Economists: Czechia Is Eating Through Its Budget — The Era of Easy Growth Is Over

Real revenues of the Czech state budget have shrunk by more than CZK 100 billion since 2019 — driven mainly by the abolition of the "super-gross wage" calculation, the lack of excise tax indexation, and shrinking EU transfers. Meanwhile, real spending over the same period has jumped by nearly CZK 200 billion, according to data from the Czech Fiscal Council.

The biggest spending increases went toward defence, servicing state debt, payments for state-insured persons, and pensions. Transport spending has also risen noticeably — the only category that can genuinely be called an investment in future development. The rest, experts say, doesn't reflect any deliberate policy choice by politicians, but rather the gradual paying-off of bills run up during the COVID-19 pandemic, the war in Ukraine, the inflation spike, and an ageing population.

The Budget Hole Keeps Growing

According to the Fiscal Council's calculations, the structural imbalance in Czech public finances stands at roughly CZK 185 billion, or 2.1% of GDP. In other words, the state is spending more than it earns even when the economy is doing reasonably well. If reforms don't get underway soon, Czechia will breach its own fiscal rules as early as next year.

What's causing additional alarm is that Andrej Babiš's government is gradually dismantling the parameters of the pension reform — the one genuine success of the previous cabinet's fiscal consolidation efforts. Experts warn that the state must either raise revenue or cut spending. Yet since 2019, the Czech tax structure has been shifting in the wrong direction — away from personal income tax and toward social security contributions, which makes the system less progressive and hits low-income earners hardest. On top of that, the real tax burden on consumption has been falling.

Analysts point to Poland as a contrasting example: Prime Minister Donald Tusk and Finance Minister Andrzej Domański recently unveiled a tax reform that introduces relief for the middle class while clearly identifying how it will be funded — a moderate tax hike for large corporations and a higher solidarity levy for Poland's wealthiest citizens. Czechia, by contrast, is only promising more decisive austerity starting in 2028 — without a single concrete measure attached, and with a timeline that happens to fall conveniently after the next elections.

The End of the "Capitalist Paradise"

The state of public finances is also being shaped by a broader global shift described by British economist Charles Goodhart. According to his theory, the period roughly from the mid-1980s to 2020 was an exceptionally favourable set of circumstances — not a norm to which the world can simply return.

During that time, the global economy absorbed an enormous influx of new labour all at once: large postwar generations reached working age, falling birth rates freed up women for paid employment, and millions of people shifted from agriculture into industry and services. After the Cold War, China and Eastern Europe joined global trade, and globalisation allowed companies to move production to countries with cheap labour.

As a result, the effective labour supply available to Western employers more than doubled between 1990 and 2020. This let companies grow without running into labour shortages, while global competition kept wages and prices in check — hence cheap goods, low inflation, and low interest rates, which governments around the world got used to treating as the new normal. Goodhart wryly calls this era a "capitalist paradise": the main winners were owners of capital and highly skilled professionals, while real wages for unskilled workers in the West stagnated — fuelling discontent among large segments of society in Germany, the US, France, and Czechia.

According to Goodhart, this demographic and globalisation wave is now fading: populations are ageing, the labour force is shrinking, and deglobalisation is slowing the movement of cheap labour around the world. The result is slower growth, higher wages, inflation, and interest rates — all putting serious pressure on state coffers, at a time when the budgets of Czechia and most of Western Europe are already running significant deficits.

The cheap financing that once allowed governments to keep postponing debt repayment is disappearing along with the cheap labour that once kept inflation low. That's why, analysts argue, Czechia shouldn't rely solely on its relatively low debt-to-GDP ratio — around 45%, one of the lowest in the EU — as a guarantee of safety. Instead, the country needs to bring budget revenues in line with real, unavoidable obligations in defence and, above all, healthcare and pensions. As investments in transport infrastructure and nuclear energy show, a model of rising spending is achievable — but the era of growth that comes almost effortlessly, experts say, is now over.

Source: seznamzpravy.cz