Czech Republic

   

Economic Policies

#28
Key Findings
Despite increasingly positive signs, the Czech Republic falls into the lower-middle ranks (rank 28) in terms of economic policies. Its score on this measure has fallen since last year, but still represents a 0.1 point gain relative to 2014.

Rising growth rates have marked the end of a period of stagnation. Unemployment rates are moderate and declining steadily. Parents with young children, low-skilled workers, disabled people and Roma face significant labor-market disadvantages.

The VAT rate has become more progressive. Tax revenues generally enable sustainable budgets, but are not sufficient to finance needed public investments. Deficits have been controlled, with public debt levels low by EU standards. Economic growth has enabled some expansion of domestic demand.

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

#23

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
In the period under review, the Czech economy emerged from stagnation with GDP increases by 2% in 2014 and by about 4% in 2015. Investment in support of economic growth has increased significantly. European structural funds have been the major contributor to public investment and, to a significantly lesser degree, the state budget. The central bank has intervened in foreign exchange markets to devalue the currency. This has resulted in an increase in import prices, but makes little difference to exports which compete more on quality than on price. Overall, these strategies represent a basis for growth when demand is rising in the rest of the EU – the main market for Czech exports – but not a basis for raising the level of the Czech economy to that of more advanced countries in Western Europe.

Labor Markets

#25

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
Since 2014, the Czech Republic has experienced a moderate but steady decline in unemployment. According to national statistics, the unemployment rate stood at 6.5% in 2015 and is expected to decline to 5.9% in 2016 and 5.5% in 2017. While long-term unemployment has declined, groups such as parents with young children, low-skilled workers, persons with disabilities and Roma are still strongly disadvantaged on the labor market. Operationally poor public employment services hinders the transition from unemployment to employment, and the shortage of affordable high-quality child-care services together with the limited use of flexible working hours makes it difficult for mothers with small children to remain in the labor market.

Taxes

#23

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
6
The Czech tax system broadly ensures horizontal equity. One exception is the blanket tax allowance given to the self-employed to cover notional expenditure with no checks on what 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. A degree of vertical equity is achieved by a tax allowance on personal income taxes and some differences in VAT rates. The Sobotka government has increased the progressiveness of VAT with the introduction of a third rate of 10%, on top of the existing rates of 21% and 15%. The low rate applies only to books and medicines. The government has also reintroduced a tax allowance for working pensioners and introduced tax benefits for families with more than one child and a discount on second and subsequent child living in the same household. Parents can claim a tax deduction in the amount of the documented payment for a child in kindergarten or other preschool facility. The tax system raises the revenue required to maintain a budget deficit of under 3% of GDP, but is not sufficient to finance the level of public investment needed for reaching adequate levels of sustainable economic growth.

Budgets

#24

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
6
Improved economic performance has enabled the Czech government to retain its objective of reducing the state budget deficit and thereby limit the growth in public debt while allowing some expansion of domestic demand. Spending relative to GDP is still below the EU average, and government expenditures and revenue alike grew more slowly than GDP in 2015. The level of state debt remains below 40% of GDP, suggesting considerable leeway both in tems of euro zone rules – these are not obligatory for the Czech Republic as a non-euro zone member – and in terms of safe sustainability of debt.

Research and Innovation

#23

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
5
Overall, R&D expenditures are growing and approaching the EU average in terms of spending as a share of GDP. European structural funds are the main driver of this growth. The majority of the public R&D funding is allocated to public universities and research institutions and focuses mostly on natural, technical and medical sciences. There is also indirect support for R&D in private sector in form of tax credits. The newest available data (2013) show that the volume of tax credits amounted to CZK 2.3 billion (€85 million), and most of these are used by large corporations (70%). The government support for start-up companies remains weak. The main means of transferring scientific discoveries into products and enhanced productivity is inward investment by multinational companies, bringing innovations to the Czech Republic that were developed elsewhere, or in-house innovation focusing on product improvement.

Citations:
Analýza stavu výzkumu, vývoje a inovací v České republice a jejich srovnání se zahraničím v roce 2014 [Analysis of the state of Reserach, Development and Innovation in the Czech Republic and their international comparison in 2014]. Published on 31.9.2015 by the Office of the Government of The Czech Republic, ISBN: 978-80-7440-140-4 Available online http://vyzkum.cz/FrontClanek.aspx?idsekce=759405 (last visited 6.11.2015).

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 shied away from formulating an explicit deadline for entering the European Monetary Union.
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