Foundations for Growth and Competitiveness 2026

Czechia

Economic convergence vis-à-vis most advanced economies has slowed since the pandemic. Czechia has one of the lowest unemployment rates of the OECD, but employment rates of women with young children are very low. Moreover, productivity growth has slowed significantly since the global financial crisis and has stalled since the pandemic, leaving a sizeable productivity gap with the upper half of OECD countries.

Revitalising productivity growth will require boosting educational outcomes for all students, reducing skill shortages and mismatches, improving the innovation capacity through developing capital markets and better targeting business support for R&D, and fostering labour mobility. The tax system can also be made more growth-friendly.

Economic performance

Gaps to the average of the upper half of the OECD countries

Source: Panel A: OECD, Economic Outlook database; Panel B: OECD, Labour Force Statistics database; Panel C: OECD, Economic Outlook and Productivity databases; Panel D: OECD, Economic Outlook and Annual National accounts, GFCF by assets databases.

Selected policy gaps

Source: OECD calculations based on the Foundations for Growth and Competitiveness database.

Skills: Boost tertiary attainment and reduce inequalities in education

High skills shortages and mismatches pose a threat to productivity growth. Tertiary education attainment is low, especially among vulnerable students, who face significant financial challenges despite the absence of tuition fees in public universities and often struggle to balance work and study leading to high dropout rates. Expanding tertiary education attainment and boosting participation in adult learning for the low-skilled would improve the alignment of skills with labour market needs. School outcomes are strong, but student performance has been declining among the most vulnerable. Expanding capacity and participation in high-quality affordable early childhood education and care, especially for disadvantaged children, can improve educational outcomes for all students.

Recommendations

✓ Introduce grants for vulnerable students and income-contingent loans to increase tertiary attainment, especially of vulnerable groups

✓ Expand the supply of modular learning and introduce high-quality micro-credentials in the national register of qualifications to boost participation in adult learning.

✓ Increase high-quality and affordable early education and care capacity.

Financial markets: Reduce financing constraints to boost innovation

Despite significant progress, access to risk capital remains a challenge for start-ups and young firms. Bank credit is available for SMEs but capital markets are underdeveloped. Risk capital funding is critical for young SMEs without collateral, as well as corporate and credit history. Pension funds, which play an important role in capital market development and venture capital funding in some OECD countries could be better mobilised in Czechia. R&D cash refunds may be more beneficial for young firms, which may not have sufficient tax liability for several years and need financial support early in the innovation process.

Recommendations

✓ Mandate pension providers to offer default life-cycle-based investment strategies.

✓ Consider introducing tax incentives to stimulate the provision of private risk capital, including by experienced foreign venture capital investors and support the creation of a formal and structured business angel network.

✓ Make the R&D tax allowance refundable or extend the duration of the carry-forward option for small and young firms

Labour market: Foster labour mobility and employment of mothers with young children

Labour mobility in terms of job-to-job transitions is among the lowest in the OECD. The employment protection legislation for regular workers is the highest in the OECD and the difference between protection of regular and temporary workers is wide. Employment of mothers with young children is very low, which partly reflects long parental leave eligibility.

Recommendations

✓ Increase flexibility in permanent employment contracts and reduce the difference in employment protection between regular and temporary contracts.

✓ Expand active labour market policies, especially targeted to training and reskilling programmes, and strengthen the capacity of the public employment service to effectively profile jobseekers.

✓ Further reduce the maximum duration of parental leave and make part of it conditional on the second parent’s participation.

Environment: Accelerate the deployment of renewables to ensure energy security

Accelerating the deployment of renewables is crucial to ensure energy security and sustainable growth as electricity demand is increasing and Czechia plans to phase out coal from the energy mix by 2033 new nuclear capacity will only come online in the mid-2030s. The large differences in carbon prices across sectors and activities mean that marginal abatement costs are not equalised, potentially increasing the cost of emission reductions

Recommendations

✓ Further simplify permitting procedures for renewable energy, including by establishing administrative one-stop-shops and assigning suitable land for acceleration zones.

✓ Accelerate investment in electricity grid capacity, system flexibility and electricity storage.

✓ Phase out fossil fuel subsidies and increase effective carbon prices in sectors outside the EU Emission Trading System. Mitigate the impact on vulnerable households via targeted transfers.

Taxation: Make the tax system more growth friendly

Czechia relies significantly more on social security contributions and less on environmental and property taxes than other OECD countries. A lower reliance on social security contributions and higher revenues from property taxes and indirect taxes, including environmental taxes, would make the tax system more growth-friendly and reduce the exposure of government revenue to ageing.

Recommendations

✓ Shift towards recurrent taxes on immovable property, consumption and environmental taxes, and reduce social security contributions.

✓ Change the base for recurrent taxes on immovable property from area to regularly updated market values. Introduce options to protect the most vulnerable property owners, such as tax deferrals or payments in instalments.

✓ Further broaden the VAT base, including by reducing the number of items under the reduced VAT rate.

Recent progress on structural reforms

In 2023, a system of individual learning accounts with training vouchers was introduced with a special focus on digital skills. Efforts are ongoing to boost risk capital markets, for example by launching funds focused on equity financing for early-stage start-ups and allowing pension funds to invest in a wider set of assets. Since 2023, starting a company has been facilitated by decoupling the process of obtaining licences and permits, and allowing to start a limited liability company fully electronically. In 2024, the maximum length of time the parental allowance can be drawn was reduced until the child reaches the age of three, from four previously, which is still significantly longer than in other OECD countries.