SAO Annual Report: The Czech Republic is burdened by the state budget deficit and by the increasing pace of debt growth, however the state continues to waste public funds

Press release on the SAO annual report – 3 April 2023

The Supreme Audit Office (SAO) issued its annual report for 2022. Apart from summarising the findings of 33 audits, it also describes the main problems in the management of public funds in the Czech Republic. The first is the ever-increasing structural deficit of the state budget due to the increase in mandatory expenditure and the increasing pace of debt growth. At the same time, the key reforms of the pension system, health and social systems which are necessary to maintain the stability of public finances have not been launched. The state is looking for resources and the SAO is able to offer valuable knowledge in this area. Significant savings could be made, for example, by changing the overall attitude to the subsidy system. SAO audits have shown that the true purpose of subsidies has been replaced by formalism. Furthermore, the digitalisation of public administration agendas is an example of a number of inefficiencies. The audits have also confirmed that in many cases state institutions have abandoned their fundamental responsibility towards citizens, i.e. their efforts to manage funds properly. The SAO repeatedly highlights cases where public funds are being wasted.

“Our economic condition in 2022 was undoubtedly affected by the war in Ukraine and its repercussions. However, most of the shortcomings we have highlighted in the annual report, are unrelated to the war or related only marginally," stated the President of the SAO, Miloslav Kala. GDP growth last year was 1.1 percentage points lower than the European Union average. By contrast, the enormous rise in inflation – the fifth highest in the EU – has significantly reduced the standard of living of the population. Real wages in the Czech Republic fell by 7.5% year on year. This is one of the worst results in OECD countries. High government deficits have led to a significant increase in government debt since 2020. At the end of 2022, it stood at almost CZK 2,895 billion and it grew by more than CZK 429 billion year on year. The sovereign debt growth rate in the Czech Republic was the third highest in 2022 compared to Europe. This trend is a threat to the stability of public finances. Stabilising public budgets is a necessity for ensuring sustainable financing of the state in the long term, and for the Czech Republic to be able to cope successfully with crises such as the COVID-19 pandemic or the current Russian aggression in Ukraine.

One of the areas where significant savings could be made is the subsidy system. SAO audits have shown that the true purpose of subsidies was replaced by formalism. The act of drawing funds has become superior to the potential benefits of subsidies. The system of hundreds of subsidy titles, based on which hundreds of billions of Czech crowns are allocated, has become unmanageable and administratively cumbersome. “The bloated subsidy system, in which the formal aspect of the matter prevails over the real meaning and, above all, the benefits of subsidies, is a luxury that our country cannot afford at a time of huge structural deficits in the state budget,” says SAO President Miloslav Kala. Audits carried out by the SAO revealed that various ministries supported ineffective and inefficient projects. Examples include subsidies for industrial research. Although almost CZK 10 billion was spent on it in 2016-2022, in most of the audited cases, the projects did not deliver any economic benefits. In the case of the audited projects funded from the TRIO programme, actual sales were at a tenth of the planned values after three years from their conclusion.

The efficiency of the digitalisation of public administration is also not improving, even though the state spends more and more money on it. Total ICT expenditure for 2022 alone for the state organisational units and the state funds amounted to more than CZK 19 billion, i.e. by almost more than a third in 2018. Yet, last year, in an international comparison carried out by DESI, focused primarily on digitalisation, the Czech Republic fell by one place again to the 19th place within the EU. The computerisation of public administration in the Czech Republic is progressing slowly and is not delivering the expected results. “We confirm what we repeatedly say: digitalising inefficient processes does not lead to effective government performance. Successful digitalisation is therefore hampered by the fact that, in many cases, it is not preceded by a fundamental revision of existing agendas", points out Miloslav Kala, SAO President. Shortcomings in digitalisation and communication across Ministries were also one of the important reasons why the Czech Republic failed to manage the COVID-19 pandemic. Moreover, citizens’ demand for state online services is constantly growing, particularly in the context of dealing with different life situations.

In 2022, the SAO also described situations where the Ministries acted directly against their own priorities and objectives or wasted state money. These were strategically important areas such as the environment or agriculture. For example, in the case of municipal waste management, the responsible authorities, contrary to the state’s strategy, favoured landfilling over more gentle methods. Although CZK 9 billion have been spent in this area, landfilling remains the most used method: in 2020, 48% of municipal waste was landfilled. Another example where the reality is at odds with the priorities is in the area of aid to micro, small and medium-sized enterprises in the processing of agricultural products. Based on the strategy of the Ministry of Agriculture, these enterprises were supposed to receive national and European subsidies in the first place. However, the Ministry of Agriculture failed to prepare a national subsidy programme for them. On the contrary, it launched a programme to aid large enterprises, from which it allocated CZK 1.7 billion to them. Wasting of resources can also be documented by an audit of the Ministry of Finance’s promotion action to support the collection of taxes, the so called “Receipt Lottery”. Although the Ministry paid a total of CZK 231 million for it, after its termination it did not assess whether it had contributed to a higher tax collection at all.

Communication Department
Supreme Audit Office

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