Czech National Budget Council sees better-than-expected budget balance

The National Budget Council sees a better-than-expected balance in the state budget in 2018, according to a report. It noted that due to a positive output gap, there was a cyclical effect of CZK20bn to tax revenue, which would disappear were the economy move back to its potential. We remind that the state budget deficit target is at CZK50bn (0.9% of GDP) in 2018, but the finance ministry expects a much better result. However, the finance ministry has changed its language recently, no longer directly referring to a balanced budget as before. At any rate, the Council is optimistic that budget performance will remain sound, despite a slowing economy, affected by lower external demand and a very tight labor market. The latter is the primary reason why fiscal performance has remained so strong, as higher collection of social security contributions has boosted tax revenue considerably.

Regarding 2019, the Council still sees a positive output gap (though a closing one), which is why it considers the fiscal expansion planned in the 2019 budget bill as not impacting the economy. The Council still warned against a labor market that has remained too tight, as it increasingly poses constraints over productivity and output. Interestingly, the Council favored the considerable increase of capital expenditure planned in the 2019 budget, even though there has been criticism that a lot of the projects are not ready yet and that there isn’t clear oversight over the feasibility of infrastructure projects planned next year. It noted that skilled labor shortages are extremely severe in construction, which could lead to delays in carrying out these expenses. Nevertheless, this goes in line with the Council’s argument that budget performance should remain solid in 2019, as delayed expenses will only bring about a better balance.

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