The plan of the Minister of Finance, Alena Schillerová, is clear: to increase the state budget deficit in order to then more easily reduce it. However, the second part of this plan does not seem very credible, especially since the government is fundamentally weakening the rules of budgetary responsibility that limit debt growth by changing the law.
The plan of the Minister of Finance, Alena Schillerová, is clear: to increase the state budget deficit in order to then more easily reduce it. However, the second part of this plan does not seem very credible, especially since the government is fundamentally weakening the rules of budgetary responsibility that limit debt growth growth.
The commitment of the government to keep the annual deficit of public finances below the three percent of GDP threshold, as set by the European Union's Maastricht rules, is not very credible. The concern, especially among those who will have to pay for this debt through their taxes in the future, is justified, and economic logic is not easily found in the government's plan.
Let's start with the "fixed point" of a deficit below three percent of GDP. For this year, the government has planned a deficit exceeding 300 billion crowns. In order to keep this state budget deficit (public finances also include other items) below three percent of GDP, the Czech GDP would have to increase to more than 10,000 billion crowns. However, realistic estimates are around 9000 billion, which means that the deficit itself exceeds the three percent threshold. The Minister apparently relies on other parts of the public sector operating with significant surpluses and reducing the overall deficit.
Health insurance companies, whose operations are included in the balance of public finances, will not help. In recent years, they have been heading towards deficits that the state intends to address by increasing the funds it sends them from the budget. This will deepen their own budgetary deficit. Municipalities and cities traditionally achieve significant budgetary surpluses, creating reserves for investment. Even though this sector operated with a surplus last year, there has been a change. The "usual" surplus of around 25 billion crowns was primarily due to the budget of the capital city Prague. The operations of all cities and municipalities, except for Prague, have shifted from significant surpluses to a nearly balanced result last year. Even if the situation does not worsen further, it may not be enough to compensate for the deep deficit of the state budget.
```Maintaining the deficit of public finances below three percent cannot be achieved without maintaining control over the state budget. However, this year's half-year data show a state budget deficit of 183.6 billion crowns, which is 31.2 billion more year-on-year. Adjusting for the influence of funds from the EU and financial mechanisms leads to an even greater increase in the deficit of 52.9 billion.
If the minister speaks of a "deficit safely below three percent of GDP," she is likely referring to a different methodology for reporting according to EU rules, which is not based on cash flows. This difference was already significant in 2025. While the "European public finance deficit" reached 2.1 percent of GDP according to confirmed data, the cash flow deficit reached a value close to the increase in state debt, just under 300 billion crowns, and thus exceeded the three percent of GDP threshold. A better result according to EU rules, as shown by last year's data, does not change the problem of rapidly increasing debt. Furthermore, over a longer period, the results of both methodologies naturally converge.
The June report and the spring forecast from the European Commission also show a deficit at the three percent threshold. According to them, the Czech Republic is expected to have a public finance deficit of 2.8 percent and 2.9 percent of GDP in 2026 and 2027, respectively, with economic growth of 1.8 percent in 2026 and 2.4 percent in 2027. This is only a few billion crowns away from the threshold that the minister promises not to exceed. It is also questionable whether the Commission's data includes all the steps that the government plans to take. Most of them do not reduce deficits. This corresponds to Prime Minister Babiš' statement that the deficit for the next year will be "significantly below 400 billion crowns," which probably means well above 300 billion crowns.
Excessively High Interest Rates
The fact that the government will, at best, be on or just beyond the three percent threshold can be inferred not only from the Prime Minister's somewhat unclear statement, but also from the Finance Minister's own words: "... we will start next year somewhere higher..." It is almost certain: The deficit of the budget itself will increase, for example, due to increased payments for state-insured individuals, which is intended to prevent deficits in health insurance companies.
We can also add the financing of public service media or the continued increase in defense spending (although spending above two percent of GDP has an exception in EU rules). The cash budget will also be increased by the fact that the government postponed some of the expenses related to the construction of the planned nuclear power plant this year. It is important to remember that even expenditures that are not included in the "EU" deficit calculation often contribute to the level of debt. And interest rates on it are increasingly burdening the state's economy. The sum of these items amounts to several tens of billions of crowns, or several tenths of a percent of GDP. If the deficit actually approaches the three percent of GDP threshold this year, as expected by the European Commission, it is not clear how the government intends to pay for these new, additional expenses without significantly increasing the deficit.
```htmlAfter what the minister calls a "temporary" increase in the deficit, a turnaround is supposed to occur: "... and then we will start gradually reducing it." The experience of all previous governments shows that finding savings on the expenditure side of the budget in the order of tens of billions of crowns is almost impossible. This is also reflected in the analysis of budgetary data. According to this analysis, the main cause of current deficits is not increasing expenditures, but rather a weakening of the revenue side of the budget.
Therefore, if a faster reduction in the deficit is truly to be achieved after 2027, it is difficult to imagine that this could be accomplished without increasing certain taxes or implementing significant spending cuts (which is repeatedly emphasized by recommendations from the European Commission, which stresses the importance of efficient public spending). There are few signs to suggest that this government will achieve a breakthrough in deficit reduction after years of only moderate improvements. Moreover, the government's plan to reduce the deficit involves more than just minor changes. The minister rightly points out that "…the commission will expect us to reduce it by approximately 0.5 percentage points of GDP per year." With the expected economic development, such a rate of consolidation would represent a correction of approximately 50 billion crowns each year. This roughly corresponds to the annual impact of the very unpopular, but necessary for public finances, Fiala package.
If it turns out that the government cannot find savings of tens of billions of crowns per year (the government is currently moving in the opposite direction), and if expectations are met that measures such as the new electronic sales register (EET) will only bring limited increases in revenue, then increasing revenues (i.e., raising taxes) will be necessary to further reduce the deficit. However, according to the government's plan, this would occur at a time when parliamentary elections are approaching. Given the populist nature of the ANO movement, such a scenario seems very risky. And therefore, the minister's assurances about future "deficit reduction" do not seem convincing.
It would be unfair to say that deficits of around 3% of GDP represent a catastrophe for the Czech Republic. They do not. However, they represent a long-term loss that will be difficult to correct. Moreover, these are primarily "bad" deficits.
This is a loss because we are gradually losing one of the advantages that our country has long had – relatively low levels of debt. My former colleague, Pavel Kysilka, who expressed tolerance towards higher deficits at an event organized by the think tank of the largest governing party, claimed that the Czech Republic still ranks among the countries with the lowest debt. However, it seems that he did not examine the current figures too closely. Many years ago, we tolerated such a designation to some extent. Today, we do not. In 2025, eight countries in the European Union had lower debt-to-GDP ratios, which is certainly not an insignificant number. And even ten years earlier, we were not among the absolute leaders – in 2015, six member states had lower levels of indebtedness.
``````htmlPerhaps even more interesting is another statistic. Over the past ten years, the debt-to-GDP ratio has decreased in more countries in the EU (fifteen) than it has increased in (twelve). Moreover, it is not true that indebtedness is decreasing primarily in highly indebted countries, where such a decrease is mathematically easier to achieve. Unfortunately, the Czech Republic belongs to the second group. Our debt in relation to GDP has increased, and it will very likely continue to increase.
Few people realize how much the fact that we are not in the Eurozone complicates the situation for the guardian of state finances. This significantly increases the cost of financing our debt. Even a relatively lower level of indebtedness burdens us similarly to if we had a substantially higher debt within the Eurozone.
Another economist, Professor Jan Švejnar, whom the minister invited to the aforementioned discussion, in my opinion, is not entirely correct in his tolerance for relatively high deficits. He has long argued that our country needs to invest more and that budget deficits help with this. However, the structure of our expenditures does not suggest that the increasing debt is a temporary consequence of increased productive investments that will strengthen economic growth in the future.
Expenses that are growing rapidly do not have this potential, and moreover, our country has not implemented the budget system recommended by the Commission, which would help to select expenditures based on their performance, nor is it close to doing so. In other words, our deficits are not "good deficits," and it seems that the government may even have difficulty maintaining the expected share of productive investments in the budget.
Forever Indebted
The primary cause of today's complex budgetary situation is the weakening of the revenue side of public finances. This is mainly a consequence of a combination of reductions in certain taxes under the previous government led by Prime Minister Babiš and a real decline in revenues from excise taxes. The situation is further complicated by a rigid tax structure, which, among other things, is characterized by an unwillingness to tax assets or capital income at least to the extent common in many comparable countries. On the expenditure side, the current government combines the absence of significant changes with economically questionable and budgetarily costly political decisions, although it has already postponed many of its original promises.
It is almost impossible to find a significantly increasing share of specific expenditures that strengthen the country's growth potential. Current and future deficits are therefore more a consequence of populism and the inability to implement necessary reforms. A closer look also suggests that a number of strategic investments, such as high-speed railways, will be postponed or partially abandoned.
This is not an unusual situation. The Czech state has long had difficulty investing quickly enough in areas that would support economic growth, not to mention the limited ability to use the budget countercyclically, i.e., to stabilize the economy. We also do not know how to effectively manage the tax system to encourage certain desirable activities – such as investment – and discourage others, such as the consumption of alcohol, cigarettes, or fossil fuels.
```However, many previous governments at least tried to keep the growth of public debt under a certain level of control. And to some extent, they accepted or tolerated existing fiscal rules. In these respects, the current government will likely differ significantly from its predecessors. Despite not very original assurances from the guardian of the state treasury, it is likely that the Czech Republic will face higher deficits than those announced.
The government will therefore take advantage of the space created by controversially loosening budgetary rules. The deficit reduction that the government has incorporated into its plans will be difficult to achieve. This will be detrimental to our citizens. Not in an abstract sense, but in a very concrete way – expressible in money that they will have to pay extra to the state in the future.
COMMENT BY MEP LUĎKA NIEDERMAYER FOR HOSPODÁŘSKÉ NOVINY