The financial management of the Czech Republic in 2022: fastest rising debt, fifth highest inflation in the EU, historically the most significant decline in real wages
Opinion of the SAO on the Draft State Closing Account of the Czech Republic for 2022 (4 September 2023)
In 2022, the Czech Republic continued the trend of being the fastest-rising indebted country, reaching the fifth highest inflation rate in the EU, and experiencing the most significant decline in real wages in Czech history. The economy's performance grew at a slower pace than in 2021, and in international comparisons, the Czech Republic ranks as the seventh slowest-growing country in the EU. The state is struggling with high expenditures. Mandatory expenses, as determined by laws and contracts, exceeded one trillion CZK for the first time in history. The Czech Republic did not benefit from the lowest unemployment rate either, as the revenues from high employment did not cover the continually rising expenditures. The Supreme Audit Office (SAO) states the above mentioned in its “Opinion on the Draft of the State Closing Account of the Czech Republic for 2022”.
State budget revenues increased by just under 16% from 2018 to 2022, while expenditures grew by 42%. Consequently, the growth in state budget expenditures exceeded revenue growth by 26 percentage points. Revenues were insufficient to cover the rapidly increasing expenses, forcing the state to finance its operations through debt. In 2022, the state budget deficit reached 360 billion CZK.
The Czech Republic's economic performance, measured by GDP growth, increased by 2.4% last year, which was 1.2 percentage points lower than in 2021. Efforts to recover the economy from the COVID-19 pandemic were hindered by the energy crisis, deepened by the conflict in Ukraine and its economic repercussions. However, international comparisons show that three-quarters of EU countries have a higher annual GDP growth than the Czech Republic, which became the seventh slowest-growing EU country.
In 2022, the Czech Republic continued the trend of being the fastest-rising indebted country in the EU. The public debt of the Czech Republic increased by over 430 billion CZK compared to the previous year, approaching the threshold of three trillion CZK. Factors such as the energy crisis, high inflation, and the war in Ukraine negatively affected the situation, however, other EU states face similar issues. "Therefore, it is alarming that, unlike the Czech Republic, most of the EU members are successful in reducing their debt while increasing their GDP. “It appears that the Czech Republic is not handling these problems as effectively as other EU countries," said Miloslav Kala, President of the Supreme Audit Office (SAO).
When comparing the level of debt between 2020 and 2022, the Czech Republic shows the highest increase in the EU. During this period, the share of the public debt in relation to GDP in the Czech Republic has increased by 6.4 percentage points. In contrast, most other EU countries have managed to reduce their debt as a percentage of GDP by an average of six percent. In addition to the Czech Republic, only three countries - Malta, Romania, and Luxembourg - increased their debt, but significantly less than the Czech Republic (in the range of 0.1 to 0.5 percentage points). “The significant increase in debt in the Czech Republic is primarily due to ordinary expenses related to the operation of the state, which cannot be covered by the revenues collected”, states Miloslav Kala, President of the Supreme Audit Office (SAO). He also adds “This increase is not driven by significant investment activity that would help address problem areas in public life, such as transportation infrastructure, energy self-sufficiency, the pension system, or digitalisation and public administration reform, and thereby support future economic development”.
The state is struggling with high mandatory and quasi-mandatory expenditures. Mandatory expenses exceeded one trillion CZK for the first-time last year, increasing by more than 94 billion CZK compared to 2021. This increase was primarily driven by extraordinary pension adjustments, which raised the average old-age pension by approximately 1,700 CZK per month. The rapid growth of these expenses caused a deficit in the pension system, which reached 21.5 billion CZK in 2022. An important component of mandatory expenditures is and will be the expenses related to servicing the state debt, which reached nearly 50 billion CZK last year, accounting for approximately 14% of the 360-billion CZK state budget deficit.
The average inflation rate for 2022 in the Czech Republic, according to Eurostat, was 14.8%, which was 5.6 percentage points higher than the EU average. Within the EU, this was the fifth-highest value. Since the establishment of the independent Czech Republic, higher inflation was only recorded in 1993 when it reached 20%. Such high inflation significantly slows down the economic growth and reduces the standard of living for the population. “The government should focus primarily on systemic fiscal measures and address the causes of inflation, driven also by expenditure expansion, which leads to deficit spending and rapid state debt growth,” emphasised Miloslav Kala, President of the Supreme Audit Office (SAO).
Especially due to high inflation, the past year brought a change in the wage development trend. While in previous years, the growth of the average wage outpaced inflation, last year saw the highest decline in real wages in the history of independent Czech Republic. Real wages decreased by 7.5%, which is nearly 2,500 CZK per month, despite the fact that in 2022, the average monthly nominal wage exceeded 40,000 CZK. Further reduction in the average real wage by 2.6% is expected in 2023.The unemployment rate in the Czech Republic remained at a record low level in European comparison last year, reaching only 2.2%. Even with such high employment did not generate enough income to cover the rising expenditures. It is evident that any worsening of the unemployment rate carries the risk of further increasing the public debt."
Supreme Audit Office