Czech Republic

   

Economic Policies

#21
Key Findings
Despite numerous positive signs, the Czech Republic falls into the middle ranks (rank 21) in terms of economic policies. Its score on this measure represents a gain of 0.7 points relative to 2014.

Growth rates declined in 2016 due to slow draw-down of EU funds, but remained healthy. A fiscal surplus was achieved thanks to unexpectedly high revenues. The economy still relies on EU co-financed investment, and on multinational companies seeking low wages. This will make it difficult to bring income levels to match those in wealthier EU countries.

Unemployment rates are moderate and declining steadily, with rising employment rates. Parents with young children, low-skilled workers, disabled people and Roma face significant labor-market disadvantages.

Direct taxes, including the flat personal income tax, are low. Public debt is low by EU standards. An effort to pass a constitutional fiscal-responsibility law failed. R&D spending is nearing the EU average, but is driven largely by EU structural funds. The government has declined to set an explicit deadline for entering the European Monetary Union.

Economy

#21

How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?

10
 9

Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 8
 7
 6


Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 5
 4
 3


Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
 2
 1

Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
Economic Policy
6
The Czech economy has experienced a post-crisis rebound since 2014. However, while real GDP grew by 4.3% in 2015, GDP growth reached only about 2.5% in 2016. The slowing of growth was largely caused by the weak drawing of EU funds at the start of the new programming period. As it stands, the performance of the Czech economy still strongly depends on EU co-financed investment activity, and the investment and exports of multinational companies, especially in the automobile sector. Multinationals continue to prefer to locate lower value-added activities in the Czech Republic, leading to productivity and wage levels around one-third of those in Western Europe. This pattern of growth will not bring income levels up to those in more wealthy EU member states and it leaves the Czech Republic vulnerable to downturns. While the Sobotka government has expanded R&D spending and started education reforms, it could have done more to promote diversification and higher added-value sectors.

Citations:
European Commission (2017): Country report Czech Republic 2017. SWD(2017) 69 final, Brussels. (https://ec.europa.eu/info/sites/info/files/2017-european-semester-country-report-czech-en_1.pdf).

OECD (2016): Economic Survey Czech Republic. Paris.

Labor Markets

#23

How effectively does labor market policy address unemployment?

10
 9

Successful strategies ensure unemployment is not a serious threat.
 8
 7
 6


Labor market policies have been more or less successful.
 5
 4
 3


Strategies against unemployment have shown little or no significant success.
 2
 1

Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Labor Market Policy
6
Labor market outcomes have improved considerably in recent years. While the employment rate has risen steadily over the past five years to reach 76.8% in the third quarter of 2016, the unemployment rate has fallen considerably since 2014. In Eurostat terms, it was the lowest in the EU in 2016. Some sectors, especially the manufacturing industry, are already experiencing a shortage of skilled labor.

While the decline in unemployment has gone hand in hand with a decrease in long-term unemployment, groups such as parents with small children, low-skilled workers, people with disabilities and Roma are still strongly disadvantaged on the labor market. Parents with small children and single parents are hampered in labor force participation by a shortage of affordable child-care services together with the limited use of flexible working hours. Low-skilled employment has suffered from tax disincentives, a weak capacity of public employment services and low regional mobility. Despite the growing risk of labor market shortages, the Sobotka government has done little to address these issues.

Citations:
European Commission (2017): Country report Czech Republic 2017. SWD(2017) 69 final, Brussels, 6-7, 18-20. (https://ec.europa.eu/info/sites/info/files/2017-european-semester-country-repor t-czech-en_1.pdf)

Taxes

#16

To what extent does taxation policy realize goals of equity, competitiveness and the generation of sufficient public revenues?

10
 9

Taxation policy fully achieves the objectives.
 8
 7
 6


Taxation policy largely achieves the objectives.
 5
 4
 3


Taxation policy partially achieves the objectives.
 2
 1

Taxation policy does not achieve the objectives at all.
Tax Policy
7
The Czech tax-to-GDP ratio is low from a comparative perspective. While revenues have been sufficient to generate a small fiscal surplus in 2016, it will be difficult to ensure sustained financial support for areas such as education, R&D, environmental protection after 2020, when EU structural funding will finish. The Czech tax system broadly ensures horizontal equity. One exception is the blanket tax allowance given to the self-employed to cover operating expenditure with no checks on what it is actually spent. This leads to a lower tax rate on the self-employed rather than employed and an incentive to convert employment contracts into contracts for individual services. While revenues from direct taxes are low and there is a flat personal income tax, a degree of vertical equity is achieved by a tax allowance on personal income taxes, a solidarity surcharge on higher incomes and some differences in VAT rates. Tax rates for enterprises are modest, but tax compliance costs relatively high. In 2016, changes in tax rates were confined to higher rates for lotteries and similar gambling activities as the first step towards a stronger regulation and taxation of gambling. Partly due to measures adopted in 2015 to fight VAT fraud, tax collection substantially increased in 2016.

Citations:
European Commission (2017): Country report Czech Republic 2017. SWD(2017) 69 final, Brussels, 14-15. (https://ec.europa.eu/info/sites/info/files/2017-european-semester-country-report-czech-en_1.pdf)

Budgets

#15

To what extent does budgetary policy realize the goal of fiscal sustainability?

10
 9

Budgetary policy is fiscally sustainable.
 8
 7
 6


Budgetary policy achieves most standards of fiscal sustainability.
 5
 4
 3


Budgetary policy achieves some standards of fiscal sustainability.
 2
 1

Budgetary policy is fiscally unsustainable.
Budgetary Policy
7
Improved economic performance has enabled the Czech government to retain its objective of reducing the central government budget deficit and thereby limit the growth in public debt while allowing some expansion of domestic demand. For the first time since 1994, and despite original plans for a deficit, the Czech Republic ran a fiscal surplus thanks to higher than planned revenues and EU funding, and lower government spending, especially on infrastructure projects. The government’s attempt to push through parliament a constitutional law on fiscal responsibility was unsuccessful. The law, which envisaged the introduction of debt limits for all tiers of government, the adoption of a central government expenditure ceiling and the creation of an independent National Budgetary Council, did not gain enough support even among the deputies from the governing coalition. In 2016, public debt stood at about 40% of GDP, thus being lower than in most EU countries and clearly below the debt limits of 55% and 60% defined in the fiscal responsibility law.

Research and Innovation

#21

To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?

10
 9

Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
 8
 7
 6


Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
 5
 4
 3


Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
 2
 1

Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
R&I Policy
6
From 2010 to 2015, R&D expenditure grew by two thirds, almost reaching the average EU level (relative to GDP). European structural funds have been the main drivers of growth. Public R&D spending has suffered from a strong bias towards capital rather than current expenditure, meaning construction of research facilities rather than conduct of research activities. Private R&D spending has also risen, but is still dominated by foreign-owned companies, particularly in the automotive industry, which are still poorly integrated in the national innovation system. More recently, R&D spending in ICT services and programming has been growing. In February 2016, the government approved a new medium-term strategy for research, development and innovation, which puts more emphasis on support for applied research and the strengthening of public-private linkages.

Citations:
Srholec, M., C. Benedetti Fasil (2017): RIO Country Report: Czech Republic 2016. Luxembourg: European Union (https://rio.jrc.ec.europa.eu/en/country-analysis/Czech%20Republic/country-report).

Global Financial System

#30

To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?

10
 9

The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
 8
 7
 6


The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
 5
 4
 3


The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
 2
 1

The government does not contribute to improving the regulation and supervision of financial markets.
Stabilizing Global Financial Markets
5
The Czech Republic is not a major player in international financial affairs. Its main banks are foreign owned and their independent international involvement is very limited. Nor did it participate in reforming the international financial system, preferring to see itself as a follower of initiatives developed elsewhere. While the Sobotka government made a turn from the eurosceptic policy of previous governments toward a more mainstream view of EU economic policy, neither the Ministry of Finance nor the Czech National Bank have come out in favor of an accession to the EU Banking Union. Both fear that such an accession would restrict national competencies and lead foreign-owned banks to take deposits from their Czech branches to cover losses elsewhere. The Sobotka government has also avoided formulating an explicit deadline for entering the European Monetary Union.
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