Czech fiscal policy lacks long-term perspective

In recent years, Czech politicians have failed to consider the long-term context when making fiscal policy decisions. They have taken mainly short-term measures, postponing long-term decisions such as pension reform. Czech fiscal policy has thus come to represent a systemic risk to the macroeconomic segment, and this is currently contributing to high inflation, says Marek Kapička, who leads an SYRI National Institute research group on economic impacts.

According to Kapička, who is also a researcher at the CERGE Economics Institute (of the Czech Academy of Sciences), there are two extreme examples of how fiscal policy can contribute to a shift in a state’s economy. One is from Ireland, which was one of the poorest countries in Europe a few decades ago and is now one of the richest. “This shift is linked mainly to prudent fiscal policy, well-set taxes, and strict adherence to rules,” Kapička says. The other is from Argentina, which was one of the wealthiest countries in the world a century ago but today is at the very bottom of the Top 100 list. “This is because of a series of fiscal disasters, ill-advised budget policy, and non-compliance with obligations,” Kapička says. “Unfortunately, I think that the Czech Republic is moving away from the Ireland model and towards the Argentina one.”

The SYRI economist sees the main problem as being in the failure of Czech politicians of recent years to think in a long-term context. They have made short-term decisions and postponed long-term ones. “As economists, we know how important reputation is, how long it takes to build, and how easy it is to destroy. The situation in this country is not good in this regard,” Kapička says. He explains that politicians do not consider the context when making decisions. “For instance, the high rate of fiscal transfers made in this country leads to significant inflation. When decisions about fiscal transfers were made, no one took this fact into account.” According to Kapička, a stable macroeconomic environment should be considered a key value.

Experts at SYRI will analyse the sustainability of fiscal policy, a complex issue that considers uncertainty and possible future crises. “We have faced three major crises in the last 15 years, with two in the last three years,” Kapička says. “We need to bear in mind that there will be other crises in future and the need for fiscal policy to address them.” His team of scientists with international experience will conduct fiscal stress testing and offer monitoring that will be available to the general public.

Kapička says that the Covid-19 pandemic has highlighted inequalities in society that had previously gone largely unnoticed by scientists. “That’s why we will conduct studies on the impact of different public policies adopted during the Covid-19 pandemic, such as the stay-at-home policy,” he says. “Our aim is to provide recommendations on optimal combinations of tax and transfer policy.” Kapička and his team intend to provide the public with serious analysis based on quantitative methods and extensive datasets.