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Fiscal Policy during
Transformation Period
Czech Case
Ing. Petra Dvoøáková
KVE ESF MU
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Content of Lecture
1. Fiscal Policy Strategy 1993 (Klaus)
2. Fiscal Policy Strategy 1997 (To¹ovský)
3. Fiscal Policy Strategy 1998 (Zeman)
4. Fiscal Policy Strategy 2002 (©pidla)
5. Fiscal Policy Strategy 2004 (Gross)
6. Discussion
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Fiscal Policy - definition
Government macroeconomic policy
aimed at affecting state economy
through public budgets.
Possible instruments:
reduction/increase of government expenditures,
reduction/increase of taxes or government
revenues.
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Fiscal expansion
increase of government expenditures,
in general:
- consumption of government
(purchases of goods and services),
- transfers;
reduction of taxes.
Fiscal restriction ­ opposite of expansion.
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Instruments of fiscal policy
Fiscal expansion  budgetary deficit.
Fiscal restriction  budgetary surplus.
 taxes
 government
expenditures
Fiscal expansion
 taxes
Indirect
instruments
 government
expenditures
Direct
instruments
Fiscal restriction
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Graphs: Trends in government deficit,
expenditure and revenue (per cent of GDP)
(1) The general government deficit is from the cash-based GFS account adjusted by the
Ministry of Finance. The State Budget deficit is from the cash-based GFS account
voted by Parliament. Source: Czech Statistical Office.
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Basic Phases of Czech Fiscal Policy
1. 1993 ­ 1998 ,,conservative" fiscal policy
aims - to achieve balanced public budgets
- to reduce role for the state in the
economy;
2. 1998 ­ 2004 ,,neokeynesian" fiscal policy
aims - to achieve sufficient growth of GDP
in spite of budget deficits
- to strengthen role for the state in the
economy.
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Graph: Fiscal Developments 1994 ­ 2005.
Back Klaus Back Zeman
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Graph: Difference between budged estimated
balance and real budged balance (1993 ­ 2005).
Source: Author based on data by The Czech Ministry of Finance.
back Klaus
-140
-120
-100
-80
-60
-40
-20
0
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1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Years
BillionsofCZK
Budget Estimated Balance Real Budget Balance
back Gross
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Form of fiscal policy
The form of fiscal policy is influenced by values of
political parties coalition that can reach the
majority in Parliament.
Right wing political parties ­ based on idea of free
market, come out of neo-liberal theories.
Left wing political parties ­ based on idea of
solidarity, come out of social-democratic theory.
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,,Narrow" vs. ,,wide" conception of
Czech public finance
narrow conception
- used 1993 ­ 1997
- included only state budget and municipal
budgets
wide conception
- used 1998 ­ nowadays
- included state budget, municipal budgets,
extra-budgetary funds, budget of health
insurance system, state financial assets and
debts.
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Fiscal position of CR in 1993
CR was given as an example of a good fiscal
position to the other transitive economics.
Reasons:
budgets had no deficits,
the value of public debt was low,
tax burden had gone down.
This position was partially supported by a non-
transparent system of transformation
institutions and extra-budgetary funds.
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Fiscal Policy Strategy 1993 (Klaus)
Václav Klaus
Neoclassic economist
Connected with right wing
political party ODS
Prime Minister
1992 ­ 1997
1997 ­ abdication because
of problems in political
coalition
Nowadays ­ President of
The Czech Republic
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Fiscal Policy Strategy 1993 (Klaus)
establishing a legislative and technical
framework comparable to that in modern
market economies
privatization as the cornerstone of the Czech
transition to market economy
explicit fiscal target  no increase in the
nominal state debt  decrease as a ratio to
GDP (see graph)
balanced public budgets (see graph)
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Fiscal Policy Strategy 1993 (Klaus)
debate about establishing a legislative
requirement for balanced state budgets  not
accepted by the Parliament
a new tax system (1993) based on a neutrality,
equity, and simplicity
expenditure restrictions ´97, ´98 ("packets")
restrictive fiscal policy
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Fiscal Policy Strategy 1997
(To¹ovský)
Josef To¹ovský ­ Prime Minister in 1997, before
and after - Governor of Czech National Bank,
nowadays ­ head of Swiss Financial Stability
Institute
non-political government, ,,officers"
short term (17. 12. 1997 - 22. 7. 1998)
more transparency in fiscal flows
no further expenditures restriction
neutral fiscal policy
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Fiscal Policy Strategy 1998 (Zeman)
Milo¹ Zeman
Neokeynesian economist
Connected with left wing
political party ÈSSD
Prime Minister
1998 ­ 2002
Nowadays ­ ,,pensioner"
and commentator of Czech
politics
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Fiscal Policy Strategy 1998 (Zeman)
social democrat government
original fiscal policy target  maintenance of
balanced public finances, BUT the government
openly opted for promoting economic growth
by means of public budget deficits (see graph)
priorities in housing, education, infrastructure
investment (highway D 47?)
public expenditure growth  structural deficit
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Fiscal Policy Strategy 1998 (Zeman)
problem ­ mandatory expenditures -
predetermined structure of state budget
expenditures (see graph)
some special off-budgetary institutions (e.i.
extra-budgetary funds) were established to carry
out public investments in certain areas 
further fragmentation of government budget
structure
expansive fiscal policy
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Fiscal Policy Strategy 2002 (©pidla)
Vladimír ©pidla
Connected with left wing
political party ÈSSD
Prime Minister
2002 ­ 2004
2004 ­ abdication because of
problems in his political party
Nowadays ­ EU
Commissioner for
Employment, Social Affairs
and Equal Opportunities.
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Fiscal Policy Strategy 2002 (©pidla)
another social democrat government
continued public expenditure growth, decrease
of public revenues
continued growth of public debt
attempt of restrictive fiscal policy ­ suggestion
of Public Budgets Reform (connected with
entrance of the CR to the EU in May 2004 ­
Maastricht criteria )
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Fiscal Policy Strategy 2004 (Gross)
Stanislav Gross
Connected with left wing
political party ÈSSD
Prime Minister
2004 ­ 2005
2005 ­ abdication
because of problems
with his family property
Nowadays ­ left politics,
employed as a lawyer
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Fiscal Policy Strategy 2004 (Gross)
another social democrat government
continued growth of public debt, BUT
decreasing of deficit (real < estimated) see graph
achievement of Maastricht criterion for public
deficit - 3 % GDP (= 83,4 bill. CZK)
restrictive fiscal policy ­ implementation and
realization of Public Budgets Reform
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Public sector balance and the
Maastricht criteria
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Public debt and the Maastricht
criteria
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Current Situation
1. 5. 2004 ­ access to the EU (obligation to
fulfill Maastricht criteria)
25. 4. 2005 - change in position of Prime
Minister  Paroubek
Analyses of current situation in fiscal policy
connected with analyses of Public Budgets
Reform ­ next lecture
Discussion
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Graph: Comparison of Budget Balance.
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Mandatory expenditures
Expenditures can be divided in:
non-mandatory expenditures
mandatory expenditures (social benefits,
unemployment benefits, contribution for
building savings, public debt interest ...)
quasi-mandatory expenditures (wages, allowance
organization, ...).
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Graph: Development of Mandatory
Expenditures (1997 ­ 2002)
back
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Graph: Comparison of total expenditures.
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Issues for Discussion
Fiscal policy objectives of the first Czech
government compared with those of student's
countries at the same time
An analysis of the Czech fiscal policy in terms of
access to the EU (see graph)
Transparency of the Czech fiscal system
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Graph: Direct Impact of EU Accession
on Government Sector Deficit.
-2,5
-2,0
-1,5
-1,0
-0,5
0,0
0,5
1,0
2004 2005 2006 2007
%GDP
Structural operations Compensations Own resources
SF & CF projects Other items (net) Net budgetary impact
Source: The Czech Ministry of Finance. back
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The End