IMF downgrades Czech economic outlook: what it means for budget

The International Monetary Fund has downgraded its outlook for the Czech economy. It estimates that Czech GDP will grow by 1.8% this year, while the Ministry of Finance expected 1.9% in August. The IMF forecasts that inflation will accelerate to 2.8% next year, whereas the budget assumes 2.7%.

This is unwelcome news for the government: when drawing up next year's budget, it bet precisely on economic growth. The reasoning was that higher spending would kick-start the economy and the state would collect more in taxes. “Every additional percentage point of GDP growth brings roughly 20 billion crowns into the state coffers,” Finance Minister Alena Schillerová (ANO) said in February.

Deficit and risks to tax revenue

The budget for next year is planned with a deficit of 386 billion crowns, the second deepest in the history of independent Czechia. Only the 2021 deficit of almost 420 billion was larger.

BHS economist Štěpán Křeček notes that slower growth puts pressure on tax revenue and threatens the planned balance. In his view, MPs can take the risks into account through amendments. “If no adjustments are made, the government will have to actively manage the budget throughout the year. Otherwise, the actual deficit risks being higher than planned,” he said.

VAT collection will be decisive

Economists do not expect a truly significant impact on the budget. Deloitte economist David Marek calculated that a one-percentage-point change in GDP translates into roughly 26 billion crowns in budget revenue. “If the economy grew by just 1.9% instead of 2.4%, the impact on the budget would be about 13 billion,” he said.

Petr Dufek, an analyst at Creditas Bank, believes the worsened outlook will not hit next year's budget much. According to him, higher-than-expected inflation could bring greater VAT revenue, while inflation-indexed spending will be affected only in the 2028 budget.

Around Prague, based on reporting by novinky.cz