Czechia

   

Economic Policies

#21
Key Findings
With a strong but slowing economy, Czechia falls into the middle ranks (rank 21) in terms of economic policies. Its score on this measure represents a gain of 0.8 points relative to 2014.

Previously high growth rates have gradually slowed, but remain strong. Growth has increasingly been supported by domestic demand, in part due to rising pay levels. Wages have risen faster than labor productivity for four years in a row. Stagnating motor-vehicle exports, previously the main driver of growth, contributed to slowing export growth.

Unemployment rates have been the lowest in the EU for some time, and employment rates high. The difficulty in filling high-skilled jobs is a barrier to investment. The most substantial minimum-wage increase since 1991 took place in 2019, but levels remain low relative to the EU average.

Direct taxes, including the flat personal income tax, are low. A major income-tax reform passed in 2018 has been delayed until 2021 due to revenue-reduction fears. Public debt is very moderate by EU standards, with recent fiscal surpluses helping to push it further downward. The government has declined to introduce the euro, and has not sought to join the EU banking union.

Economy

#24

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 economic policies of successive Czech governments over the past 20 years have focused on achieving broad macroeconomic stability and attracting inward investment by multinational manufacturing companies drawn by wage levels about half the level of those in richer Western European neighbors. This strategy has ensured growth in most years; however, these growth rates have gradually slowed, in line with the trend in the euro area, the destination for a significant share of Czech exports. After strong GDP growth in 2017 (4.6%), growth slowed to 2.9% in 2018, with a forecast of 2.5% for 2019. Stagnating motor-vehicle exports, previously the main driver of growth, contributed in large part to the slower export growth. Thanks to rising pay levels, partly due to the pressure of low unemployment rates, growth has increasingly been supported by domestic demand. Wages were expected to rise faster than labor productivity in 2019 for the fourth year in a row. One serious long-term economic problem remains the character of the country’s integration into global value chains. According to a study by Deloitte, the share of domestic value-added in total exports is an average of 61%, one of the lowest such shares worldwide, reflecting an economy based on the assembly of goods from imported parts and materials. More than 60% of Czech exports come from foreign companies. Compared to the preceding Sobotka government, the Babiš government has done less to drive advancement of the Czech economy by strengthening R&I.

Citations:
Deloitte (2019): Made in World. Analýza českého zahraničního obchodu a pozice v globálních hodnotových řetězcích. Prague.

Labor Markets

#17

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
7
The labor market situation in Czechia is stable. Employment rates are high, and the unemployment rate has been the EU’s lowest for some time. However, the government has done little to address the substantial differences in unemployment rates both with regard to regions and worker skill levels, or the growing labor shortages reported across the economy. The “lack of staff with the right skills” is identified as a barrier to investment by 95% of firms, the highest such figure for any EU member state. This in part reflects weaknesses in the education system, and in part the pay levels for highly skilled workers, which remain unattractive by international standards. Filling low-skilled jobs is less of a problem, thanks to foreign workers. In 2004, such individuals accounted for less than 4% of total employment; by mid-2019, this figure had grown to 13.2%. The tight labor market, the relatively strong economic performance, and government commitments to low-paid and public sector employees are all factors driving wage increases in the private and public sector. The most substantial minimum-wage increase since 1991 took place in January 2019, to CZK 13,500 (€528, about 3.2% of the average wage); however, this is still low relative to the EU average. Another important factor driving wage increases has been the increasingly aggressive bargaining approach pursued by trade unions, exemplified by the “end to cheap labor” initiative led by the Czech-Moravian Confederation of Trade Unions. Since 2015, representatives of trade unionists from across the country have held autumn meetings to support collective-bargaining wage demands.

Citations:
European Investment Bank (2018), EIB Investment Report 2018/2019: Retooling Europe’s economy. Brussels (http://www.eib.org/attachments/efs/economic_investment_report_2018_en.pdf).

Taxes

#8

How effective is a country’s tax policy in realizing goals of revenue generation, equity, growth promotion and ecological sustainability?

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
Tax policy ensures the availability of adequate financial resources for spending commitments, but little action is being taken on measures relating to equity, competitiveness or environmental sustainability. The tax burden in Czechia – that is, the ratio of revenues to GDP – was 34.9% in 2017, which was above the OECD average (34.2%), but below the EU average. Labor taxation for employees remains higher than the EU average due to higher social security contributions, a subject of frequent criticism by the business sector. However, this is evidently not a barrier to employment. The largest share of government revenues in Czechia derives from the value-added tax (VAT), with a base rate of 21% and two reduced rates of 15% and 10%, providing an element of progressivity. In 2018 and 2019, the state managed to recover taxes more effectively than in the previous period; as a consequence, total state revenues from taxes (excluding social security contributions) increased by 7% in 2018. The introduction of electronic sales records, despite opposition from many businesses, has contributed to this. A flat income-tax rate still nominally applies, albeit with an income threshold that ensures some degree of progressivity. The Babiš government proposed a major reform of the income tax in 2019, with the aim of enshrining progressivity, but this was postponed until 2021. The introduction of a higher rate on high incomes was also not enforced. Businesses can apply tax deductions to research and development, but have not yet fully exploited this option, due to the ambiguous interpretation of the law by the tax authorities and the complex administrative process. Promised changes to the tax code to support a new innovation strategy have yet to be implemented. The Czech cabinet has promised the EU Commission that it would work to reduce greenhouse-gas emissions, and in September 2019 started to prepare a tax on the use of coal and gas, but no legal regulation on this issue had been adopted as of the end of the review period. According to the Ministry of the Environment, the introduction of a carbon tax will be left up to a future government.

Citations:
European Commission (2020): Country Report Czechia 2020. SWD(2020) 50s final. Brussels, 17-18 (https://ec.europa.eu/info/sites/info/files/2020-european-semester-country-report-czechia-en.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 general government budget deficit, and thereby limit the growth in public debt, while also allowing some expansion of domestic demand. While the central government has posted small deficits, the general government budget has shown a surplus since 2016. Public debt fell from 34.7% of GDP in 2017 to 32.7% in 2018, and was expected to decline further to 31.3% in 2019. Despite the slowing economic growth, the government met its fiscal targets in 2019. Lower-than-budgeted investments and better-than-expected EU fund flows helped make up for a slight tax shortfall. In order to limit the central-government budget deficit in 2020, the government has postponed planned tax cuts. The 2020 budget was adopted only with the help of President Zeman, who convinced the Communists to support it.

After years of controversy, the government won approval for the Act on Fiscal Responsibility in January 2017. This act set debt limits for all tiers of government, introduced a central-government expenditure ceiling and created an independent Czech Fiscal Council (Národní Rozpočtová Rada, ÚNRR). This latter body has since published annual reports on the long-term sustainability of Czech public finances, as well as quarterly assessments of the country’s fiscal developments. In 2019, it criticized the government for its costly pension reform, for one-time changes in VAT payments and for basing the 2020 budgets on tax reforms that had not yet been adopted. The council has also highlighted the fiscal risks associated with the aging of the population. Responding to the draft 2019 and 2020 budgets, the council criticized the small envisaged central-government deficits for being pro-cyclical, and called for policies that would provide more fiscal flexibility in hard times. In April 2019, Czechia eventually acceded to the European Fiscal Compact, being the last EU member to do so.

Research, Innovation and Infrastructure

#29

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
The Babiš government has continued the previous government’s verbal commitment to aim for the EU target of an R&D spending level equivalent to 2.5% of GDP. However, actual spending remains below 2% of GDP, and even this has always been dependent on EU support, which can be expected to decline. Five foreign-owned companies and the automotive sector (which includes vehicle production businesses) accounted for 50% of total research in the business sector. Foreign and domestic businesses alike benefit from indirect subsidization, as 100% of R&D expenditure is supposed to be exempt from taxation. However, many smaller enterprises complain that this exemption has not been honored in practice. Various reports have highlighted R&D weaknesses, suggesting a low rate of effectiveness for much of what has been spent. Problems include the perception that the government lacks a strategy in this area; the failure to attract and retain young, qualified researchers, who take advantage of the EU’s free movement of people to find better-paid work in other countries; and the low employment level among women (who accounted for just 23% of researchers in 2017), which suggests that this population’s potential is not being fully utilized, and which may be a negative consequence of the lack of services supporting the work-life balance. Research groups often exhibit little change, with the same people staying together throughout their careers, and thus failing to benefit from experience acquired elsewhere. New research centers have frequently failed to make significant international contacts, and are often ignored by (largely foreign-owned) manufacturing companies that rely on research centers in their home countries. In 2019, the government adopted the “Innovation Strategy of Czechia 2019 – 2030. The Country for the Future.” Despite broad-based participation in this strategy’s formulation, only a small number of Czech-owned companies were consulted, reflecting the absence of larger Czech companies with a record of innovation. The document was largely composed of well-meaning generalizations.

Citations:
Council for Research, Development and Innovation (2019): Innovation Strategy of the Czech Republic 2019-2030. Prague (https://www.vyzkum.cz/FrontAktualita.aspx?aktualita=867990).

Global Financial System

#25

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 System
5
Czechia is not a significant player in international financial affairs. Its main banks are foreign-owned, and their independent international involvement is limited. The country has participated in some attempts to improve the regulation and supervision of financial markets, but has not shown much initiative. It has declined to introduce the euro, and has not sought to join the EU banking union.
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