State finances in 2023: second highest inflation in the EU, high velocity of debt rate and real GDP decline
SAO OPINION ON THE DRAFT STATE CLOSING ACCOUNT OF THE CZECH REPUBLIC FOR 2023 (26 August 2024)
The average inflation rate in the Czech Republic reached 12% last year, the second highest in the EU. The debt rate velocity of the Czech Republic was also the second highest in the EU. Over the last three years, government debt has increased by a further 50% and last year exceeded the threshold of CZK 3 trillion. The Czech Republic's gross domestic product (GDP) fell by 0.3% in real terms and gross capital formation by 6.8%. However, the Czech Republic is the European leader in low unemployment. Last year, unemployment in the Czech Republic reached 2.6%, while the European average was 6.1%. This is stated by the Supreme Audit Office (SAO) in its "Opinion on the draft state closing account of the Czech Republic for 2023".
"In terms of most economic indicators, 2023 was not a good year. In many of them we lagged behind the EU average. And even the lowest unemployment rate, which at first glance could be perceived as positive, hides great risks associated with declining labour productivity," commented Miloslav Kala, President of the SAO, on last year’s state finances.
Low household consumption was one of the key factors behind the real GDP decline. Their purchasing power was significantly weakened by rising prices. Household final consumption accounts for almost half of total GDP, but it showed a continuous year-on-year decline from May 2022 to November 2023. Another negative factor in the GDP outcome was a 6.8% decline in real gross capital formation, indicating the caution by investors and firms at the time of economic uncertainty and high energy costs.
The average 12% inflation rate in the Czech Republic was 5.6 percentage points above the EU average. Compared to the Visegrad Four countries and the EU, the Czech Republic had significantly higher inflation in electricity, gas and thermal energy. Housing and energy costs contributed most to the year-on-year price increases. High energy prices had a negative impact on industrial production and construction work.
The Czech industry is not supported by global trends either. The automotive industry is beginning to experience a global shift of production capacities to China and other Asian countries. While China produced 17% more vehicles last year than in 2019, Germany, the largest manufacturer in Europe, produced 12% fewer vehicles over the same period. In other countries, the decline is even more marked - Spain down 13%, the UK down 25% and France down 31%.
The Czech Republic and Slovakia have been able to maintain their positions thanks to the sustained competitive advantage of cheap labour. However, the decline in production in the traditionally strong European markets is affecting supply chains and consequently reducing the volume of orders for Czech automotive component manufacturers. Changes in the position on world markets thus threaten the future of this classically Czech domain. "The warning light for the Czech industry could not be flashing more alarmingly. We can only defend ourselves against global changes to a very limited extent, and therefore maximum budgetary prudence and systemic reforms would be in order to enable us to prepare for them. However, nothing like this is happening," highlighted Miloslav Kala, President of the SAO.
The Czech Republic's debt rate velocity between 2020 and 2023 was the second highest in the EU. In three years, government debt increased by another 50%. This increase is significantly higher than the EU average of 14%. The rising debt puts an additional burden on the state budget in the form of the servicing costs of the government debt. These reached CZK 68 billion in 2023, representing a third of all state investments over the given period. The Ministry of Finance expects these costs to rise by more than CZK 51 billion by 2026. At the same time, state expenditures are rising - by 11% last year - and are overwhelmingly of mandatory or quasi-mandatory nature. "We are setting ourselves up for a big problem. Without drastic and immediate systemic changes that would increase the efficiency of the state, the condition of Czech public finances has no chance of approaching at least the European average," added Miloslav Kala, President of the SAO.
The situation of territorial budgets is different from the state budget. Their management ended in 2023 with a historically highest surplus of CZK 72 billion. Both regions and municipalities reached black figures. The positive results of local governments management are also reflected in their bank balances. At the end of 2023, territorial budgets had a total of CZK 482.5 billion, of which about CZK 339 billion was held by municipalities and CZK 65 billion by regions. These available funds were losing real value due to high inflation.
Communication Department
Supreme Audit Office