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Growth has picked up, reflecting past reforms
Growth in the Czech Republic is projected by the OECD to be around 4 per cent, somewhat above potential, this year and next, marking substantial progress over past performance and reflecting the success of past reforms. Investment and exports are expanding rapidly, taking over from a period of strong increase in domestic consumption. This good performance needs to be sustained, and preferably bettered, for living standards to catch up with the OECD average at a reasonable pace. This means creating the right conditions for continued capital deepening, efficient utilisation of labour resources and the further development of relevant skills. In many areas, good policy has already created healthy conditions for growth. For some years now, inflation has been low and stable and membership of the EU has prompted further progress in structural reform. Indeed, institutions and policies now closely resemble those in many other OECD countries.
Output growth
Per cent 
Source: OECD, Annual National Accounts Database.
But challenges need to be addressed in a broad range of policies for real convergence to be sustained in a more growth friendly environment
At the same time, however, there are challenges related to the fiscal position, business conditions and the labour market. These will need to be addressed alongside the approaching challenges of euro entry and accelerated ageing of the population. The key policy issues can be summed up under four headings:
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Fiscal consolidation. Government spending has increased over the past few years, generating a high deficit and a large tax burden, notably a high tax wedge on labour. The high deficit needs to be brought down and budgetary reform has to deliver sustainable spending cuts so as to bring down the influence of taxes and transfers in household and business decision making. Particular attention is needed to reform health and pension systems as Czech demographic trends are set to bring a rapid rise in the old-age population in the next few years.
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Successful entry to the euro area. Monetary policy has to stay on course to reap the benefits of euro entry; difficult decisions have to be made regarding the best implementation of the strategy for entry so as to avoid untimely pressures on the real economy and exchange rates.
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Improving policy towards business. Increases in labour productivity have to do most of the work to catch up with levels of GDP per capita in more advanced OECD countries. Among the many structural policies influencing the business environment, the administration and legislation for dealing with non-viable firms and relatively cumbersome business-start-up procedures are of particular concern.
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Improving the labour market and increasing skills. The labour market is not performing as well as it should and this is reflected in rising unemployment. The intention to reintroduce legal extensions in wage setting would risk reducing the flexibility of wage determination. Furthermore, the high-tax wedge damps both demand and supply and leads to grey-sector activity. In addition, employers face difficulties in applying the regulations for letting go underperforming or surplus workers. Poor performance has not only arisen from labour market inflexibilities but also poverty traps, particularly for unemployed families, and low mobility partly linked to problems in the rental market for housing. In terms of increasing skills, tertiary education programmes are lagging behind rapidly increasing enrolments and new curriculum demands. In addition, there are specific challenges in the education system for the Roma where unemployment rates are well above average.
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The Czech language version of the Policy Brief is also available
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The complete edition of the OECD Economic Survey for the Czech Republic is available from:
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SourceOECD for subscribing institutions and many libraries
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