  from  recurrent  property  taxation  is  very  low  at  0.4%  of  GDP 
(EU:  1.8%), and  short-term rentals  are treated more favourably than long-term  ones. 
Increasing  the  property  taxes  and  linking  them  to  market  values,  together  with 
removing the favourable tax treatment of short-term rentals, would incentivise putting 
vacant  and  short-term  rental  housing  on  the  long-term  rental  market  and  denser 
construction.  Demand  would  also  be  reduced  by  lowering  the  personal  income  tax 
deductibility of mortgage interest payments. On the supply side – beyond better spatial 
planning, construction permitting and municipal incentives – the housing stock could 
also be increased by more investment into housing construction and renovation by the 
public and non-profit sectors. 

(27)  Czech households have a higher savings rate than the EU average, but a large share of 
their financial assets remains held in cash and deposits. At the same time, their direct 
investment in listed shares and bonds remains limited, as does investment channelled 
through insurance products and pension funds, substantially below the EU average and 
despite  a  higher  share  invested  through  investment  funds  compared  to  the  past. 
Channelling  private  savings  through  the  capital  markets  could  unlock  valuable 
additional financing to firms and increase the currently very low share of listed shares 
and bonds as a source of business funding. 

(28)  The recently introduced long-term investment product has had a positive take-up, but 
its  design  may  need  to  be  amended  to  ensure  additionality  vis-à-vis  other  long-term 
savings instruments, such as 3rd pillar pension funds. The participation rate in 3rd pillar 
pension  funds should be supported,  encouraging  higher contributions particularly for 
younger and lower income employees. A larger allocation to equity investments by 3rd 
pillar pension funds would improve their modest return profile and their attractiveness. 
This  could  be  promoted  by  creating  conditions  for  more  diversified  long-term 
investment  strategies,  while  reviewing  regulatory  features  and  default  investment 
options that limit equity exposure, investment flexibility and suitable pay-out options, 
encouraging  a  strong  annuity  element.  A  public  pension  dashboard  comparing  fund 
returns and fees, alongside a pension tracking system showing accumulated public and 
private rights, would boost transparency, competition and awareness. 

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(29)  Access to non-bank finance is limited for innovative businesses, as the Czech private 
equity and venture capital ecosystem is fragmented and underdeveloped, with a large 
part of funding to innovative firms relying on foreign investors. Encouraging greater 
participation by institutional and retail investors, in listed and unlisted equity, venture 
capital  and  private  equity  would  help  broaden  the  pool  of  long-term  risk  capital 
available  to  firms.  In  this  context,  further  efforts  to  disincentivise  early  withdrawals 
from  domestic  institutional  investors,  such  as  insurers  and  pension  funds,  would 
improve their ability to invest more in asset classes with a longer investment horizon.  

(30)  Existing  efforts  to  provide  public  support  and  crowd  in  institutional  and  retail 
investors  into  private  equity  and  venture  capital  should  be  further  expanded  through 
greater use of financial instruments, including fund-of-funds structures and appropriate 
de-risking  mechanisms.  Such  instruments  can  help  mobilise  private  funding  towards 
innovative  and  growth-oriented  firms,  thereby  supporting  competitiveness  and  the 
decarbonisation  of  the  economy.  This  would  require  strengthening  the  relevant 
management  capacity  of  the  National  Development  Bank  to  design  and  deploy  such 
instruments effectively. 

(31)  Czechia has adopted several measures to improve its innovation ecosystem, but further 
action is required to tap into its research and innovation potential. The 2025 reform of 
the employee stock option plan improves the attractiveness of the scheme for start-ups, 
and  a  new  Start-up  Act  is  under  development,  aiming  to  enhance  the  regulatory 
framework  for  innovative  businesses.  This  is  necessary  as  administrative  barriers 
continue to weigh on Czech businesses, with 71% of them perceiving regulations as a 
barrier  to  investment,  and  as  innovation  performance  stays  below  the  EU  average. 
Furthermore, Czech businesses lag behind the EU average in the adoption of advanced 
digital tools, and the digital intensity of businesses remains largely stagnant, often due 
to  a  shortage  of  digital  skills  and  financial  constraints.  The  new  Research, 
Development  and  Innovation  Act  (in  force  from  2027)  aims  to  promote  knowledge 
transfer  and  allow  flexible  R&D  funding,  but  the  institutional  incentives  for 
commercialisation  of  research  and  the  links  between  academia  and  business  remain 
weak. The reform  of R&D tax deductions  aims to  make the scheme more attractive, 
but  further  steps  to  improve  the  predictability  in  the  implementation  of  the  scheme 
would be beneficial as only 30% of businesses active in research take benefit of it. The 
research potential is further limited by decreasing R&D spending (at 1.8% of GDP in 
2024)  and  its  low  efficiency,  hampered  by  a  high  degree  of  research  system 
fragmentation. 

(32)  Czechia’s  persistent  high  dependency  on  imported  fossil  fuels  leaves  the  economy 
vulnerable to price and supply shocks, posing risks to its economic security and long-
term competitiveness. The transport sector accounts for the largest and growing share 
of final energy consumption, coming predominantly from fossil fuel combustion. The 
uptake  of  zero-emission  vehicles  is  still  considerably  behind  the  EU  average.  The 
reforms  adopted  as  part  of  REPowerEU  should  be  complemented  with  further 
measures to boost zero-emission mobility. This could for example include maintaining 
exemption from highway vignette fees for zero-emission cars and vans and also setting 
out exemptions for zero-emission heavy-duty vehicles from tolling to help decarbonise 
the  large  Czech  freight  sector.  Such  decarbonisation  efforts  should  also  address  the 
low  availability  of  affordable  and  accessible  zero-emission  public  transport  options, 
which hinders mobility and access  to  essential services, in  particular for low-income 
households, by improving regional connectivity, making services more affordable for 
transport  schemes,  where 
vulnerable  households,  and  supporting  on-demand 

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to  decarbonisation  and 

appropriate.  The  industry’s  energy  consumption  remains  high,  although  declining  in 
recent  years,  reflecting  efficiency  improvements  and  structural  changes.  To  ensure  a 
cost-effective  path 
industrial  competitiveness,  further 
investment into energy efficiency and electrification is needed. The gradual shift of the 
Czech industry toward production of higher volume of green technologies is a positive 
development.  Fossil  fuels  remain  a  predominant  source  of  electricity  generation, 
accounting for around 40% of total output in 2025. As district heating remains broadly 
fossil-fuelled,  further  efforts  to  decarbonise  the  sector  and  provide  support  to 
renewable heating and cooling are also needed. In addition, environmental taxation is 
underused in Czechia. 

(33)  Czechia’s  share  of  renewables  in  the  electricity  mix  stagnated  at  16.6%,  the  second 
lowest  share  in  the  EU  in  2025.  Electricity  prices  remain  largely  set  by  expensive 
natural  gas,  which  retains  its  predominant  role  as  marginal  price-setting  technology. 
While  reforms  under  the  REPowerEU  contributed  to  a  streamlined  permitting 
procedure,  wind  energy  potential  remains  largely  untapped.  The  designation  of 
renewable acceleration areas, expected to take place by August 2026 as a part of the 
RRP,  will  enable  faster  development  of 
installations, 
contributing  to  more  affordable  energy  prices  and  lower  exposure  to  external  risks. 
The  absence  of  long-term  certainty  for  investors  into  renewables  continues  to  be  an 
important  structural  barrier  for  their  roll-out.  Launching  power  auctions  and 
developing long-term contracts at a larger scale would enable the growth of large-scale 
renewable  energy  projects  beyond  traditional  support  schemes  and  also  create 
opportunities for energy-intensive industries to decarbonise.  

large-scale  renewable 

(34)  The  limited  capacity  of  Czechia's  electricity  grids  and  the  need  to  upgrade  the 
networks continue to hamper the swift deployment of renewable energy sources. Grid 
investment is also still below the level needed to accommodate the increased needs for 
electrification  and  sustainable  mobility.  The  delays  in  roll-out  of  major  grid 
infrastructure  investments  remain,  in  particular,  due  to  the  bottlenecks  in  spatial 
planning  and  administrative  capacity.  Moreover,  challenges  in  the  grid  management 
persist,  such  as  grid  connection  queues  and  unused  capacity  reservations,  and  slow 
rollout of smart meters. Czechia has taken important legislative steps to enable more 
of  non-fossil  flexibility,  though  further  investments  in  this  sector  would  bring  more 
stability  to  the  market.  The  Electricity  Data  Centre  (EDC)  already  provides 
functionalities  for  energy  sharing,  but  the  final  phases  of  the  EDC  to  enable 
independent  aggregation  of  technical  and  market  flexibility  still  need  to  be 
implemented.  These  would  enable  the  transition  to  a  more  flexible  energy  sector, 
including  the  development  and  integration  of  new  technologies.  The  tariff  reform, 
including  the  introduction  of  a  dynamic  tariff  scheme,  is  also  an  important  missing 
element to fully unlock benefits of domestic flexibility and to ensure an effective grid 
management. 

(35)  Czechia  has  made  progress  in  improving  the  energy  efficiency  of  the  residential 
buildings stock. The renovation support programmes have delivered results, although 
the  improvements  have  largely  concentrated  on  family  houses,  while  progress  in  the 
renovation  of  apartment  buildings  and  low-income  dwellings  remain  slow.  The 
renovation of public buildings is a persistent challenge. In this underperforming sector, 
a roll-out of innovative financial instruments has potential to leverage private capital 
for energy savings investments.  

(36)  Weak  climate  and  water  resilience  is  an  increasingly  significant  challenge  for 
productivity of Czech industry, agriculture and energy sectors. Czechia suffers from a 

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weak  administrative  governance  and  capacity  for  climate  adaptation  and  water 
policies. Their implementation is hampered by the systemic lack of human resources 
across ministries and all governance levels, unclear division of responsibilities among 
them and lack of efficient coordination framework. Setting up a coordination system, 
defining  responsibilities  and  strengthen  the  institutional  capacity  would  ensure 
effective implementation of adaptation policies across sectors.  

(37)  Czechia’s  labour  market  boasts  high  employment  levels,  with  the  2025  employment 
rate  at  82.9%  (EU:  76.1%)  and  the  unemployment  rate  at  2.8%  (EU:  6.0%),  both 
among the best-performing in the EU. However, the job vacancy rate stands close to 
the EU average. Besides higher labour mobility, unfilled vacancies could be filled by 
increasing  certain  population  groups’  employment  levels.  These  include  parents  of 
young children, Roma and persons with disabilities. Additionally, an estimated 66% of 
economically  active  Ukrainian  refugees  were  employed  in  2024;  however,  half  of 
them reported working in roles that did not match their qualifications. This is linked, 
amongst  others,  to  complicated  recognition  of  foreign  qualifications  and  a  high 
number of regulated professions. The Roma employment rate was about 55% in 2024 
(compared to 82.3% in the general population), and almost half of young Roma aged 
16-29 are neither in employment nor education and training (against 8.6% nationally), 
undermining social inclusion.  

(38)  The tax and benefit system continues to dissuade parents, in particular young mothers, 
from going back to work. While the 2025 employment rate of women stood at 77.5% 
(EU:  71.3%),  the  gender  employment  gap  for  women  aged  25  to  34  was  32.8 
percentage  points  in  2025,  one  of  the  highest  in  the  EU.  The  gender  pay  gap  was 
18.5%  in  2024  (EU:  11.1%),  driven  by  long  parental  leaves,  among  other  issues. 
Taxation on earnings for second earners was above the EU average in 2025, and above 
the tax wedge for single people at the same wage level. The tax credit for non-working 
spouses and design of family benefits discourage parents, in particular mothers, from 
working. In terms of availability of childcare services, in 2025, only 7.9% of children 
under  the  age  of  three  were  in  childcare,  an  improvement  of  3.5  percentage  points 
compared  with  2023,  but  still  far  below  the  EU  average  of  40.5%.  This  has  been 
driven both by fewer children and increased capacity, but more capacity is still needed 
in some regions (as well as better modelling of demand). The capacity of community- 
and  home-based  long-term  care  services  also  remains  underdeveloped,  reducing  the 
employment  amongst  carers,  typically  women,  while  also  leading  to  broader 
challenges  in  the  organisation  of  care,  including  in  healthcare.  Public investment in 
residential  care  long-term  care  is 14% higher  in  Czechia  compared  to  the  EU 
while investments in home-based services are 20.5% lower than in the EU, underlining 
the need to find a more balanced public investment structure for long-term care in the 
context of  a rapidly ageing  population. The healthcare system  remains overly reliant 
on hospital-based services, with high bed capacity, low occupancy rates and avoidable 
admissions,  pointing  to  inefficiencies  and  insufficient  coordination  with  primary  and 
community care. 

(39)  The tax and benefit system continues to place a heavy burden on low-income earners, 
lowering  financial  incentives  to  work  due  to  high  non-deductible  contributions  and 
benefit reductions as earnings rise. Czechia has one of the highest labour tax wedges 
for single workers earning 50% of the average wage, discouraging formal employment 
and fuelling the grey economy and working poverty. Adjusting labour taxes could ease 
this  burden,  encouraging  more  people  into  standard  employment.  Additionally, 
Czechia has a high share of self-employed workers (13%, EU: 9%) who face far lower 

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taxation  than  traditional  employees.  The  current  system  allows  self-employed 
individuals to deduct 40-80% of income as business expenses or, for those earning less 
than CZK 2 million annually, to opt for a lump sum tax. This tax is significantly lower 
than the tax a conventional employee earning a similar income would pay, and high-
income self-employed  workers pay  only  a quarter of the tax an  equivalent  employee 
would pay.  A  recent reform to  raise flat-rate payments was reversed in  March 2026, 
maintaining  the  minimum  pension  assessment  base  at  35%  of  the  average  wage. 
Removing  exemptions  for  high-income  earners  could  improve  fairness  and  reduce 
labour market distortions.  

(40) 

In light of the crucial role of human capital in enhancing the Union’s competitiveness 
and  strategic  autonomy,  in  2026  the  Council  recommended  that  Member  States  take 
action  to  urgently  address  human  capital-related  structural  challenges  in  the  areas  of 
skills  and  education,  which  hamper  competitiveness.  The  2026  country-specific 
recommendations  addressed  to  Czechia  can  contribute  to  the  implementation  of  the 
Council Recommendation on human capital in the Union. 

(41)  Relatively  low  higher  education  participation  and  attainment  exacerbate  the  shortage 
of  skilled  workers,  especially  in  less  developed  regions.  Tertiary  educational 
attainment  among  25-34-year-olds  remains  among  the  lowest  in  the  EU  (36%,  EU: 
45% in 2025), well below the EU target of 45%. Total enrolment in tertiary education 
remains  low  despite  a  slight  increase  between  2020  and  2023,  and  dropout  rates 
remain persistently high, particularly in  information and  communications  technology 
(ICT),  agriculture  and  services.  The  lack  of  sufficient  financial  support  and  career 
guidance to students and mismatches between programme and student expectations are 
among  the  drivers  of  high  dropout  rates  at  Czech  higher  education  institutions. 
Affordable  housing  also  remains  among  key  challenges.  Insufficient  support  for 
students,  including  those  with  disabilities,  limits  their  access,  participation  and 
successful completion of tertiary education. 

(42)  Enrolment  in  STEM programmes  remains  slightly low compared to the  EU average, 
pointing  to  persistent  structural  challenges.  In  2023,  only  11.8  women  per  1 000 
people  aged  20-29  graduated  in  science,  technology,  engineering  and  mathematics 
(STEM) fields, below the EU average of 15. This trend contributes to skills shortages 
in  high-demand  sectors,  risks  constraining  innovation  and  research  capacity,  and 
reflects  broader  challenges  related  to  student  participation  and  retention,  including 
limited guidance to pursue STEM fields.  

(43)  Czechia  faces  constraints  in  secondary  education,  notably  an  insufficient  capacity  in 
general secondary schools and limited flexibility for students to move between general 
and  specialised  education,  which  restrict  students’  opportunities  to  successfully 
progress  to  tertiary  education.  Despite  growing  interest  for  general  education  tracks, 
supply has not kept up with demand. While a significant share of vocational education 
and  training  (VET)  students  are  eligible  to  apply  to  tertiary  education,  their  success 
rates  are  below  those  of  students  in  general  tracks,  which  contributes  to  persistently 
low tertiary educational attainment. These challenges are compounded by shortages of 
qualified  teachers,  particularly  in  high-demand  fields  such  as  STEM  and  in  certain 
regions, which risk affecting the quality of education. 

(44)  Educational  performance  in  Czechia  is  strongly  influenced  by  socio-economic 
background, with one of the largest gaps in performance between socio-economically 
advantaged and disadvantaged pupils in the EU. In mathematics, the gap was the fifth 
highest in the EU in PISA 2022. Early academic tracking, differences in school types 

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and the segregation of Roma children contribute to these results, alongside persistent 
regional  inequalities  in  access  to  education.  While  measures  have  been  initiated  to 
address these challenges, including a support programme for schools with a high share 
of  disadvantaged  pupils,  further  efforts  are  needed.  Further  improvements  could 
include  better  support  for  teachers  and  school  leaders  to  implement  the  revised 
curricula and to reduce administrative burden on smaller schools.  

HEREBY RECOMMENDS that Czechia take action in 2026 and 2027 to:  

1. 

2. 

3. 

4. 

5. 

Continue adhering to the maximum growth rates of net expenditure recommended by 
the  Council  on  21 January 2025,  while  making  use  of  the  flexibility  under  the 
national  escape  clause  for  higher  defence  expenditure.  Reinforce  defence  spending 
and readiness while ensuring spending efficiency and gradually adapting the budget 
to  sustain  structurally  higher  defence  spending.  Ensure  that  any  measures  taken  to 
mitigate the impact of the hike in energy prices are temporary, targeted at protecting 
vulnerable households or at addressing the needs of energy-intensive firms, preserve 
incentives for energy savings while ensuring that their fiscal cost is compatible with 
the  commitments  under  the  EU  fiscal  framework.  Improve  the  incentives  for  older 
workers  to  continue  working.  Improve  the  efficiency  of  public  spending  especially 
through the systematic use of spending reviews and outcome-based indicators. 

Ensure continuity of reforms and investments implemented under the Recovery and 
Resilience  Facility.  Sustain  implementation  momentum  under  cohesion  policy 
programmes  building,  where  appropriate,  on  the  reallocation  to  strategic  priorities 
and flexibilities in the mid-term review of the cohesion policy framework.  

Strengthen the capacity of the public administration, both in central government and 
disadvantaged regions, to attract and retain talent, and develop skills. Enhance public 
investment  and  administrative  efficiency  by  simplifying  and 
incentivising 
tax 
cooperation  among  municipal  administrations,  and  reforming  municipal 
assignment rules. Simplify spatial  planning and improve the  digitalisation, capacity 
and management of construction offices. Improve the supply of affordable and social 
housing by expanding the role of the public and non-profit sectors and encouraging 
more efficient use of existing housing through property and income tax reforms.  

Strengthen  capital  markets,  business  access  to  non-bank  finance  and  the  conditions 
for saving, investment and innovation by promoting household investments in capital 
markets, through improving the design  of the long-term  savings product  and of the 
3rd  pillar  pension  funds.  Encourage  institutional  investor  participation  in  listed  and 
unlisted  shares,  as  well  as  venture  capital  and  private  equity.  Increase  the  use  of 
financial  instruments,  including  by  strengthening  the  capacity  of  the  National 
Development  Bank  to  mobilise  private  funding.  Boost  innovation  and  enhance  the 
business environment by improving the regulatory framework for start-ups, reducing 
research  system  fragmentation  and  accelerating  technology  adoption,  including 
through technology transfer from academia and effective use of R&D tax benefits.  

Reduce  reliance  on  fossil  fuels,  notably  for  road  transport,  industry,  heating  and 
power generation. Provide further incentives for the roll-out of large-scale renewable 
energy capacity, in particular wind. Modernise and expand electricity grids, enhance 
fossil-free  flexibility,  ensure  the  implementation  of  all  functionalities  of  the 
Electricity  Data  Centre,  and  enable  the  electrification  of  transport  and  industrial 
processes. Enact measures to reduce the energy consumption and carbon intensity of 
the  buildings  sector,  especially  of  the  public  buildings  stock.  Strengthen  climate 
resilience governance and coordination across all levels of government.  

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6. 

Increase the labour market participation of underrepresented groups and simplify the 
recognition of foreign qualifications. Lower the disincentives for parents to return to 
work and improve the supply of childcare and long-term care services to encourage 
more  women  to  enter  the  labour  market.  Reduce  the  tax  burden  on  low-income 
workers and exemptions for high-income self-employed. Boost skills and educational 
outcomes  by  increasing  participation,  reducing  dropout  rates,  and  providing  more 
student support for tertiary education, and providing more support for disadvantaged 
schools  and  pupils  in  primary  and  secondary  education.  Increase  the  number  of 
students and graduates in STEM fields, especially women. Expand access to general 
secondary  education,  enable  students  to  transition  between  general  and  vocational 
education, and address teacher shortages. 

Done at Brussels, 

For the Council 
The President 

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