Uncertainty regarding the evolution of public finances in 2005 and 2006

The preliminary public budget results for 2004 increase the uncertainty regarding future fiscal developments and their macroeconomic effects in 2005 and 2006. This is mostly due to the state budget deficit, which was roughly CZK 22 billion lower than originally planned. A comparison of the approved state budget and the preliminary results shows not only that revenues were underestimated, as in 2003, but also that expenditure was very much overestimated. The adjusted deficit according to the approved law was CZK 115.7 billion, whereas the Ministry of Finance reported a deficit of CZK 93.5 billion as of the end of 2004. More than two-thirds of this result can be attributed to higher revenues (especially from taxes) and less than one-third to lower expenditure.

Much more uncertainty is introduced into the considerations of the evolution of the public budgets by the fact that under the current methodology expenditure includes transfers of undrawn funds for reserve funds for future use, which exceeded CZK 29 billion for all the budget chapters combined. From the economic point of view, the actual deficit (not only the accounting deficit) of the state budget was much lower still (taking into account expenditure from reserve funds of roughly CZK 5 billion), at approximately CZK 70 billion. The change in the budgetary rules in mid-2004, which for the first time allowed the carry-over of all undrawn funds into 2005, thus revealed the reserves on the expenditure side of the state budget. Currently available data on the results of state funds, local budgets and the National Fund also indicate that these segments, contrary to expectations, could contribute to a reduction in the total government sector deficit in 2004.

Given the underestimation of revenues and overestimation of expenditure, the predicted evolution of public finances and the estimated effect of public finances on the economy in 2005 and 2006 are associated with a high degree of uncertainty. It is not clear whether similar reserves will be created in the state budget in these years, and, if so, and how high they will be, and there is also a risk that the state authorities will change their behaviour and fail to create new reserves, or even "dissolve" the funds carried over from the 2004 budget by increasing expenditure.