The gap between budget revenues and expenditures is widening in the Czech Republic, and a shift towards sustainability is not in sight. The imbalance in public finances has reached a level that can only be eliminated by increasing tax revenues in conjunction with changing laws that deal with so-called mandatory expenditures or define the scope of state activities. This comes on the heels of the Public Finance Long-Term Sustainability Report, which was released by the National Budget Council on Thursday.




Prague

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If tax and spending policies do not change significantly, according to the National Budget Board, we can expect an effect on the debt brake in terms of units of years (illustration image) | Photo: Rene Volvik | Source: iROZHLAS.cz

According to the National Budget Board, the major imbalance in Czech public finances arose from a combination of fiscally unwise steps taken especially in the past two years and the long-term failure to address the future effects of demographic development. Compared to last year, the development of indebtedness has improved only slightly.

The main results of the board do not change. If tax and spending policies do not change significantly, we can expect an effect on debt brake in the order of units of years. The Council warns that since the 1930s, due to the aging of the population, the increase in public debt will be so severe that it will be difficult to finance it due to the level of debt servicing.


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According to the council, the revenues of the general budget have declined in recent years, while expenditures have increased. The structural deficit, a key indicator for assessing the state of Czech public finances from a medium-term perspective, is currently hovering around three percent of GDP.

“The structural deficit, which arises regardless of whether the economy is doing well or not, currently amounts to approximately 220 billion kroner. Unfortunately, this deep imbalance will not be resolved in the medium term only by economic growth, but by It is also necessary to take active steps by the government that will lead to the adjustment of the income and expenditure sides of the budget.” Mujmer Humble.

According to him, these steps will not be popular, but they are very decisive from the point of view of the future of the Czech Republic. “Given its size and the range of public services it provides, the state cannot be funded from current revenues,” he added.

Imbalance after tax cuts

Public finances were already entering 2022 with a huge imbalance. “The imbalance in the medium term dominates the legacy of tax cuts, specifically the adoption of the so-called tax package in 2020, which eliminated, among other things, taxes on super-gross wages, as a result of which public budgets became The loss of 120 billion kroner annually is on the revenue side.”


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He added, “This step not only came at the wrong time, but rather counterproductively on the macroeconomic front, and we are still dealing with its repercussions today, as it contributed significantly to increasing inflationary pressures.”

However, according to the council, the government documents published so far do not even hint at actions that indicate an attempt to put Czech public finances on a sustainable path.

“The Ministry of Finance’s draft medium-term forecast envisages a stable structural deficit at the level of 2.9 percent of GDP for 2024 and 2025, and it can be concluded that there are no systemic reforms on the way, while there are fewer and less time left for them,” Pavel noted. during the election period.

The National Budget Council is an independent professional body whose main task is to assess whether the state and other public institutions comply with the rules of financial responsibility established by law. The Council consists of three members and was filled in January 2018. The Speaker of the Council is proposed by the Government, one Council member by the Senate and the other by the Czech National Bank.

CTK

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