IMF Concludes Article IV Consultation With Czech Republic

by Ulrika Lomas, for LawAndTax-News.com, Brussels

25 November 2008

The International Monetary Fund (IMF) on Monday published the conclusions of its Article IV Consultation with the Czech Republic.

The IMF mission report observed that overall, strong fundamentals have helped the Czech economy weather the global financial crisis over the past year, with robust productivity growth, improved fiscal performance, and a comfortable external position supported by inflows of foreign direct investment placing the economy in a relatively favourable position.

However, it went on to suggest that following three years of exceptionally rapid expansion, the economy is set to slow sharply next year, amid a gathering recession abroad and tightening credit at home.

Commenting on the way forward for tax and budgetary policy, the Fund's report suggested that:

"With the outlook for growth worse than assumed in the budget, the fiscal deficit in 2009 is likely to be higher than planned. Although revenue growth will likely decline rapidly, the streamlining of social spending under the 2007 fiscal reform package and the still buoyant corporate tax revenues should keep the general government deficit close to 1.5% of GDP in 2008, resulting in a small stimulus."

"For 2009, the government plans a budget deficit of 1.6% of GDP, with cuts in corporate income tax and social security contribution rates largely offset by the tightening of the wage bill and social transfers. Reflecting mainly revenue shortfalls from slower growth, staff project a deficit of around of 2.5% of GDP, which would imply a neutral fiscal stance."

It concluded:

"Over the medium term, the momentum of reforms will need to be restored to address long-term challenges and ensure high growth. Fiscal space will need to be created to cope with the demographic transition through greater efficiency in public spending. In this regard, the introduction of user fees in the health sector and plans to modernize the tax administration are welcome."

"The forthcoming regulatory reforms should encourage private pension savings and pave the way for the development of a funded system. Recent parametric pension reforms should help reduce fiscal pressures and increase labour force participation. Considerable scope exists for improving incentives to work through reforms of the labour market and the tax-benefit system. The beneficial effects of such structural reforms would reinforce each other, promoting economic stability and sustained growth."

Earlier this year, the government announced that it would be delaying a further drop in the individual income tax rate.

The newly introduced 15% single tax rate had been expected to drop to 12.5% in 2009, but Finance Minister Miroslav Kalousek explained in July that there was "no room for further tax cuts until 2010", because the political will was not present to cut spending.

Recommended