The Czech Republic has garnered the unenviable distinction of being the fastest-growing debtor nation in the European Union, as per a report from the country’s Supreme Audit Office (SAO). Despite boasting the EU’s lowest unemployment rate, the Czech state finds itself unable to leverage the advantages of high employment due to the insufficiency of income to cover burgeoning state expenses.

The SAO report underscores the rapid escalation of debt attributed to mounting expenditures, notably in the pension sector. It also delivers a stark warning that even with soaring employment rates, the state’s income falls short of meeting escalating costs. In addition, the report reveals that the country’s inflation rate ranked fifth highest in the EU last year, while the decline in real wages reached historic levels in Czech history.

To address these pressing economic challenges, the SAO suggests that the government should embark on systematic budgetary measures to combat inflation and address its root causes. The report emphasizes how efforts to resuscitate the economy post-COVID-19 have been hampered by the energy crisis, further exacerbated by the Ukraine conflict and its adverse economic consequences, leading to surging energy prices.

In response to these economic complexities, the Czech government has introduced a consolidation package aimed at improving public budgets through tax adjustments. However, the SAO’s report reveals that expenses have outpaced income growth by a staggering 26 percentage points over the past four years, a primary driver of state budget deficits. The SAO suggests that there is ample room for improvement in state revenue, particularly in terms of more efficient tax collection.

The report also underscores the need to combat tax evasion, particularly in relation to value-added tax, and highlights the importance of tax system adjustments. Taxes would be indexed to inflation to ensure they maintain their real value. As part of the consolidation package, the government has proposed increasing real estate taxes.

Furthermore, the SAO report sounds a cautionary note: even with high employment rates, the state’s income remains insufficient to cover escalating expenses. If the unemployment rate were to approach the EU average, it would result in a significant revenue shortfall for public budgets and a surge in expenditures on unemployment benefits, further exacerbating the alarming rise in public debt.

In essence, the SAO’s comprehensive report paints a picture of a nation grappling with economic challenges that necessitate both structural reforms and prudent fiscal management to ensure long-term financial stability and sustainability.

Article by Prague Forum