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Momentum on fiscal reform needs to be boosted
The fiscal reform programme that began last year marks a positive commitment to consolidation. The programme has already resulted in economies in spending and revenue-raising measures. And, a proposed new budgeting framework has the capacity to harden spending constraints and force a longer-term outlook through its legally binding three-year spending ceilings. Implementation of the fiscal programme should meet its objectives while avoiding any dilution of the expenditure ceilings. It should, furthermore, stick to the agreement that windfall revenues will only be used for deficit reduction. While the new budgeting framework is set to be introduced as planned, pension reform has gone back to the drawing board, and concrete proposals for healthcare-system reform have yet to emerge. In addition, there has been a degree of compromise on some measures to increase VAT revenues. Though implementing fiscal reforms is difficult given the narrow majority of the coalition government, every effort should be made to push through and communicate to the public reforms of both expenditure programmes and budgetary procedures.
Trends in government deficit, expenditure and revenue
Per cent of GDP
(1) The general government deficit is from the cash-based GFS account adjusted by the Ministry of Finance. The State Budget deficit is from the cash-based GFS account voted by Parliament.
Source: Czech Statistical Office
Deficit ambitions in the Ministry of Finance's Budget Outlooks
for 2003-2006 and 2005-2007(1)
% GDP, adjusted-cash account
(1) The Budget Outlook is a government-approved document that complements detailed budget proposals put before Parliament. The second year of each scenario shown is the estimated deficit outcome (the Budget Outlooks are written in early autumn). The deficits for the following three years are based on calculations of economic conditions and the assumed implementation of active measures indicated in the Budget Outlook.
Source: Ministry of Finance.
The intended fundamental pension and health reforms need to contribute significantly to fiscal consolidation
Earlier pension reform is starting to pay off and employment rates among older workers have been rising, in contrast to most other OECD countries. The recent relaxation of work restrictions on those getting pensions is a good move that should further boost rates. Furthermore, the possibility for the unemployed to get two years of early retirement pension has been removed and rules that allow invalidity pensions to be converted to unconditional early retirement pensions will be phased out. The Government has asked an expert commission to provide the inputs for a discussion among all parliamentary parties about the main direction of pension reform. Although the effort to seek political consensus is commendable, further delays should be avoided. Moreover, fundamental public-pension reform, whether only through parametric change to the PAYG system or through the introduction of a new pension, has to generate savings for the budget and should be announced as soon as possible. In health, even though regionalisation is to some extent hardening budget constraints and forcing economies in the hospital sector, a major health reform is still needed. The reform should include fewer universal services and more private provision as well as greater use of fees, preventive measures and outcome-based resource allocation.
... and procedures in extra-budgetary funds and sub-national governments need attention
Though the fiscal reform programme covers important bases, some issues are not tackled. Despite substantial recent progress to increase transparency, some extra-budgetary funds continue to obscure the Government’s true fiscal position and all of them should be more fully integrated in mainstream government budgeting procedures. Increases in transparency are needed elsewhere too. In particular, clearer distinction in communication on the different government accounts is needed, particularly regarding the Ministry of Finance’s adjusted-cash account and the ESA95 account produced by the Central Statistical Office and reported to the European authorities. In addition a permanent financing system for the regions needs to be finalised, following the decentralisation of responsibility for providing hospital services and secondary schooling. The decentralisation means good accounting practices in sub-national government matter all the more. In this regard, debt developments in municipal government should be closely monitored following the removal of borrowing constraints. Decentralisation also raises the importance of diffusing best-practise in public spending to ensure outcome orientation and efficiency gains in provision.
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