Present and Future Fiscal Policy Problems in the Czech Republic

Abstract

This paper is focused - using the example of the Czech Republic since 1993 - on a description of the hidden risks, implicitly existing in the system of public finances during the transition period (from a centrally planned towards market economy). The starting assumption is that public budgets have in time of economic transition certain specific functions. These consist explicitly in supporting the transitional process by transferring part of the economic and social costs, attached to it, over time and various categories of population. These functions are to be carried out at time, when the economic performance of those countries tends to be rather poor and the revenue side of the budgets is not buoyant. Since the financial capacity of the budget is restraint, governments try to find ways by which transition functions could be carried out while their financing would not take the form of instant cash outlays.

Evidence of the Czech Republic suggests that measures, conceived to meet the expectations attached to the budget in respect to part of the transitional costs, though conceived  originally as temporary, tend over time to become of a permanent nature. Issues such as a risk of moral hazard then occur.

The analysis also points to the fact that these sorts of  phenomena may not be the only factor that contributed to the deterioration of the Czech public finance in recent years.

The evidence of fiscal developments in quite a number of transitional economies suggests that elements of these features tend to exist in most of those countries.