Last year, the Czech Republic was the fastest growing EU country in terms of debt, and while Italy and Greece take the crown for the most debt overall, there are fears that Czechia could soon be facing trouble over its public finances.
Last year’s budget deficit surpassed 2020’s record high, the Supreme Audit Office (NKÚ) states in its opinion published on Monday on the draft of the Czech Republic’s final state of accounts for 2021.
NKÚ also pointed out that Czechia ranked among the countries with the lowest economic growth in the EU last year. On the other hand, the report positively evaluated the country’s low unemployment rate.
The ratio of Czech public debt to GDP increased by 4.2 percentage points year-over-year in 2021, the highest among all EU countries.
“While 20 EU countries were able to reduce their debt to GDP year-over-year in 2021, ours increased by more than four percentage points,” said the president of NKÚ, Miloslav Kala.
According to Kala, the high share of mandatory and quasi-mandatory state expenditures prevented a better result. Expenditures established by law and necessary for running the state absorbed almost 94 percent of state budget revenues in 2021. Thus, the government had only approximately 95 billion korunas left to respond to current economic and social problems or to kickstart the economy with investments. According to NKÚ, if steps are not taken to achieve savings on the expenditure side of the state budget, it will be necessary to strengthen the state’s income, likely through taxes.
The state budget deficit reached almost 420 billion korunas (€17 billion) in 2021.
“Thus, it surpassed the worst result from 2020 by more than 52 billion korunas (€2.1 billion). And this even though the economic restrictions related to the Covid-19 pandemic last year did not reach the same level as in 2020,” NKÚ pointed out. According to the amendment approved by the government, this year’s budget should end with a deficit of 330 billion korunas (€13.4 billion). The Czech House of Representatives will discuss the budget amendment in September.
Economic growth is slow while the unemployment remains low
The auditors also pointed out that the Czech Republic ranked among the countries with the lowest economic growth in the European Union last year. While the GDP of the Czech Republic grew by 3.3 percent year-over-year, the EU average was 2.1 percentage points higher. Only Slovakia and Germany recorded slower growth than Czechia last year.
A significantly worse year-over-year foreign trade balance prevented a higher year-over-year GDP growth. In contrast to the high surpluses in previous years, the balance ended in a deficit of 1.5 billion korunas (€61 million) in 2021. The reason was higher prices of imported goods, especially oil and natural gas, and lower foreign demand.
“On the other hand, even in 2021, the Czech Republic maintained the lowest unemployment rate within the EU, at 2.8 percent,” reports NKÚ. The share of unemployed people in the Czech Republic was 4.2 percentage points lower than the average unemployment rate in the EU.
The auditors also said that the finances of municipalities and regions ended last year with a surplus of 41.3 billion korunas (€1.68 billion), 27.3 billion korunas (€1.1 billion) more versus 2020. At the end of last year, local governments had 367.5 billion korunas (€15 billion) in their accounts, an increase of 47.4 billion korunas (€1.9 billion) year-over-year.
“Local budgets need a certain reserve. However, it is necessary to ask whether the current reserves are not already excessive, moreover devalued by high inflation,” said Kala.