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Speech by Angel Gurría, OECD Secretary-General, for the launch of the OECD Economic Survey of the Czech Republic
Prague, 24 April 2008
Prime Minister, Ministers, colleagues, it is a pleasure to be here to present the 2008 OECD Economic Survey of the Czech Republic.
An impressive pick up in growth
With real GDP growth over 6% since 2005, the country is one of the economic bright spots in the region, and indeed in the OECD area. Our Survey projects growth of 4.5% for 2008 and around 5% in 2009. Given the current international context, this outlook is very positive. So far, the global financial turmoil has not affected the economy in any significant way.
However, in order to maintain these high growth rates, further reforms are necessary. The Survey identifies two big challenges for policy makers:
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The biggest reform challenge is to ensure fiscal sustainability in light of population ageing. Indeed, a phase of rapid ageing will begin as soon as 2012 and the projected spending increases if policies are not changed would be huge in the long run.
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The other big challenge is to tackle the risk of labour market shortages.
The package of fiscal measures passed last year signalled the Government’s commitment to reform. Aside from substantial tax reform, the package made a welcome start in several areas of structural policy, and there are many plans for further measures. Our Survey provides an in-depth assessment of many of these. We welcome the shift from direct to indirect taxes. The associated temporary increase of inflation and the effects of recent increases in food and energy prices appear to be well contained by the inflation targeting regime. But these developments will bring a dip in GDP growth this year, mainly because of weaker household consumption growth. However, this should not present a threat for the medium-term growth prospects.
Ensuring fiscal sustainability
Ensuring fiscal sustainability requires disciplined budgeting. Deficit outcomes have been better than expected and the government’s deficit targets should be lowered to reflect this. Also, reforms to budgeting systems should be pursued. Deeper scrutiny of spending plans in the preparation phase of the budget would be beneficial, as would measures to increase the enforceability of the Medium Term Expenditure Framework.
Reform of the healthcare is system closely linked to fiscal sustainability, particularly in order to prevent population ageing from weighing heavily on government deficit and debt. The government’s fiscal package, which brought in small fees for some healthcare services, is a good start. International evidence shows that such charges help rationalize healthcare consumption. However, access to needed care must not be compromised and appropriate exemptions, as well as support for poor persons, should be maintained. In the Czech cost-sharing system, exemptions (for those below certain income levels and for chronically ill children) and out-of-pocket expenditure caps are important in addressing equity concerns.
The Government’s proposals for a second phase of healthcare reform are bold and innovative, aiming to increase the quality and efficiency of services by introducing a profit motivation of the insurance funds. International experience with such reform is limited; indeed only the Netherlands and Switzerland have taken a similar approach. And, it is clear there are certain pitfalls that must be avoided:
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First, to prevent undesirable reactions to a more competitive environment on the part of health insurers. For instance, efforts to avoid risky clients, or as we say “cream skim” the client base, may intensify.
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Second, if despite reform, healthcare providers maintain local monopolies, incentivising insurers is unlikely to generate significant efficiency gains. Attention will need to be paid to what happens to health services “on the ground” , in order to gauge the impact of reform and to consider any further adjustments.
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Third, further work will be required on what is included in the basic package of healthcare services. The package either needs to be narrowed or funded by other sources, particularly in the context of ever growing treatment possibilities. Whatever this basic package looks like, it is important to make sure that no one is excluded from receiving necessary treatment.
The pension system also has to be in shape to deal with ageing. Here, further increases in the retirement age are crucial to financial sustainability. We hope that the proposals currently under discussion pass successfully.
Deeper reform to the pension system has been debated for some time. It should be stressed that the current pay-as-you-go pension system is sustainable, as long as further adjustments are made. However, many believe that the system would be improved by a stronger link between contributions and payouts. The current pension system is indeed highly redistributive, more closely resembling a generous version of New Zealand’s flat rate pension than a traditional pay-as-you-go pension. The defined contribution carve-out currently under discussion would bring a stronger link between contributions and payout. But, whether it would mark an improvement on all fronts depends very much on the details.
High growth brings new challenges for labour market policy
The unemployment rate has fallen to record lows and firms are increasingly reporting hiring difficulties. Also, the working-age population will start shrinking in the next few years. As a result, labour market bottlenecks are becoming a significant challenge. An important part of the solution lies in improving conditions for the labour market in general. The recent fiscal package heads in the right direction by shifting the tax burden away from labour income. This will help strenghthen both supply and demand in the labour market by narrowing the wedge between net wages and the total cost of employing a worker.
The plans to strengthen activation in the social security system and to reform unemployment benefits are also welcome. On other fronts, further reform of the labour code would be desirable. At a minimum, notice and severance pay arrangements ought to be linked to the length of service.
In addition, special attention is needed to mobilise the large reserves of labour among older cohorts, parents with young children and long-term unemployed.
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For older cohorts, the issue of the retirement age is again important. Under current legislation, the retirement age is rising but will only reach a maximum of 63 years. Hence, without further increase, the labour market participation of older cohorts will remain below the majority of OECD countries, where the standard age of retirement is already typically 65 years.
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We welcome the efforts being made to widen choices for working parents - for instance with the new “three-speed” parental allowance - but more should be done. Further steps should be taken to increase childcare provision. For instance, a system of vouchers for childcare could be introduced and financed with a reduction in the length of leave. Indeed, by international standards parental leave is too long. International evidence suggests that long periods out of work damage parents’ careers and family incomes, and this has a negative impact on child development. For these reasons, the combined maternity and parental leave should be cut back to two years or less.
The tighter labour market also underscores the need for ensuring education policy encourages the right kind of learning at the right pace. Action is needed on two fronts:
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The secondary school system would benefit from less streaming of students and wider access to courses that provide options for tertiary education.
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As we have recommended in previous Surveys, tuition fees in tertiary education would bring significant benefits. Fees would strengthen signals between students, providers and employers on the length, level and content of courses that provide labour market skills.
How should Czech policymakers respond to globalisation?
Our Survey devotes a chapter to the challenge of globalisation. The largest impact of globalisation on the Czech economy has so far been in the manufacturing sector. Indeed, much of Czech output growth over the past 15 years is attributable to export-based manufacturing by plants that are part of international supply chains. How this will evolve in the future, and how other globalised sectors such as tradeable services, will develop, is of course hard to gauge. While market forces will largely determine what happens in the future, policy does have some leverage to help guide them in a positive way for the Czech economy.
Globalisation suggests some specific policy priorities. As in many OECD countries, there are tax concessions and other forms of support aimed at attracting capital-intensive manufacturing plants or high-value-adding services. Getting the right level and mix of this support is key. Too little support could run the risk of missing out on important opportunities for new growth sectors. Too much support wastes public money and distorts market forces. Globalisation also suggests attention is needed to transport networks and to ensuring telecommunicaitons markets deliver competitive prices for telephone and broadband Internet.
On another front, globalisation presents opportunities that policymakers can tap into, such as the increasing international mobility of labour. Especially in light of the tightening labour market, Czech immigration policy should be adjusted accordingly.
But importantly, what is good policy for growth in general is also good for harnessing globalisation. So, getting the best out of globalisation also means following well-established principles of economic management. In particular, low and stable inflation, responsible fiscal policy and attention to structural policies that affect the business environment.
To sum up
In broad terms the government’s fiscal package, and the many plans for further reform are moving in the right direction. But, good times can breed complacency - please do not succumb to this temptation.
I urge you to take a close look at our recommendations. Your economy has been performing well, and you have the opportunity now to act to consolidate this performance and make it sustainable in the future.
While many governments find reforms are only acceptable in bad times – when backs are to the wall – our experience has shown that it is best to use good times for reform.
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