OECD Economic Surveys: Czech Republic 2020

1. Key Policy Insights

Introduction

As most of the world, the Czech Republic is battling the social and economic consequences of the new coronavirus pandemic (Figure 1.1). The government reacted swiftly by introducing strict containment measures in March, and much of the social and economic activity – domestic as well as international – was brought to a halt during March and April. While the first wave of the outbreak was effectively contained, the Czech Republic is undergoing an even stronger second wave. Recovery, which started as soon as the initial lockdown was lifted in April, is now stalling due to a renewed lockdown and restrictions on certain activities. Uncertainty remains elevated and economic growth is expected to resume only slowly over the coming years.

The Czech Republic had ample policy space at the start of the crisis, and the authorities stepped in with bold monetary and fiscal easing to support employment, incomes and liquidity (Figure 1.2). Moreover, many of these support programmes have been extended amid the second wave and the reintroduction of new economic restrictions.

Figure 1.1. The Czech Republic is fighting the social and economic consequences of the pandemic

Source: OECD calculations based on European Centre for Disease Prevention and Control (ECDC); OECD Economic Outlook database; Czech Statistical Office.

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Policy has helped preserve jobs and businesses, but some of them may no longer be viable after the economy restarts. A balance will need to be found between supporting viable jobs and companies on the one hand, and promoting resource reallocation across sectors and companies to restore productivity growth on the other. With relatively low public debt, the Czech Republic is in a good position to continue to provide fiscal support, if needed. Nevertheless, the crisis heightens the need to continue addressing long-term challenges and resume structural reforms. Sustainable growth will raise living standards and help restore fiscal and monetary policy space.

Figure 1.2. Fiscal and monetary policies stepped in to support the economy

Source: OECD Economic Outlook 108 database; Refinitiv.

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The crisis struck after a long period of impressive convergence to the OECD average incomes (Figure 1.3), and rising living standards. Geographical location and openness to foreign direct investment, boosted by the accession to the EU and the single market, spurred integration to global value chains. Coupled with sound economic policies, this helped lift productivity, wages and the quality of life (Figure 1.4). The Czech Republic has also maintained one of the lowest inequality and poverty rates in the OECD, supported by high employment rates and comprehensive redistribution through taxes and transfers (Figure 1.5).

Figure 1.3. The Czech Republic was rapidly converging towards the OECD average

Note: CEECs include Hungary, Poland, Slovak Republic and Slovenia.

Source: OECD Productivity database.

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Figure 1.4. Prior to the crisis, the Czech Republic performed well in many aspects of well-being

Rankings amongst OECD countries from 1 (best) to 37 (worst)¹, 2018 or latest available year

1. 1. Each well-being dimension is measured by one to four indicators from the OECD Better Life Index set.

Source: OECD Better Life Index database.

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Figure 1.5. Income inequality is one of the lowest in the OECD

Gini coefficient, scale from 0 "perfect equality" to 1 "perfect inequality", 2017 or latest available year

Source: OECD Income Distribution database (IDD).

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Nevertheless, the Czech Republic faces long-term challenges that need to be addressed in order to sustain the rise in living standards once the economy recovers. Labour utilisation is high, raising GDP per capita, but labour productivity – while catching up - still lags behind markedly from the OECD average (Figure 1.6, panel A). After the global financial crisis, productivity growth slowed significantly (Figure 1.6, panel B), and remained firmly below pre-crisis trends for an extended period. Sharp cuts to output and trade during the coronavirus pandemic and heightened uncertainty may additionally hurt productivity-enhancing investment. In addition, shifting to higher value-added activities could be an opportunity to help reduce the high carbon dependency of the Czech economy.

The Czech population will age substantially over the coming decades (Figure 1.7), reducing employment rates and growth, but also raising age-related spending pressures. Before the coronavirus crisis, labour shortages were one of the main barriers to growth and labour market tensions resulted in high growth of wages and a record low unemployment rate. With the COVID-19 crisis, unemployment has started to rise, although it remains very low in international comparison. To support the recovery and future growth, it is essential to help jobseekers transition to new jobs and to raise labour participation of groups at the margins of the labour market, notably women with young children. Together with more equitable provision of education and effective lifelong learning, this could spur growth and productivity.

Figure 1.6. Labour productivity growth has stalled and remains below the OECD average

1. GDP is measured at current prices, current PPPs. Labour productivity is measured by GDP per hour worked and labour utilisation is the total number of hours worked divided by the population.

2. Pre-GFC trend growth in real GDP per worker is calculated from a linear trend between 1997 and 2006, and is projected from 2007Q1 onwards.

Source: OECD Economic Outlook database; OECD Productivity database.

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Figure 1.7. The population is ageing rapidly

Note: In Panel A, youth are shown in green, 25-64 year-olds in blue and seniors in orange. After 2020, data are from the “medium variant” of UN scenarios. In Panel B, the shaded area denotes the 25th to 75th percentile range of available data for OECD countries.

Source: United Nations (2019), World Population Prospects: The 2019 Revision, Online Edition; OECD Economics Department Long-term Model.

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Challenges related to lagging productivity, industrial pollution, ageing and obsolete skills are not the same across the Czech Republic. Despite overall low inequality, there is considerable regional variation in incomes and poverty, and the gaps have grown over time. Certain regions suffer from declining and ageing population, low human capital, poor connectivity and restructuring economies. This is not helped by the fact that the Czech Republic suffers from a highly fragmented subnational government with the highest number of municipalities per head in the OECD. The resulting lack of capacity at the local level impacts the quality of public services and impedes the uptake of effective development projects.

Against this background, the main messages of this Survey are:

• Policy needs to continue to support households and businesses in the event of persistent economic weakness. It should nevertheless gradually shift from broad support towards facilitating resource reallocation and implementing well-targeted measures to avert scarring effects and multiple firm bankruptcies. This will also help reduce poverty and deprivation.

• Strong growth in incomes and living standards will require faster productivity growth, which can be fostered through further improvements in the business environment and higher and more effective R&D investment. Policies to reduce the reliance on coal, greenhouse gas emissions and air pollution would also boost well-being. Raising labour-market participation, notably of mothers with young children, and improving skills are also needed to lift incomes and economic growth, and make them more equitable.

• Less fragmented local government would help effectively deliver public services such as education, health and public administration, and help reinvigorate local economies.

Box 1.1. The key long-term priorities of government’s economic policy

The priority in 2020 has been to tackle the coronavirus pandemic and the associated social and economic crisis. The government aimed to ensure the safety and health of the population by steering the health system and other government services towards effective containment of the pandemic and treatment of those infected. Furthermore, the authorities provided ample income and liquidity support to the economy.

Other key priorities of the current government include the following areas:

Ageing – improving the long-term fiscal sustainability of the pension system; upholding the quality and the cost-effectiveness of the healthcare system in the long-term and adopting measures to fulfil the needs of healthcare personnel.

Digitalisation – keeping up to speed with the ongoing digital revolution; improving eGovernment services; developing high-speed internet and building new-generation networks.

Investment – promoting private investment; focusing investment incentives on higher value-added projects linked to R&D activities and the creation of higher-skill jobs; simplifying and streamlining the process of obtaining construction permits.

Labour market and gender equality – reducing the gender pay gap; supporting affordable, accessible and high-quality childcare services; facilitating labour migration from abroad and integration of foreigners.

Research, development and innovation – supporting R&D activities and innovation; providing support for cooperation between research and business sector and subsequent commercialisation of R&D results.

Transport infrastructure – aiming to complete the backbone transport infrastructure and improve connectivity of remote regions; implementing measures enabling the development of automated and autonomous mobility.

Housing – setting up conditions for more affordable housing.

The economy requires substantial macroeconomic policy support

The Czech Republic is experiencing a strong second wave of the coronavirus pandemic

The Czech health system - with close to universal coverage - was relatively well equipped to respond to the crisis, with the number of doctors and acute hospital beds above the OECD average (Figure 1.8). As the threat of the pandemic rose, additional resources were channelled to the health sector. Adjustments were made to raise capacity to treat COVID-19 patients, enhance testing capacity and boost the availability of personal protective equipment (PPE).

Figure 1.8. The Czech health system was relatively well equipped to respond to the crisis

Note: In Austria, the number of nurses is underestimated as it only includes those working in hospitals. Acute care beds include not only beds in intensive care units, but also beds in acute care units (e.g. all surgical units, all gynaecological and obstetric services, as well as acute psychiatric care beds in about half the countries). France, Japan and Latvia exclude psychiatric care beds.

Source: OECD Health Statistics.

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The coronavirus pandemic first started gathering pace after March 9, 2020, when the first infection of a person without travel history was confirmed. A state of emergency was proclaimed on March 12. Internal travel and gathering in groups were restricted and international travel banned. Restaurants, hotels and most stores were closed. Swift action bore fruit and the first wave was soon effectively contained. This allowed the government to commence a gradual lifting of restrictions on society and the economy in mid-April and most restrictions were lifted by the end of June, after which only bans on large gatherings remained in place.

After the summer, however, the Czech Republic entered a strong second wave with the number of cases and deaths far exceeding the levels from the first wave (Figure 1.9). The government declared a state of emergency on September 30, and reintroduced a national lockdown on October 21, limiting the movements of people. Increasingly heavy restrictions were also imposed on economic activity, with bans on events and gatherings, the closure of education establishments and severe restrictions in the hospitality and retail sectors, among others. The number of new cases dropped significantly in November, albeit remaining elevated, and in December, the government started easing some containment measures. If the Czech Republic was one of the more successful countries in containing the pandemic during the first wave, it was hit hard in the second wave.

Figure 1.9. The Czech Republic is experiencing a strong second wave

Source: OECD calculations based on European Centre for Disease Prevention and Control (ECDC).

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The economy contracted sharply

Before the coronavirus outbreak, the economy was growing at a robust pace, but already showed signs of slowing (Figure 1.10). Weak growth in trading partners, notably Germany, slowed industrial production and exports. The rise in uncertainty and softening sentiment in relation to international trade disputes and Brexit reduced private investment. On the other hand, household consumption remained strong, fuelled by high wage growth, underpinned by a very tight labour market. The labour market tightness also contributed to rising inflation, together with rising food prices. In November 2019, inflation moved outside the 1-3% inflation tolerance band, and peaked at 3.7% in February 2020.

Figure 1.10. Economic developments

1. Sales in retail trade, except of motor vehicles, constant prices.

2. Number of overnight stays of guests in collective accommodation establishments.

Source: OECD Economic Outlook database; Czech Statistical Office.

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The coronavirus outbreak and the lockdown had an immediate strong negative impact on economic activity (Figure 1.10). Industrial production fell and economic sentiment plunged. In the first half of 2020, all components of GDP showed large drops, bar government consumption and investment. Apart from essential businesses, activity in some sectors was frozen temporarily by decree, while in others, companies reduced output of their own accord due to unfavourable conditions. The Czech National Bank (CNB) estimated that the spring containment measures affected about 40% of the Czech economy (Czech National Bank, 2020a). According to the Czech Statistical Office, trade, transport, accommodation and hospitality, and manufacturing were among the economic activities most negatively affected in the second quarter of 2020.

Figure 1.11. The recovery stalled due to renewed containment measures and elevated uncertainty

Note for panel B: The level during the baseline period was established based on the median value of the volume of visits for each day of the week during the period January 3–February 6, 2020.

Source: OECD calculations based on Google Community Mobility Report; Central bank of the Czech Republic, https://www.cnb.cz/cs/o_cnb/cnblog/Prvni-odhad-dopadu-pandemie-COVID-19-na-ekonomiku-CR/#

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Activity showed signs of a partial recovery soon after the government lifted restrictions, but the recovery has stalled amid elevated uncertainty and renewed containment measures. Electricity consumption and mobility statistics quickly recovered from their troughs in April (Figure 1.11). Manufacturing production, retail sales and tourism also bounced back after April and economic sentiment partly recovered (Figure 1.10). However, these rebounds have reversed since the end of the summer. The Prague stock exchange PX index and the koruna exchange rate, after regaining value over the summer, lost value from August to October (Figure 1.12).

The Czech Republic’s economic openness and high level of integration in global value chains magnified the economic impact of the pandemic (Figure 1.13). Exports of goods and services fell strongly due to the drop in external demand and bans on international movements. Importantly, the automobile industry was forced to stop production for close to 30 working days (ACEA, 2020) due to international supply chain disruptions and lower demand, with repercussions for many domestic SMEs. This has added to difficulties of the automobile sector that had already been under pressure due to regulatory changes (CO2 emission targets for new cars) and digital transformation requiring structural change and investment in new technology.

Figure 1.12. The stock market and the exchange rate lost value after summer gains

Source: Refinitiv.

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Unemployment started to rise from low levels (Figure 1.14). The survey-based unemployment rate rose from 2.0% in February, to 2.9% in October 2020. Employment declined, and the number of average hours worked dropped in March–May, most notably among the self-employed, before rebounding in the summer. According to official estimates, job retention schemes (“Antivirus”) helped support more than 790 000 employees by end-September from close to 58 000 firms (Ministry of Labour and Social Affairs, 2020a), reflecting increased slack in the labour market. Job vacancies started falling after staying at elevated levels for almost a year, and wage growth eased markedly.

Inflation remained above the upper boundary of the tolerance band for most of 2020 (Figure 1.15), despite economic weakness. Rising slack in the labour market lowered pressures on wages and big drops in oil prices have had a dampening effect. However, koruna depreciation and increasing food and administered prices have put upward pressure on inflation. Increased costs for firms, due to supply restrictions and new sanitary requirements, also translated to higher prices for consumers (Czech National Bank, 2020c).

Figure 1.13. High integration in global value chains amplifies crisis impacts

1. The degree of exposure to a supply shock is computed as a share of foreign value added in gross output of the manufacturing sector, while the degree of exposure to a demand shock is computed as a share of domestic value added in foreign final demand. Other Asia includes Japan, Korea, India and ASEAN countries.

Source: OECD Economic Outlook n.107, IMF DOTS Database; UN Comtrade Database.

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Figure 1.14. Unemployment started to rise and wage growth slowed

Source: OECD Economic Outlook database; Eurostat database [jvs_q_nace2]; Czech Statistical Office; OECD National Accounts.

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Figure 1.15. Inflation hovered above the upper boundary of the tolerance band for most of 2020

Note: Inflation target is 2% with a tolerance band of +/- 1% points.

Source: OECD Economic Outlook database.

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The recovery will take time and is shrouded by uncertainty

GDP is estimated to contract by an estimated 6.8% in 2020. It is projected to recover slowly, by 1.5%, in 2021, and 3.3% in 2022. During 2021, the continuation of the pandemic outbreak, some remaining containment restrictions in most sensitive sectors, and weak foreign demand will delay and weaken the economic recovery. Vaccines are assumed to be widely deployed only in the latter half of 2021. Subdued activity and high uncertainty will dampen private consumption and business investment. Wages and prices will grow slowly and inflation is expected to slow towards the 2% target level. Firm bankruptcies are expected to rise in 2021 due to prolonged economic weakness and withdrawal of some support measures. The unemployment rate is also expected to continue rising in the first half of 2021. Thereafter, once the pandemic is better controlled globally and locally, economic growth will gather pace on the back of improving sentiment and rising domestic demand. Trade will pick up, too.

Table 1.1. Macroeconomic indicators and projections

Annual percentage change, volume (2015 prices)

1. Contribution to changes in real GDP.

2. Consumer price index excluding food and energy.

Source: OECD Economic Outlook 108.

Table 1.2. Low-probability events that could lead to major changes in the outlook

Shock	Possible impact
Limits on the free movement of goods and services after hard Brexit	The Czech economy is landlocked and very integrated into European value chains and would be struck by major changes affecting the flow of goods and services across Europe and the world.
Rising protectionist pressures in trade and investment and geopolitical tensions in and around Europe	Tariff increases affecting intermediate goods for the manufacturing sector would have damaging impacts. A downturn in activity in Europe due to geopolitical tensions could jeopardise the economic recovery in the Czech Republic.
Major house price correction	Large correction in house prices would have a negative impact on household consumption and economic growth and could expose vulnerabilities in the financial system.
Accelerated structural changes in the automotive sector (demand for low-emision cars and drive for digitalised production methods)	Loss of demand for cars and car parts produced in the Czech Republic, with multiplying effects throughout the Czech economy, destroying jobs and incomes, affecting SMEs as well as large companies.

Uncertainty remains high. In case of a more prolonged lockdown, private consumption, investment and trade would drop again to low levels. Protracted adversity would increase bankruptcies further, and the unemployment rate would surge. The unemployment duration would lengthen, too. The highly open Czech economy is exposed to persistent disruptions to international trade or new trade barriers. Potential further disruptions to the international automobile supply chain could be particularly damaging to the economy. On the upside, the current substantial government support could have a stronger than expected positive effect. Notably, companies could resume their activities more quickly than expected thanks to job retention measures. Moreover, the deployment of vaccines could turn out to be swifter than expected, triggering a faster resumption of confidence and economic growth.

Considerable policy space permits continued support if needed

Monetary policy has room to ease further if needed

Monetary policy moved quickly to accommodate the drop in activity and support liquidity. Over the period from March to May 2020, the Czech National Bank (CNB) cut policy rates, from 2.25% to 0.25% (Figure 1.16), and communicated that it stood ready to do more, including koruna exchange rate support and quantitative easing. The Act on the CNB was amended, to temporarily allow (until the end of 2021) the CNB to trade instruments with maturities of more than one year, paving the way for quantitative easing. In addition, the CNB is now allowed to trade also with non-bank financial institutions, such as insurance and pension companies or with other institutional investors. The CNB took additional measures to support liquidity by broadening the range of eligible collateral and introducing liquidity-providing operations with longer maturities.

The CNB also relaxed credit ratio limits for new mortgages, relaxing the loan-to-value ratio and removing the debt-to-income ratio and debt-service-to-income ratio limits. These had been repeatedly tightened over previous years due to mounting risks in the housing markets (Czech National Bank, 2019a). Some households are exposed to the risk of default. The CNB estimated apartment prices to be 15-25% overvalued in 2019 Q4 and affordability continued to deteriorate (Czech National Bank, 2020b). However, despite the crisis, there have been no significant corrections in house prices as of 2020 Q2. Moreover, a prolonged period of very low interest rates may trigger a build-up of imbalances and further rises in housing and other asset prices, calling for monitoring the associated risks.

To help banks extend credit, the CNB also lowered the counter-cyclical capital buffer (from 1.75% to 0.5%, Figure 1.16). Before the crisis, banks were well capitalised and highly profitable, earning high interest margins and profiting from negligible impairments losses (Czech National Bank, 2019b and 2019c). Ample capital and measures taken to cushion the impact on credit losses should buttress the banking sector. In particular, the government introduced a measure – in agreement with the CNB – where debtors were able to interrupt their repayments for a period of three or six months. In addition, liquidity was offered to struggling firms backed by government guarantees. The CNB’s recent macro stress test confirmed the sector’s resilience to shocks (Czech National Bank, 2020b). However, credit defaults are expected to increase after the end of the loan repayment moratorium, and peak in mid-2021 (Czech National Bank, 2020b). In a prolonged recession, the capital surplus held by banks would play a key role in keeping the sector’s overall capital ratio above the regulatory threshold. The CNB has called for a prudent dividend policy.

Figure 1.16. The central bank moved quickly to support the economy

Source: OECD Economic Outlook database; Refinitiv; Czech National Bank.

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The monetary policy stance remains appropriately accommodative. However, the CNB should further scale up its support in the event of continued weakness in the economy, taking into account potential sizeable disinflationary (or even deflationary) effects, and their impact on its price stability mandate. At the policy interest rate of 0.25%, the room for conventional monetary policy is limited. The countercyclical capital buffer could be reduced further to allow more bank credit to the economy. Greater room – after the change to the Act on the CNB - to provide liquidity at longer maturities to the financial sector is welcome. The CNB could also undertake asset purchases (quantitative easing) to lower borrowing costs and ease financial conditions over the yield curve. This said, the yield curve has turned positive, reflecting lowering of interest rates at the short end, while long-term interest rates do not show signs of stress. The government bond yield and the spread with German Bunds have stayed within a limited range for the last two years (Figure 1.17).

Figure 1.17. Long-term interest rates do not show signs of stress

Source: OECD Main Economic Indicators database; Czech National Bank.

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The accommodative stance, despite short-term supply disruptions, is unlikely to compromise the price stability objective in the medium-term due to subdued demand. If inflationary pressures on the other hand arise in a persistent way, some stimulus might need to be withdrawn. In the case of a prolonged recession, it will be more challenging to minimise financial stability risks, as bankruptcies will be much larger and capital buffers of banks will likely be eroded. The Czech National Bank should continue to monitor risks in the banking sector, including that banks maintain a prudent dividend policy and refrain from other actions that might reduce their loss-bearing capacity.

Box 1.2. Rules-based macroeconomic policy

Monetary Policy

According to the Czech Constitution and the Act on the Czech National Bank (CNB), the CNB’s primary objective is to maintain price stability. Nevertheless, the CNB also supports the general economic policies of the Government leading to sustainable economic growth. As stipulated in the Act, the CNB has a high degree of independence from political structures when performing its functions.

The CNB’s monetary regime can be characterised as “inflation targeting”. An inflation target of 2 % currently applies (since January 2010) over the medium term, with a tolerance band of one percentage point in either direction. The CNB achieves its primary objective – price stability – by using its instruments, especially key interest rates. Occasionally, the CNB would use foreign exchange interventions to dampen excess market volatility or to help ease/tighten monetary policy.

Another main task of the CNB is to maintain financial stability. The CNB is required to set macroprudential policy by identifying, monitoring and assessing risks to the stability of the financial system and, in order to prevent or mitigate these risks, contribute to the resilience of the financial system and the maintenance of financial stability. In pursuing this mandate, the CNB performs financial sector supervision.

Fiscal policy

The Czech fiscal policy framework is bound by European and domestic legislation. In 2017, the Czech Republic strengthened further its fiscal framework, partly by translating EU fiscal rules into national legislation. Currently, however, due to extraordinary circumstances, fiscal policy deviates from the rules specified below, as the European Commission allowed members to activate the escape clause.

A debt rule stipulates that the general government sector debt (after the deduction of cash reserves) should not exceed 55 % of the nominal GDP. Acts on budgetary responsibility set the expenditure framework for the state budget and state fund budgets, compatible with a medium-term budgetary objective (MTO), to ensure long-term sustainability of public finances. The mandated MTO is expressed in terms of a “structural budget balance”, adjusted for the cycle and one-off factors. Fiscal policy should reach the MTO or be heading towards it by adjusting the structural budgetary positions at a rate of 0.5% of GDP per year. The fiscal framework includes the rules for local governments, whereby the amount of debt of a local government unit cannot exceed 60% of its average revenue for the last four financial years.

With the 2017 reform, two independent institutions have been put in place: i) the National Budgetary Council monitors the respect of fiscal rules and assesses the impact on long-term sustainability of public finances, and ii) the Committee for Budgetary Forecasts verifies the plausibility of macroeconomic and fiscal forecasts used in the budgetary process.

Any further easing of prudential regulation should be done conditional on transparent disclosures of financial exposures and regular stress testing. Once recovery is fully under way, the needed easing of prudential regulation during the crisis will have to be gradually reversed to rebuild capital and liquidity buffers, and to restore policy space. A sound financial system will be key for future monetary policy transmission and resilience in a next downturn (OECD, 2020a). In addition, the CNB could be given full-fledged powers to use a wide array of instruments in tackling future crises, by more permanently amending the Act on CNB.

Further fiscal policy support is needed

The authorities have introduced a broad and generous package of fiscal measures to support employment and incomes of households, and to preserve the liquidity of companies. Some of the measures have been extended in duration and scope after the reintroduction of containment measures in autumn. Employment support schemes, benefit payments to the self-employed, income support to workers caring for children and tax-deferrals were introduced. Moreover, a COVID loan and guarantee programme was launched to boost firm liquidity, notably for SMEs. Further support has been offered through deferrals of rent and loan repayments (see Table 1.3 for details).The Ministry of Finance (2020a) estimated that the direct budget support and deferred taxes amounted to 4.4% of GDP in 2020. In addition, liquidity support and guarantees to businesses amounted to 16% of GDP.

Prudent policies before the crisis had kept debt levels low, but the emergency fiscal response will raise the deficit and contingent liabilities. The sharp drop in economic activity negatively impacted fiscal revenues. Meanwhile, growing social benefits together with emergency support measures boosted public expenditures, resulting in a steep deterioration in public finances. The state budget for 2020 was revised three times in the first half of 2020, going from an initially planned state budget deficit of CZK 40 billion (0.7% of GDP), to CZK 500 billion (9% of GDP). According to the OECD projections, the general government deficit will rise steeply (Figure 1.18) and public debt is projected to rise from around 30% in 2019 to 45% of GDP in 2022. In addition, the government’s generous programme of guarantees could increase future burdens on public finances.

Figure 1.18. The public deficit and debt will rise from low levels

Source: OECD Economic Outlook 108 database

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As a reaction to the COVID-19 crisis, the structural balance fiscal rule has been temporarily amended to allow fiscal support. In 2017, the Czech Republic strengthened its fiscal framework by introducing debt and expenditure rules, and establishing two independent institutions that monitor public finances. According to the debt rule, the general government sector debt (after the deduction of cash reserves) should not exceed 55% of GDP. Furthermore, acts on budgetary responsibility set the expenditure framework for the general government that needs to be compatible with a medium-term budgetary objective (budget balance adjusted for the cycle and one-off factors). In line with the European Commission’s activation of the escape clause of the Stability and Growth Pact, following the crisis, the structural balance rule was amended for the new expenditure framework 2021-2028 (Ministry of Finance, 2020b). The amendment requires at least 0.5 percentage point annual improvements in the structurual budget balance per year between 2022 and 2028.

Fiscal consolidation should not be rushed. A more protracted crisis than expected would warrant further support to the economy. Efforts should also be made to use fully the newly available recovery funds at the EU level. In any case, the temporary nature of the emergency measures in 2020 - and their gradual withdrawal – are likely to contribute to a quite significant consolidation in 2021. Depending on the strength of the economy, enough flexibility should be permitted to do less consolidation early and more later on, once recovery is well under way.

Providing effective support to labour and capital reallocation

A key challenge is to identify viable jobs and companies in the near term to minimise long-term scarring, while allowing sufficient flexibility for necessary resource reallocation across sectors to support productivity growth (OECD, 2020a and 2020b). Restrictions on some non-essential activities (e.g. travel; hotels and restaurants; parts of the retail sector; recreational services) may persist for some time and consumer demand may take time to fully recover. In contrast, industries and firms with business models that are compatible with distancing may grow (e.g. e-commerce; courier, express and parcel services; parts of the health sector), suggesting that significant reallocation of resources is likely to occur (OECD, 2020b).

The “Antivirus” job retention programme has been effective in preserving existing jobs and valuable firm-specific human capital, but may hinder post-crisis adjustment across sectors. One policy option would be to gradually raise the financial contributions from employers in these schemes. This would encourage companies to self-select whether to continue participating or not, based on their assessment of the medium-term viability of the business. The government now aims to introduce a more permanent short-time working scheme, which could be triggered in future crises. Care should be taken to strike a balance between facilitating reallocation and preserving potentially unviable jobs.

Active labour market policies should be significantly boosted to facilitate job reallocation. The Czech Republic spends little money on active labour market programmes, partly a consequence of a history of a tight labour market (Figure 1.19). The OECD Priorities for Adult Learning Dashboard points to large gaps in providing adult learning to the unemployed. With rising unemployment and the gradual withdrawal of emergency measures, there is an opportunity to channel more resources into such programmes. Active labour market programmes should support the unemployed in their job search, and include training programmes and reskilling to facilitate employment in growing sectors, notably targeted to the low skilled, older workers and youth. The youth unemployment rate is likely to rise, as new entrants onto the labour market will face meagre prospects of finding work. For instance, in the 2009 crisis, youth unemployment doubled and stayed elevated for a number of years.

Effective insolvency procedures will also be crucial to minimise barriers to corporate restructuring and spur productivity-enhancing capital reallocation (Adalet McGowan et al., 2017). The Czech Republic implemented reforms to insolvency procedures, and now scores high on the strength of insolvency framework index in the World Bank’s Doing Business indicators. Still, this framework needs to be fully translated into effective practice. The recovery rate lags behind other advanced economies, and the whole procedure is costly and takes longer (World Bank, 2020). The number of insolvency cases will likely rise in the wake of the crisis and the system will need adequate resources to work effectively, including by recruiting and training staff.

Figure 1.19. There is room to boost active labour market policies

Source: OECD Labour Force Statistics; OECD Key Short-Term Economic Indicators; OECD Economic Outlook database.

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Table 1.3. Emergency fiscal measures to support the economy

Measure	Description		Total Amount (billion CZK)
Income support measures for individuals and households, excluding tax and contributions policy changes	Financial support for the self-employed and employees that stayed at home to take care of children aged 6 to 13 (due to schools closures). CZK 424 per day (up to CZK 13 144 per month) in March (later increased to CZK 500 per day) to all self-employed persons and 60% (later increased to 80%) of reduced assessment base to employees. The measure lasted from March 12 to June 30, 2020. Extended in October for the self-employed, with CZK 400 per day.		15.6
	Compensatory bonus for the self-employed persons and very small businesses of CZK 500 per day, where the activity performed is the principal activity and there is a proved sufficient drop in sales compared to a year before. The programme lasted from March 12 to June 8, 2020. The Government also approved a compensatory bonus to persons working on the employment agreement (or agreement on working activity) of CZK 350 per day for the same period. In October, the programme was extended, for both the self-employed and persons on employment agreements, with CZK 500 per day.		22.,2
	Increased funds for salary bonuses of workers in the health sector and social services, for police, firefighters and taxmen.		7.0
	See also Antivirus programme below (under public sector subsidies to businesses)
Deferral of taxes and social security contributions	Waiver of the advance payments (not the tax itself) for corporate and personal income tax in June. Road tax advances due in April and July can be paid until 15 October. Further extended in October.		22
	Waivers of any penalties and default interest for corporate and personal income tax payments up to 1 July. Deferral of the VAT. Further extended in October. Deferral of a continued rolling out of the electronic registration of sales for all subjects, first to the end of year 2020, and then further deferred to January 1st, 2023.
Tax and contributions policy changes	A six-month waiver on the (minimum) payments of health and social insurance for the self-employed.		23.1
	Waiver of social security contributions paid by employers with a maximum of 50 employees (under certain conditions), between June and August 2020.		13.5
	Exemption of VAT on goods that are supplied free of charge (e.g. test kits and diagnostic test tools for COVID-19, protective clothing, thermometers, disinfectants and sterilisation products, other medical devices and medical supplies) and the products used to manufacture these goods. Further extended in October.		Not quantified
	Reduction in VAT rate from 15 to 10% for accommodation services, tickets for cultural and sporting events, admission fees to sports grounds, fare on ski lifts and admission fees to saunas and other similar facilities. A reduction to 25% of the road tax on lorries over 3.5 tonnes and shortening the refund time for the overpayment of excise duty on "green diesel".		4. 8
	Introduction of a loss-carry backward provision – the self-employed can offset CIT and PIT losses reported in 2020 from their tax bases in 2019 and 2018, thereby obtaining a refund from the Financial Administration.		18
Public sector subsidies to businesses	Job retention scheme (Antivirus programme) to compensate for all or part of salary costs for the time of the emergency measures. Employees received all or part of their wages, subsidised by the state, depending on the exact reason and situation of reduced activity. For example, employees ordered into quarantine received 60% of their salaries, while employees working in firms that had to stop operations by a government order were compensated in full. In both cases, the government reimbursed the employer 80% of the employee compensation (up to CZK 39 000 per employee). Employees in firms facing supply disruption in inputs or drop in sales, received 60-100% of their salaries, with the state reimbursing 60% of the costs (up to CZK 29 000 per employee). Lasted from April (retroactive effect from 12 March to the end of October 2020. In October, the Antivirus (renamed Antivirus Plus), for companies that need to shut down or restrict operations due to government decree or workers in quarantine job-retention scheme was extended until the end of the year 2020. Support was increased as companies were newly entitled to the entire sum of employee compensation (80% before). The maximum monthly limit was increased from CZK 39,000 to 50,000 per person. Antivirus for companies affected indirectly by the coronavirus crisis was also extended until the end of 2020.		22.9
	Other programmes included: COVID Technology Programme 19 (subsidy for projects directly linked to the fight against the further spread of coronavirus through the acquisition of new technological equipment and facilities, CZK 300 million in total); Czech Rise Up 1.0 and 2.0 Programmes (encouraging the introduction of new solutions to fight the coronavirus crisis by supporting innovative companies, including start-ups, CZK 500 million in total). The 2020 Rural Development Programme, to help entrepreneurs in agriculture, food and forestry (CZK 3.3 billion). Subsidy of spas (CZK 1 billion). COVID Accommodation program, to subsidise accommodation facilities by contributing CZK 100 to 330 per room per night for the period when they had to close during the pandemic. COVID Cultural and Creative Industries of CZK 900 million (in October extended in duration and scope by CZK 750 million) to support small and medium-sized enterprises in the creative industries in the form of subsidies and creative vouchers. In October, additional programmes were announced. A COVID - Bus subsidy program, to compensate bus carriers fore their lost revenues (CZK 1 billion). COVID – Sport II, to support professional sports and sports event organizers (CZK 500 million). Agrocovid Food industry - to support the food industry (CZK 3 billion). Additional funds for the State Fund of Cinematography (CZK 98 million) to help cinema operators, production and distribution companies (not covered by COVID- Culture programme). A Covid - Tourism Support programme (CZK 500 million), to support travel agencies and tourist guides.		11.8
Public sector loans and loan guarantees		COVID I loan program for SMEs. A direct interest-free loan in the range of CZK 0.5 to 15m. Loans were granted for up to 90% of eligible expenditure with a maturity of 2 years including the possibility of deferred repayment for up to 12 months.	1
		COVID II program in the form of guarantees for loans (CZK 10k to 15m) from commercial banks (with annual deferral of repayments), with the Czech-Moravian Guarantee and Development Bank subsidising the interest rate.	20
		COVID Prague for Prague entrepreneurs and SMEs (Since COVID II is funded by the EU, it is not possible to support projects in Prague).	1.5
		COVID III program. The self-employed and companies with up to 250 workers could receive a 90% guarantee and companies with 250 to 500 employees an 80% guarantee on loans provided by the commercial banks. In October, extended until end-2021.	150
		COVID Plus programme for large companies with more than 250 workers could receive an 80% guarantee on loans in the range of CZK 5m to 2 billion.	330
		The Government increased funds for the Support and Guarantee Farm and Forestry Fund, to provide farmers and foresters with more liquidity (delay of loan repayments).	1
Measures to promote burden-sharing within the private sector		COVID rent programme, whereby the government contributed half of the payment for commercial rent to entrepreneurs that had to close establishments, with the maximum amount of support at CZK 10m for the period from April to June (under the condition of 30% discount on the rent provided by the lessor). Individuals and companies affected by the coronavirus were also allowed to delay paying rents and there was a ban on evictions. In October, the COVID - Rent programme was extended and it was no longer conditional on a discount from the landlord.	8.0
		Government allowed moratoria on the payment of loans and mortgages. Debtors - individuals as well as companies – were able to interrupt their payments for a period of three or six months.

Improving fiscal sustainability over the long term

Czech authorities have ample fiscal space to support the economy in the short-term should economic weakness continue. Once the economy recovers from the current crisis, fiscal policy should once again focus on long-term challenges and deal with ageing pressures while reducing tax distortions.

Ageing threatens fiscal sustainability

Population ageing and the corresponding rises in public expenditure threaten long-term fiscal sustainability (Figure 1.20). Additional pressures will arise due to a reduction in tax revenues, notably from labour taxes (Colin and Brys, 2019). According to recent European projections, the old-age dependency ratio in the Czech Republic will rise from 30% in 2019 to 49% in 2070, with a peak at 54% in 2060 (Figure 1.21), albeit less than in some other Central and Eastern European countries (CEECs). Population ageing will strongly affect public finances, with rises in pension, health and long-term care spending. In the scenario with no reform to the pension system and financing of additional pension expenditure by government deficits, the public debt-to-GDP ratio is set to rise to about 105% by 2060. Moreover, taking into account also rises in age-related public expenditures in healthcare and long-term care, public debt would reach staggering 155% of GDP (Figure 1.20).

Figure 1.20. Ageing-related expenditures put strong pressures on fiscal sustainability

General government debt, Maastricht definition, as a percentage of GDP¹

1. Scenarios consist of projections for the Economic Outlook until 2021, after which the economy is assumed to grow as projected in the OECD Long-term model. In the Balanced budget scenario, the primary balance is assumed to reach a balance in 2028 and remain at zero thereafter. The “impact of ageing on pension spending” scenario assumes that increases in pension spending are financed through deficits. The “impact of ageing on total ageing-related spending” scenario adds together the impact of ageing on pensions, health and long-term care. These scenarios are based on the 2018 Ageing Report by the European Commission combined with the economic developments in the OECD Long-term model. The “mitigation” scenario assumes that half of the ageing-related spending is financed by increasing revenues and limiting spending increases.

Source: Calculations based on the 2018 Ageing Report of the European Commission, the OECD Long-term model and OECD Economic Outlook database.

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Figure 1.21. The old-age dependency ratio is set to rise significantly

In percentage

Note: This indicator is the ratio between the projected number of persons aged 65 and over (age when they are generally economically inactive) and the projected number of persons aged between 15 and 64. The value is expressed per 100 persons of working age (15-64).

Source: Eurostat; EUROPOP2019 population projections.

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The old-age pension scheme will bring the greatest burden on public finances (Table 1.4). While pension spending is projected to be stable as a share of GDP over the next decade, it is expected to rise steeply after that, and go from 6.8% of GDP in 2030 to 10.2% of GDP in 2060. Yet, policy steps in recent years have made the system less sustainable.

Table 1.4. Public pension expenditure projections

Percentage of GDP

	2016	2020	2030	2040	2050	2060	2070	Peak year
Total public pensions	8.2	8.1	8.2	9.2	10.8	11.6	10.9	2059
of which
old-age pensions	6.8	6.7	6.8	7.7	9.4	10.2	9.5	2059
disability pensions	0.9	0.8	0.8	0.8	0.8	0.7	0.8	2016
survivor pensions	0.5	0.6	0.6	0.7	0.7	0.7	0.7	2062
Scenario (linked to life expectancy)	8.2	8.1	8.0	8.5	9.7	10.2	9.3	2059

Note: The baseline scenario is computed with the fixed ceiling on statutory retirement age. The last row represents a scenario linking the statutory retirement age to the life expectancy.

Source: Ministry of Finance (2017).

Recent changes in the pension indexation rule and discretionary measures are raising pension spending. Since the start of 2018, pensions are indexed to a combination of the consumer price index (or pensioners’ cost of living index, whichever is higher) and half of the real wage growth. Moreover, if according to the standard formula the growth of pensions were to be less than 2.7%, the government has the discretion to raise pensions by as much as 2.7% in nominal terms. In 2019, the government decided, beyond the standard indexation, to increase the flat-rate component of pension benefit from 9% to 10% of average wage, resulting in an overall increase of an average monthly pension by CZK 900 in 2020. Moreover, the government decided to give an additional CZK 1000 per month to all pensioners over the age of 85 (Ministry of Finance, 2019a) and to give a lump sum of CZK 5 000 to all pensioners as a solidarity assistance during the coronavirus crisis. The new indexation rule and discretionary increases are meant to help prevent old age poverty, but these measures add to the projected steep spending increases.

The adequacy of pensions of high income earners could be improved. The main pillar is a mandatory defined benefit pay-as-you-go public system. Overall, the pension replacement rate for average earners is close to the OECD average (Figure 1.22, panel A). It is quite generous for low-income earners but low for high-income earners (Figure 1.22, panel B). Overall, disposable income levels of people aged over 65 compared to the rest of the population are relatively low in international comparison, but relative poverty is low too, due to strong redistribution within the pension system (OECD, 2020d).

Box 1.3. Potential impact of reforms

Structural reforms can boost economic growth and incomes. The OECD has estimated the relationship between reforms and total factor productivity, capital deepening and the employment rate for a sample of OECD and major non-OECD countries (Égert, 2017). The analysis suggests that if the Czech Republic implemented the selected set of reforms (see below), per capita income could increase by 1.3% in two years, supporting the recovery, and by 7% in 10 years. The estimates are illustrative.

Table 1.5. Potential impact of structural reforms on per capita GDP

	2 years	10 years
Better target R&D support to small and young dynamic firms.	0.1%	0.9%
Improve the business environment.	0.6%	2.6%
Boost active labour market policies.	0.1%	0.2%
Link retirement age to life expectancy.	0.2%	1.0%
Keep expanding the supply of affordable and high-quality childcare facilities.	0.3%	1.4%
Shift taxation from labour towards real estate, consumption and environmental taxes.	-	0.9%
Total	1.3%	7.0%

Note: The framework relies on a production function approach. A no policy change scenario is used as the baseline. The following changes in policy/outcomes are assumed. Business expenditure on R&D will reach OECD average as % of GDP. The cost of starting a business will go to zero and the difference in the cost of contract enforcement between the Czech Republic and the OECD average will be halved. Spending on active labour market policies as % of GDP will reach OECD average. Effective retirement age of men will reach EU-28 level. Family benefits in kind as a % of GDP will reach OECD average. Tax reform assumes a tax neutral shift from income taxes to consumption and property taxes.

Source: OECD calculations based on (Égert, 2017). For tax reform, the source is Arnold (2008).

The following estimates quantify the direct fiscal impact of selected recommendations included in the Survey. The estimates are illustrative.

Table 1.6. Illustrative direct fiscal impact of selected recommended reforms

Reform	Fiscal impact (savings (+)/ costs (-)) (% of GDP)
Better target R&D support to small and young dynamic firms.	Fiscally neutral
Improve the business environment.	Negligible
Boost active labour market policies.	-1.0%
Link retirement age to life expectancy.	+1.6% by 2060
Keep expanding the supply of affordable and high-quality childcare facilities.	-0.3%
Shift taxation from labour towards real estate, consumption and environmental taxes.	Fiscally neutral
Fiscal savings from higher efficiency of public expenditure and from streamlined subnational government.	Offsetting other costs (+1.3%)

Note: The following changes in policy/outcomes are assumed. Spending on active labour market policies as % of GDP will reach OECD average. Family benefits in kind as a % of GDP will reach OECD average. The estimated fiscal saving of linking the retirement age to life expectancy is based on the estimate by the Ministry of Finance about the cost of keeping the retirement age ceiling at 65 until 2060.

Source: Ministry of Finance and OECD Secretariat.

Figure 1.22. The adequacy of pensions could be improved

Net pension replacement rates, %

Source: OECD (2019), Pensions at a Glance 2019: OECD and G20 Indicators.

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Czech workers retire early (Figure 1.23) and adjusting the retirement age is key. In 2017, the automatic mechanism for increasing the statutory retirement age was withdrawn and a ceiling at the age of 65 was introduced. Keeping the retirement age ceiling at 65 is estimated to increase pension expenditures by 1.6 percentage points of GDP by 2060 (Ministry of Finance, 2017). Every five years, the Ministry of Labour and Social Affairs is tasked to prepare a report on life expectancy and to suggest a shift in the statutory retirement age, provided that on average everyone spends a quarter of their life in retirement. The first report, prepared in 2019, proposed delaying further rises in retirement age to the next round of the revision process scheduled for 2024. No change was therefore instituted. Under this mechanism, the change in the retirement age is dependent on recurring government initiative, which brings about the risk that retirement age might not be increased in a timely manner or sufficiently to curtail the long-term spending pressures. As planned in many OECD countries, the Czech Republic should introduce a tight and automatic link between retirement age and life expectancy. This will limit the increase of pension spending and help maintain adequacy of pensions.

Figure 1.23. Effective age of retirement is low

Average effective age of labour-market exit and normal retirement age, 2018

Note: Effective retirement age shown is for five-year period 2013-18. Normal retirement age is shown for individuals retiring in 2018 and assuming labour market entry at age 22.

Source: OECD (2019), Pensions at a Glance 2019.

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Reforming the tax system to better support the recovery and future growth

The Czech tax system relies heavily on labour taxes (personal income tax and social security contributions), raising costs to companies and slowing growth. Personal income taxes are low, and there is very little progressivity. The PIT is a flat tax, with a solidarity surcharge of 7% for very high incomes. Social security contributions on the other hand represent a significantly higher share of tax revenues than in the OECD on average (Figure 1.24). This results in a high average tax wedge – a gap between the take-home pay of workers and their costs to employers. For most types of households, the average tax wedge in the Czech Republic is higher than the OECD average (Figure 1.25).

Figure 1.24. Tax revenues rely heavily on social security contributions

General government tax revenues, % of GDP, 2018

Source: OECD Revenue Statistics database.

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Figure 1.25. The average tax wedge is high

Average tax wedge, % labour costs, 2019

Note: AW refers to average earnings.

Source: OECD Revenue Statistics database.

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The Czech Republic could reform its tax system in a revenue-neutral way, to reduce tax distortions and boost growth, which would in turn help restore fiscal sustainability. Taxes on production factors (personal income taxes and corporate income taxes) are most harmful to growth. The tax burden could hence be shifted away from labour in the Czech Republic. In particular, high social security contributions could be reduced and the PIT made more progressive. More revenue could also be raised from taxes on real estate property, which are the least distortive to growth, followed by consumption taxes (Arnold et al., 2011).

Efforts to strengthen VAT collection should be continued and VAT exemptions and reductions granted in recent years should be reversed, once the recovery is fully underway, not to add additional burden on sectors in distress. Receipts from VAT were rising strongly before the COVID-19 crisis (Figure 1.26) thanks to efforts to reduce tax evasion, including through the introduction of the electronic registration of sales (rolling out of which has been partly postponed due to the COVID-19 crisis). Tax evasion, as measured by the VAT compliance gap, is estimated to have declined to close to the EU average levels (European Commission, 2020a). However, there is extensive use of the reduced VAT rate. For instance, the reduced VAT rate applies to public land and water transport since 2019, and to labour-intensive services, water and sewerage services, catering and beverage services, rental of printed materials and heat and cold supply since 2020 (Ministry of Finance, 2019a). Moreover, as an emergency measure to help sectors particularly affected by the coronavirus, the government lowered the VAT rate for accommodation services and admission to sports and culture events. VAT reduced rates raise complexity and tax compliance costs and, due to poor targeting, are not an effective means of increasing equity or giving support (OECD, 2019e).

Figure 1.26. There remains scope to increase receipts from VAT

Source: OECD Revenue Statistics database; CASE, Study and Reports on the VAT Gap in the EU-28 Member States: 2019 Final Report, https://ec.europa.eu/taxation_customs/sites/taxation/files/vat-gap-full-report-2019_en.pdf.

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The Czech Republic is increasing its use of excise duties, notably by raising tax rates on tobacco products and alcohol (Ministry of Finance, 2019a), which is a step in the right direction. However, with respect to environmental taxes and a carbon tax, progress is slow (see below). The total revenue from the property tax in terms of GDP is one of the lowest in the OECD. The calculation of the tax is based on the size of the property rather than its value. Raising this tax could also help raising the tax autonomy of municipalities, which could in turn increase efficiency in providing public services (see Chapter 2). To avoid adverse consequences for vulnerable households, targeted means-tested exemptions and cash transfers could be introduced.

Taxes on the self-employed remain lower than for employees. The assessment base for social security contributions is set at 50% of net income, effectively lowering the overall contributions of self-employed workers compared to employees. In addition, a revenue threshold under which a flat rate deduction (instead of expenditures) can be used to lower the tax base is quite generous, reducing the personal income tax. The incidence of self-employment is relatively high (Figure 1.27), much of it being quasi-dependent employment and driven by the benefits from the advantageous fiscal position (OECD, 2018a).

The lower assessment base for social contributions for the self-employed creates issues of fairness, adequacy and sustainability. The self-employed enjoy the same rights from the health care system as employees, but they contribute significantly less. They also contribute less towards pensions, but in this case, lower contributions will result in markedly lower pension rights (albeit with a relatively high replacement rate), potentially leading to poverty. This could also increase the burden on public finances through future social transfers to fight poverty in old age (OECD, 2018a). In 2018, the government lowered the revenue threshold for the flat rate deduction of expenses, but this was retracted in 2019 back to CZK 2 million (EUR 80 000), demonstrating the political economy difficulties with this reform.

Figure 1.27. There are many self-employed

Self-employment, % of total employment, 2019 or latest available year

Source: OECD Annual Labour Force Statistics database.

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Table 1.7. Past recommendations on strengthening the tax mix and fiscal sustainability

Recommendations in previous Surveys	Action taken
Rebalance tax revenues by reducing social security contributions and raising indirect taxes (VAT compliance and environmental taxes).	A 0.2 pp reduction in the sickness insurance rate. This involves compensation for costs incurred by employers in connection with the obligation to pay employees for the first three days of their incapacity for work, effective from 1 July 2019 (Act No. 32/2019 Coll.). Excise duties on tobacco products and alcohol were increased with effect from 1 January 2020 (as well as rates of gambling tax). Phasing in the electronic registration of sales for the remaining sectors (e.g. liberal professions, transport, agriculture, crafts and manufacturing activities, etc.), improving VAT collection.
Reduce the advantages of self-employment in terms of social contributions and personal income tax.	No action taken. (From January 2018, a 50% reduction on the flat-rate expenditure limit (to CZK 1 million) was introduced for the self-employed. However, this reform was retracted in January 2019.)
Use a multi-pronged approach to secure fiscal sustainability: Take steps to secure an increasing effective retirement age. Link tightly retirement age to life expectancy. Continue to ensure that the indexation of pensions does not lead to old-age poverty problems. Consider options for diversifying income sources for pensioners.	No action taken. Government has recently taken steps to improve the adequacy of pensions (by raising the flat rate component of pensions and by making the indexation of pensions more generous) but without addressing sustainability concerns. Government is supposed to discuss every five years whether to raise the statutory pension age (which is currently gradually rising to reach 65 in 2030, when it will also be equalised for both men and women). In 2019, the government decided not to raise the statutory retirement age and to discuss the issue again in five years.
Broaden the financing of health care and long-term care by expanding the base of contributions to all types of income.	No action taken.

Addressing corruption to raise the effectiveness of public spending

Improving governance and fighting corruption can improve the effectiveness of government spending and value-for-money. Fighting corruption successfully can also boost economic growth, including by maintaining the Czech Republic’s attractiveness as a destination for foreign direct investment (OECD, 2016c; Blundell-Wignall and Roulet, 2017). Indicators of public sector governance are mixed. On the one hand, indicators of control and perceived risks of corruption in the public sector suggest that the Czech Republic performs poorly compared to most OECD countries (Figure 1.28). Control of corruption improved from 2012 onwards, but this progress has recently stalled (Figure, 1.28, Panel C). According to a survey by the European Commission (2017a), 84% of Czech citizens think that corruption is widespread, significantly above the EU average (68%), and they point to officials awarding public tenders, political parties and politicians at all level of government as the most corrupt. They further believe that there are not enough successful prosecutions to deter corruption and the majority perceives government efforts to combat corruption as ineffective. On the other hand, the share of Czech businesses that reported corruption as a problem when doing business dropped from 51% in 2017 to 32% in 2019, slightly below the EU average (European Commission, 2017b and 2019b).

Figure 1.28. Czech Republic performs poorly in control and perceived risk of corruption

Note: Panel B shows the point estimate and the margin of error. Panel D shows sector-based subcomponents of the “Control of Corruption” indicator by the Varieties of Democracy Project.

Source: Panel A: Transparency International; Panels B & C: World Bank, Worldwide Governance Indicators; Panel D: Varieties of Democracy Institute; University of Gothenburg; and University of Notre Dame.

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Corruption and weak anti-corruption measures have been noted in particular in relation to the management of EU funds, public procurement and other interactions between businesses and the public sector (GRECO, 2016). Elected high-level officials have been involved in criminal proceedings or recurring controversies because of integrity issues, consistent with the negative perception of politicians and political parties. Recent reforms to boost public integrity, such as new rules on election finance and political parties and improved access to information measures, have been introduced to increase resilience to fraud and corruption risks. Ensuring that these measures are implemented is critical, but more is needed to address public integrity across all branches of government.

In its fourth evaluation round, the Council of Europe anti-corruption body, the Group of States against Corruption (GRECO, 2016), listed fourteen recommendations to improve public integrity in the Czech Republic. However, in the follow-up report two years later (GRECO, 2018) it found the level of compliance with the recommendations as “globally unsatisfactory”. Several recommendations aimed at improving integrity for members of parliament. These included improving transparency in parliamentary committee meetings and implementing a written code of conduct for members of parliament. Moreover, measures were proposed to ensure that members of parliament disclose conflicts of interest and activities, gifts and sources of income. Measures to strengthen the management and prevention of conflict of interest in the executive, as well as improve integrity and transparency in lobbying, should be adopted. The government could also consider reviewing its internal controls and integrity risk management framework to ensure robust measures are in place to prevent mismanagement of public funds. Effective implementation of such measures will improve transparency of government decisions, prevent misallocation of resources, and promote confidence in the economy.

Efforts to tackle bribery of foreign public officials in international business transactions should also be stepped up by implementing the OECD Anti-Bribery Convention (Figure 1.29). The Czech Republic is highly export-oriented and its exports include high-risk sectors for bribery, such as machinery and defence materials (OECD, 2017e). The country is now prosecuting its first case of foreign bribery, which represents a positive development (OECD, 2019g). Furthermore, efforts are underway to enhance detection of foreign bribery through certain key government agencies, in particular the Financial Intelligence Unit (FAU). The OECD Working Group on Bribery also welcomes the publication of comprehensive guidance by the Supreme Public Prosecutor’s Office (SPPO) on corporate liability. On the other hand, further efforts are needed to guarantee greater independence to prosecutors so that political factors are not taken into account in foreign bribery investigations and prosecutions. Another area of concern is the lack of appropriate protection from discriminatory or disciplinary action of whistleblowers, both in the public and private sector (Dell and McDevitt, 2018; OECD, 2019g). A law has been drafted in light of the new European Union (EU) standards on whistleblower protection, which is positive, but the adoption process is in very early stages.

Figure 1.29. There is scope to strengthen Czech Republic's anti-bribery enforcement across borders

Note: Panel A summarises the overall assessment on the exchange of information in practice, from peer reviews by the Global Forum on Transparency and Exchange of Information for Tax Purposes. Peer reviews assess member jurisdictions' ability to ensure the transparency of their legal entities and arrangements and to co-operate with other tax administrations in accordance with the internationally agreed standard. The figure shows first round results; a second round is ongoing. Panel B shows ratings from the FATF peer reviews of each member to assess levels of implementation of the FATF Recommendations. The ratings reflect the extent to which a country's measures are effective against 11 immediate outcomes. "Investigation and prosecution¹" refers to money laundering. "Investigation and prosecution²" refers to terrorist financing.

Source: OECD Secretariat’s own calculation based on the materials from the Global Forum on Transparency and Exchange of Information for Tax Purposes; and OECD, Financial Action Task Force (FATF).

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Policies to raise productivity and restart investment

Fostering R&D, innovation and improving the business environment

The Czech Republic is well integrated in Global Value Chains (GVCs). With its openness and stable macroeconomic environment, it has attracted a significant amount of FDI (Figure 1.30). A number of international companies have set up production in the country, and local SMEs represent an important element of the supply chain. SMEs are a notable employer and they directly or indirectly support exporting activity by supplying larger firms (OECD, 2019c).

Compared to its EU peers, the Czech Republic’s economy remains significantly more dependent on manufacturing (Figure 1.31), of which the automotive sector is the most important part. Yet, despite this specialisation, manufacturing shows the third largest gap in labour productivity, more than 30% below the EU average (Figure 1.31), reflecting a more downstream position in the global production chain. The overall productivity gap is also sizeable.

The R&D intensity remains significantly below the OECD average, although it rose over time (Figure 1.32). The share of Business R&D (BERD) is also low in international comparison (Figure 1.32), impairing development and diffusion of new technologies (OECD, 2018g). Innovation performance is moderate (European Commission, 2019a, 2020a) and the number of patents is low (Figure 1.32). Czech firms are also slow to adopt more sophisticated technologies, holding back their digital transformation. ICT task intensity and the share of non-routine employment are relatively low, in particular in manufacturing (Figure 1.33).

Figure 1.30. Integration in Global Value Chains (GVCs) is high and there have been substantial FDI inflows

Source: OECD Trade in Value Added (TiVA) database; OECD International Direct Investment Statistics database.

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Figure 1.31. The Czech Republic specialises in manufacturing, but gaps in productivity remain

1. Gross Value Added (GVA) is measured in current USD PPPs.

Source: OECD National Accounts Statistics.

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Czech SMEs in particular have low productivity and invest little in R&D (Figure 1.34). Moreover, the gap in productivity between large and small firms has grown over time (Figure 1.34). Many SMEs seem to specialise in lower value-added activities in manufacturing, supplying larger multinational companies, or serving the domestic market. SMEs in the Czech Republic invest significantly less in R&D and represent a relatively lower share of innovating firms than in many other advanced economies (Figure 1.34). A major share of the R&D investment comes from business investment from abroad, primarily through domestic subsidiaries of international companies (Figure 1.35, OECD, 2017d).

Figure 1.32. R&D intensity and innovation performance are low, and adoption of new technologies is slow

1. The colours show normalised performance in 2018 relative to that of the EU in 2018: green above 120%; grey: between 90% and 120%; blue: between 50 and 90%.

2. Cloud computing refers to ICT services used over the Internet as a set of computing resources to access software, computing power, storage capacity and so on. Data refer to manufacturing and non-financial market services enterprises with ten or more persons employed, unless otherwise stated. Size classes are defined as: small (10-49 persons employed), medium (50-249) and large (250 and more). OECD data are based on a simple average of the available countries.

Source: OECD Main Science and Technology Indicators database; European Commission, European Innovation Scoreboard 2019; OECD ICT Access and Usage by Businesses database.

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Figure 1.33. ICT task intensity and share of non-routine employment are relatively low in manufacturing

Average manufacturing industry, 2012 or 2015

1. The share of non-routine employment represents the proportion of the industry's total employment accounted for by the 3-digit occupations found to be intensive in non-routine tasks. Occupations are ranked in terms of their intensity in routine tasks following the methodology detailed in Marcolin et al. (2015). Routine-intensive occupations are those ranking above the median in terms of the routine intensity of the tasks performed on the job; non-routine occupations score below the median.

2. The index of the ICT task intensity of jobs relies on exploratory state-of-the-art factor analysis and captures the use of ICT on the job. It relies on 11 items of the OECD Survey of Adult Skills (PIAAC) ranging from simple use of the Internet, to the use of Word or Excel software or a programming language. The detailed methodology can be found in Grundke et al. (2017). Intensities have been rescaled from the 0-1 to the 0-100 interval.

Note: Manufacturing covers mining; food and beverages; textiles, apparel and leather; wood, paper and publishing; basic and fabricated metals; chemicals, rubber, plastics and other non-metallic mineral products; machinery and equipment n.e.c; electronic, optical, and computing equipment; transportation equipment; manufacturing n.e.c.

Source: OECD (2017), OECD Science, Technology and Industry Scoreboard 2017.

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Figure 1.34. Czech SMEs have low productivity and they invest relatively little in R&D

1. Except financial and insurance activities.

Source: OECD Structural and Demographic Business Statistics Database; OECD SME and Entrepreneurship Outlook 2019.

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Figure 1.35. A major share of the R&D investment comes from business investment from abroad

Business R&D funded from abroad, by source of funds, % of business enterprise expenditure on R&D, 2018 or latest available year

Source: OECD Research and Development Statistics database.

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Better targeting support for R&D and innovation

Over time, numerous strategies, support programmes and institutions, with different and overlapping goals (support of R&D and innovation, SMEs, exports, energy efficiency, digitalisation, etc.) have emerged, making support overly fragmented, as already discussed in a previous Survey (OECD, 2016a). Recognising the weak performance in R&D and innovation (RDI), the government has set the support of science, research and innovation as a major priority. Government financial support of R&D has risen over time (Figure 1.36), and further increases are planned in the state budget (Government of the Czech Republic, 2019), with financing coming from national resources and from the EU. The government has also recently prepared the Innovation Strategy of the Czech Republic 2019-2030 with very ambitious goals (Government Council for Research, Development and Innovation, 2019). Steps towards unifying the design, assessment and coordination of RDI policies are welcome, and follow past OECD recommendations (OECD, 2016a).

Efforts to further boost business RDI and to target it better should continue, in view of the fact that most RDI investment is done by international firms. Government support for business R&D spending is offered through direct funding and through tax incentives, the total of which is close to the OECD median (Figure 1.36). International evidence shows that government support – either through direct funding or through tax incentives - tends to significantly boost R&D spending by companies (Appelt et al., 2020). Direct grants are also an opportunity for governments to exert greater control and to ensure that R&D spending follows set strategic priorities. Direct grants to businesses can be effectively targeted towards the needs of SMEs and young and dynamic companies in particular, and the Ministry of Industry and Trade and the Technology Agency of the Czech Republic offer numerous programmes with specific support for the RDI activities in these types of firms.

Figure 1.36. Government financial support of R&D has risen over the last decade

1. Median of available OECD countries.

Source: OECD Main Science and Technology Indicators database; OECD R&D Tax Incentives database.

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The importance of tax incentives in total government support has been on the rise, as in many other OECD countries. The 2019 reform of the Tax Incentives Act further simplified the procedure for companies. The R&D tax allowance is based on volume of the qualifying R&D expenditure, and additional incentives are given to firms with growing R&D spending through the incremental tax allowance, but the effect of this is small. Firms with insufficient tax liability in a given year can carry forward unused allowances for three years. OECD simulations show that marginal tax subsidies are above the OECD median for large firms, both, profit making and loss making. For loss-making SMEs, on the other hand, the marginal subsidy rate is below the OECD median (OECD, 2019d and 2018c).

Given the particular lack of RDI activity among Czech SMEs, tax incentives could be better targeted to support dynamic young firms. This could be particularly effective, as small or young firms are shown to react more strongly to R&D tax incentives than large firms (Appelt et al., 2016). SMEs are also less likely to shift their profits abroad to avoid taxes. In the Czech Republic, a possible way of offering stronger support for smaller firms would be to impose a ceiling on the amount of eligible R&D that is subsidised or a threshold for eligible R&D beyond which the subsidy rates become lower. Such upper limits on the amount of qualifying R&D exist in most other OECD countries.

Table 1.8. Past recommendations on R&D and innovation

Recommendations in previous Surveys	Action taken
Accelerate the creation of funds and guarantee programmes to support SMEs and innovation.	For 2020, 8 support programs are planned with the total amount of CZK 24.6 billion.
Develop government co-financing schemes to complement grants and increase fiscal incentives for business R&D spending.	Since April 2019, the change in R&D tax allowance came into effect. Under the new legislation, the taxpayer has to notify the tax administrator only of his intention to claim an R&D allowance. R&D project must then be prepared at the date of filing the tax return. (Companies will no longer be at risk of rejection of the R&D tax allowance due to insufficiently elaborated R&D project in advance.)
Use public procurement contracts to initiate innovative solutions in strategic areas with societal benefits.	On 21 January 2019, the government approved an update of action plan "Public Procurement Digitisation Strategy for 2016–2020". In 2019, measures such as the monitoring of foreign best practices in the field of digitisation of public procurement, including the assessment of the possible implementation of the best solutions in the legislative environment of the Czech Republic, were continuously implemented.

More funding and less red tape to foster firm entry and investment

Start-ups and young SMEs often play a leading role in the introduction of advances in products, processes, organisational methods and marketing techniques, pushing the economy toward the technological frontier. Fostering entry of new innovative firms could raise productivity and help restart growth after the crisis.

Young and dynamic Czech firms lack sufficient sources of funding suited to their needs. Bank credit is readily available to SMEs and financing conditions are not significantly worse than for large companies (OECD, 2019c), but capital markets are underdeveloped. Venture capital is essentially non-existent (Figure 1.37), creating a financing gap for early-stage innovative companies. To help remedy the lack of venture capital, the government has concluded agreements with various funds (European Investment Fund, Central Europe Fund of Funds), that would invest in Czech innovative start-ups and emerging growth-oriented companies seeking capital for their further development. The Czech-Moravian Guarantee and Development Bank also provides guarantees for SMEs and innovative projects. Such efforts and broader efforts to better develop capital markets should be pursued further.

Figure 1.37. Capital market is underdeveloped and very little venture capital is available

1. Index of benchmark (OECD median = 100), from lower resource availability or accessibility (low) to higher resource availability or accessibility (high).

Source: OECD Entrepreneurship Financing Database; FESE database; OECD SME and Entrepreneurship Outlook 2019.

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A lower regulatory burden could also unleash the entrepreneurial potential and boost investment, helping with the recovery. The World Bank Doing Business indicators (World Bank, 2020) show a number of weaknesses (Figure 1.38). Procedures for starting a business are more burdensome and time consuming than in most other OECD economies. Resolving commercial disputes (“enforcing contracts”) takes longer than on average in the OECD, and is more costly to businesses. Most notably, the process for obtaining construction permits is one of the slowest and most cumbersome in the OECD and among CEEC peers. To build a warehouse, 21 different procedures are required and the process takes about 8 months, three months longer than in the OECD on average (World Bank, 2020). Such delays in planning and issuing permits have repercussions for the wider economy, as they slow down infrastructure investment and contribute to rising house prices by limiting the supply of residential housing. The government is preparing a comprehensive overhaul of the legislation and regulation around construction permits, with the aim to speed up and streamline the process.

Figure 1.38. The Czech Republic ranks low on a number of Doing business indicators

Doing Business indicators 2020, Ease of doing business scores, from low to high, OECD average = 100

Note: CEECs is an unweighted average of Hungary, Poland, Slovak Republic and Slovenia. EU is an unweighted average of EU countries that are members of the OECD.

Source: World Bank Doing Business indicators 2020.

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Accelerating green growth

The Czech Republic has made significant progress in decoupling environmental pressures from economic activity. It nevertheless remains highly energy and carbon dependent (Figure 1.39). Power generation still relies heavily on coal, although it is being gradually replaced by nuclear power. The share of renewable sources in primary energy supply however has been on the rise. Emissions from road transport are increasing and reliance on fossil fuels for residential housing is high. Together they are primary sources of local air pollution, to which the Czech population has one of the highest exposures in the OECD.

Strengthening political commitment to a low-carbon economy and ensuring that the long-term targets of the State Energy Policy are compatible with the Paris Agreement objectives are key priorities. Despite these commitments, the Czech Republic has not increased its ambitions in the 2019 National Energy and Climate Plan. Achieving mid- and long-term targets will require further progress in energy savings. Public investment during the crisis recovery could prioritise investment spending favouring the greening of the economy, notably by targeting transport and energy projects that help improve energy efficiency and reduce air pollution. The EC’s recovery plan with the bulk of resources to support public investment for green and digital transformation and key structural reforms provide opportunities in this regard.

Pricing carbon will help in tackling climate change and air pollution cost-effectively. Revenues from environmental taxes are above the OECD average, but this is primarily driven by high energy and fuel consumption rather than high tax rates that would reflect the estimated environmental costs of fuel and energy use. The Czech Republic does not have an explicit carbon tax. OECD (2018e) estimates that the carbon pricing gap, which compares actual carbon prices and real climate costs (EUR 30 per tonne of CO2) and takes into account taxes as well as pricing of emission permits, stood at 70% in 2015. This is one of the highest gaps in the OECD. Hence, carbon price signals remain insufficient even when considering the impact of the EU Emissions Trading System (ETS).

The 2018 OECD Environmental Performance Review of the Czech Republic (OECD, 2018d) analyses the potential for a review of the tax structure to better align economic and environmental objectives. The one sector with meaningful effective carbon taxation is the road sector (OECD, 2019f) and yet, taxes on diesel are lower than on gasoline, despite the former’s higher carbon and air pollutant emissions. Taxes on natural gas, coal and other solid fuels and electricity are low and are not adjusted for inflation. Several tax exemptions applied to various fuel uses decrease end-use prices and reduce incentives to save energy or to switch to cleaner fuels. Exemptions apply for example for residential heating or in agriculture. In its recent National Energy and Climate Plan 2019, the Czech Republic has not defined a roadmap to phase out fossil fuel subsidies.

Figure 1.39. Green growth indicators

Source: OECD (2020), Green Growth Indicators, OECD Environment Statistics (database); OECD National Accounts (database); IEA (2020), IEA World Energy Statistics and Balances (database); OECD (2020), Exposure to air pollution, OECD Environment Statistics (database); OECD (2020), Land cover, OECD Environment Statistics (database); OECD (2018), Effective Carbon Rates 2018; OECD (2020), Municipal waste, OECD Environment Statistics (database); OECD (2020), Environmental policy: Environmental policy instruments, OECD Environment Statistics (database).

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The Review (OECD, 2018d) further suggests that to promote investment in low-carbon technology, the Czech Republic should increase more rapidly the share of permits auctioned in the power sector under the EU ETS, instead of free allocation. It should also set a stable support framework for development of renewables. Domestic energy generation from renewable sources faces technical and legal obstacles and changes to policy and financial support have created uncertainty and resulted in higher capital costs (European Commission, 2019a). In the road sector, tightening the environmental criteria of vehicle taxes would promote fleet renewal towards cleaner vehicles and extending distance-based charging would help address air pollution and congestion (OECD, 2018d).

Table 1.9. Past recommendations on green growth and achieving efficiency in the energy system

Recommendations in previous Surveys	Action taken
Introduce a carbon component in energy taxation for carbon emissions outside the EU system.	No action taken.
Realign the excise tax rate on all fossil energy sources and products, based on their carbon content and other environmental externalities, notably by increasing the relative taxation of diesel. Remove several excise tax reliefs on fuel use.	No action taken.
Develop traffic management in urban areas, including traffic restrictions in city centres, parking fees and incentives to commute by public transport. Strengthen control of emissions from older vehicles and stimulate the renewal of vehicles through adequate carbon pricing.	National Action Plan on Clean Mobility, approved by the Government in April 2020, is based on Directive 2014/94/EU on the deployment of alternative fuels infrastructure which in the case of electro mobility and natural gas (also hydrogen) obliges Member states to develop the relevant charging and refuelling infrastructure. The action plan sets requirements for the construction of charging stations with a time horizon between 2020 and 2030.

Countering the adverse environmental impacts of urban sprawl

Measures are needed to counter urban sprawl while addressing the vulnerabilities of densely populated cities, highlighted also by the COVID-19 crisis. The Czech Republic has experienced a process of suburbanisation, in particular in Prague and Brno. As population is moving from rural areas and small cities to Prague, its outer zone built-up areas are growing and car traffic volume is increasing, exacerbating air and noise pollution. Land use changes due to urbanisation can also have environmental effects, including on the risk of flooding. Evidence suggests that, while cities bring growth through agglomeration effects (Bartolini, 2015; Ahrend et al., 2014; OECD, 2015a), in the long run, compact cities are more resilient and have better environmental outcomes, such as lower energy consumption, for example (OECD, 2018d and 2018f).

Greater and more stable municipal cooperation is needed to tackle urban sprawl and the negative impact on the environment. The three Czech metropolitan areas – Prague, Brno and Ostrava – extend across a high number of municipalities and are among the most fragmented in the OECD (OECD, 2016a). While core cities comprise of one or two municipalities only, outer areas contain a large number of small municipalities that did not merge with the core once cities grew beyond historic limits. This fragmentation rises the cost of policy coordination, slows urban planning and transport investment. It is common for municipalities to cooperate in service delivery and investment projects, partly overcoming the problems of fragmentation. Evidence shows that a large portion of inter-municipal cooperation is happening in Central Bohemia, around Prague, and in South Moravia, around Brno (OECD, 2016a). However, these inter-municipal associations are ad hoc, often rely on temporary external funding and are dependent on a specific mayor and its local administration.

Metropolitan-area planning is needed that covers developments outside the city core. Prague’s intensive suburbanisation suggests that its land use planning system is highly permissive and its commuting zone is characterised by dispersed development. Prague’s latest land use plan – the Metropolitan Plan – aims to control sprawl and protect green areas, but due to legal restrictions the Metropolitan Plan does not cover the entire metropolitan area. In general, cities’ development plans lack a properly integrated approach to urban development that would link housing, transport and land use policies involving all municipalities in the functional urban area. Such planning should prioritise low-carbon urban infrastructure (OECD, 2020c). While many city cores enjoy good public urban transport, connections to the suburbs are more limited, intensifying car use. Furthermore, green mobility options are largely underdeveloped. While cities’ building regulations promote better and more sustainable urbanisation, the lengthy approval process hinders their effectiveness (OECD, 2018d).

Fragmentation and obstacles to policy coordination could be tackled by using a functional rather than administrative approach in delimiting metropolitan areas. Also, metropolitan governance bodies could be created. They are increasingly being used in other OECD countries to offset municipal fragmentation. In the Czech case, the focus should be on improving co-ordination of land use planning to address urban sprawl. In the case of Prague, the reach of the Prague Institute for Planning and Development could be extended to cover the entire metropolitan area (OECD, 2018d and 2016a). Czech cities could also rely more on fiscal instruments to encourage density and on a mixture of congestion charges, vehicles taxes and parking charges to address congestion and pollution.

Increasing labour market participation and building skills

Bringing more mothers to the labour market

The employment rate in the Czech Republic is above the OECD average and it has shown a rising trend prior to the crisis (Figure 1.40). Nevertheless, the employment rates of the young (15-29-year olds), older persons, people with disabilities and mothers of young children still record significant gaps to those of prime age men (Figure 1.41). Before the coronavirus outbreak, labour shortages were a major barrier to growth, but these abated because of the crisis. Still, over the long-term horizon, demographic constraints to growth in labour utilisation are set to drag down GDP per capita growth. The Czech economy would therefore benefit from bringing marginal groups more effectively to the labour market. In the short to medium run, the recent drop in economic output, the rise in the unemployment rate and disruptions to childcare provision pose additional challenges for facilitating labour transitions among groups at the margins of the labour market.

Figure 1.40.Employment rate is high and has risen over time

Source: OECD Labour Force Statistics.

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Figure 1.41. Employment gaps of certain groups are large

Employment gaps with respect to prime-age men for selected groups, %, 2016 or nearest

Note: Countries are sorted in ascending order of the employment gap (i.e. from best to worst performing). Number in parenthesis indicates the rank from best performing. For each group, the employment gap is the difference between the employment rate of prime-age men (aged 25-54 years) and that of the group, expressed as a percentage of the employment rate of prime-age men. Panel A: Mothers with young children refer to working-age mothers with at least one child aged 0 to 14 years. Panel B: Data refer to all foreign-born people with no regards to nationality. Panel C: In the case of youth, those that are in full-time education are excluded from the denominator of the employment rate. Panel D: Data refer to 2011. Panel F: The overall indicator is a weighted average of the employment gaps for each group.

Source: OECD (2018), Good Jobs for All in a Changing World of Work: The OECD Jobs Strategy, https://doi.org/10.1787/9789264308817-en.

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The employment gap of mothers with young children is particularly large and progress has been slow. The gender gaps in wages of full-time employees and in employment rates are sizeable in comparison to similar countries (Figure 1.42), although the overall employment rate of women is above the OECD average. Motherhood has a large negative effect on labour market activity (Figure 1.43), and women stay inactive for a relatively long time after childbirth. This in turn has consequences for wage and career progression over the women’s lifetime. It is also reflected in marked differences in average old-age pension between men and women and higher risk of poverty in old age for women. Nevertheless, due to strong redistributive features of the pension system, the gender gap in pensions is low in international comparison (OECD, 2019j). In view of the fact that female educational attainment has been on the rise, higher activation of women and mothers would not only be beneficial for women but for the economy and society at large. The Czech government is pushing for progress on gender equality and reconciliation of work and family life by implementing the Strategy for Gender Equality in the Czech Republic for 2014-2020.

Figure 1.42. Gender gap in employment and wages is higher than in many peers

Gender gap, %, 18-64 years, 2018 or latest available year

Note: The gender gap is computed as the difference of the relevant indicator for men and women expressed as a percentage of that of men. Wage gap is for full-time employees.

Source: OECD calculations based on the OECD Employment database.

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Generous parental leave rules and child cash benefits contribute to gender differences in the labour market, as they discourage Czech women from resuming work after childbirth. One parent – which is almost exclusively the mother - can stay at home while receiving a parental allowance until the child reaches three years of age without losing reintegration rights at their employer. The receipt of benefits is not linked to parents’ employment status and is not targeted towards families in hardship.

Public spending is tilted towards generous cash benefits for families with young children (Figure 1.44). Public spending on services – childcare provision and support and early childhood education – on the other hand, is low. The government has recently increased the generosity of family cash benefits even further (Box 1.4). Total cash benefits accruing to families with young children - relative to average wage - are the highest in the OECD (Figure 1.44).

Figure 1.43. Motherhood has a big effect on labour market activity

Note for Panel A: Data for Chile refer to 2017. The 'at-work' rate includes only those who did any work (at least one hour) for pay or profit during the survey reference week. It differs from the employment rate in that it excludes those who are employed but absent from work during the survey reference week – that is, those that have a job or business from which they were temporarily absent, and who did not do any work for pay or profit during the survey reference week – regardless of the reason for absence.

Source: OECD estimates based on the European Union Labour Force Survey, https://ec.europa.eu/eurostat/web/microdata/european-union-labour-force-survey, the Canadian Labour Force Survey, https://www.statcan.gc.ca/eng/survey/household/3701, the Chilean Encuesta de Caracterización Socioeconómica Nacional (CASEN), http://observatorio.ministeriodesarrollosocial.gob.cl/index.php, and the U.S. Current Population Survey, https://www.census.gov/programs-surveys/cps.html; OECD Labour Force Statistics database.

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The government is more actively encouraging men to take larger portion of parental leave. In 2018, paternity leave was introduced to encourage fathers to engage in childcare from an early stage. To encourage mothers with young children to take up work, the maximum monthly number of hours a child can spend in childcare facilities while parents draw the parental allowance was doubled to 92 hours. At the same time, the government is aiming to introduce “shared jobs” that would allow mothers with small children to work part-time in a flexible way. Higher flexibility of jobs, better enforcement of rights for part-time work and flexible teleworking arrangements can support the re-entering of female labour into the market.

The choice of mothers to resume work is however limited by the scarce supply of childcare. In 2017/2018 there was an estimated unmet demand for childcare of 14,000 children below 3 years of age (European Commission, 2019a) and more than 33,000 applications for admission to nursery schools were rejected, close to one-fifth of all applications (Office of the Government of the Czech Republic, 2018). Enrolment of children under three in early childhood education and care is among the lowest in the OECD (Figure 1.45).

Figure 1.44. Family cash benefits and tax breaks are generous

1. Estimates based on a two-parent, two-earner, two-child family, with one parent working full-time (40 hours per week) and one parent working part-time (20 hours per week), both on wages at the median of the full-time earnings distribution. The two children are aged three years apart, with the youngest child at the given age.

Source: OECD Social Expenditure Database, http://www.oecd.org/social/expenditure.htm; OECD Family database, http://www.oecd.org/social/family/database.htm.

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Supporting affordable, accessible and high-quality early childhood education and care services is one of the priorities for the government and significant progress has been made in the number of available places. The Ministry of Labour and Social Affairs continues to support “children’s groups” for children from one year of age to the start of compulsory education (5 years of age). Currently, the Ministry registered 1040 “children’s groups” with approximately 13 650 places for children (Ministry of Labour and Social Affairs, 2020b). Micro-nurseries offer care for small children, from six months to three years of age in small groups of up to four children, and currently, there are 98 micro-nurseries (#mikrojesle, 2020). There are plans for further expansion in both types of facilities. Public kindergartens for children from the age of three to primary school are also under expansion. These developments are in line with previous OECD recommendations (OECD 2018a, 2016a) and should be continued. One possible way to finance the further expansion of childcare places and to lower disincentives to return to work would be by reducing the cash benefits and shortening the maximum duration of parental leave.

Box 1.4. Child related benefits in the Czech Republic

Maternity benefit is received by a parent who takes care of a newborn child. It is given for 28 weeks (37 weeks in case of twins or more children). The mother can start maternity benefit 8 – 6 weeks before the expected date of birth. For the first six weeks after childbirth, the maternity benefit belongs exclusively to the mother. After that point, up to 22 weeks can be transferred to the father. Participation in the sickness insurance scheme is a condition for entitlement. The benefit is close to 70% of the gross wage, up to a maximum.

Paternity benefit is received by fathers who help care for a newborn child. It came into effect in February 2018. It is given for seven calendar days and can be used within six weeks from the date of birth. Participation in the sickness insurance scheme is a condition for entitlement. Payment and benefit amounts are the same as for the maternity benefit.

Parental allowance is received by a parent who cares for a child of up to 4 years of age. In January 2020, the total amount of this allowance was increased by 80,000 CZK to 300,000 CZK (also for parents who had already started parental leave before that date). Every family receives the same total amount for a child, regardless of their employment status or income. Typically, parents start receiving the benefit after the end of the maternity benefit. It is paid in monthly payments and the receiving parent may choose the duration of the drawdown period, which determines the monthly amount. Only one parent can receive the benefit at any one time, but every three months the receiving parent and the chosen length of the receiving period can be changed. Since January 2020, the government has doubled the maximum hours per month (to 92 hours) that a child under two can spend in nursery or other pre-school facilities, without the family losing the benefit. By law, previously employed parents are guaranteed a job with the same employer (but not necessarily the same position) for the duration of parental leave until the child reaches three years of age.

Other benefits:

• The pregnancy and maternity compensatory benefit is received by pregnant women and mothers of newborn children to compensate for lost earnings if they are reassigned to a lower-paid position because of pregnancy or maternity.

• The child allowance is a long-term benefit for low-income families that helps them to cover the costs of raising and supporting dependent children. Eligibility is means-tested on the family's total income.

• The tax credit for child placement in a pre-school facility (non-refundable) can be used by parents, based on actual provable expenses incurred for each child’s stay in a pre-school facility or children’s group. The tax credit is non-refundable, and subject to an annual limit per child, which is 14,600 CZK for 2020 (equal to a monthly minimum wage).

• The tax credit for children (refundable) can be used by parents with dependent children in the household (children up to 18 years, full-time students up to 26 years, and doctoral students up to 28 years). The tax credit for the first child amounts to 15,204 CZK, for the second child 19,404 CZK and for the third and every other child 24,204 CZK. The amounts have been in force since 2018. When the tax liability is lower than the tax credit for children, the amount of tax credit exceeding the tax liability is paid to the taxpayer, but with a maximum limit of 60,300 CZK. Only one of the parents is entitled for this tax credit.

Besides a higher number of places in early childhood education and care, it is also important to ensure quality. Evidence shows that early childhood education and care provides a crucial foundation for future learning and is important for success later in life, but much of the benefit crucially depends on the quality (OECD, 2018b; 2017a). This is perhaps even more important in the Czech Republic, where socio-economic factors have a strong effect on student performance and educational attainment (OECD, 2019a).

Figure 1.45. Enrolment of children under three in early childhood education and care is among the lowest

Children enrolled in early childhood education and care services, 0 to 2-year-olds, %, 2017 or latest available year

Note: Data generally include children enrolled in early childhood education services (ISCED 2011 level 0) and other registered ECEC services.

Source: OECD Family database, http://www.oecd.org/social/family/database.htm

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Growing numbers of early childhood education and care providers of different types can become a challenge with respect to ensuring quality. Furthermore, different parts of the sector fall under different ministries, adding to complexity. The authorities should ensure effective coordination and monitoring to safeguard quality across different providers, including by making sure that children benefit from equal learning and development opportunities across various types of settings. For now, kindergartens offer education, while children’s groups solely offer child-care. A further boost to the sector could be achieved by requiring a qualified workforce, while offering opportunities for professional development and career progression and adequate salaries, to ensure quality and job satisfaction (OECD, 2019h and 2019k).

Table 1.10. Past recommendations on higher labour utilisation

Recommendations in previous Surveys	Action taken
Keep expanding the supply of affordable childcare facilities.	It is one of Government’s priorities. Since the school year 2017/2018, the compulsory participation in pre-school facilities for children aged 5 years was introduced. The Ministry of Labour and Social Affairs continues to support the implementation of children’s groups for children from one year of age to the start of their compulsory education. The Ministry of Labour and Social Affairs continues with a project for Implementation and pilot testing of childcare service for children from six months to four years of age in “micro-nurseries”. Since 2019, an amendment of the Act on Children's group has been in the legislative process, it aims to improve quality of the services provided, legislative anchoring of a care service for the youngest children (micro-nurseries) and provide a system of national funding for these facilities.
Reduce the maximum duration of parental leave as planned and incentivise fathers to take some of the parental leave.	Limited progress. The duration of parental leave remains the same. Since January 2020, the total amount of parental allowance has increased by 80 000 CZK, to 300 000 CZK. Nevertheless, the maximum number of hours in a month during which a child of up to 2 years of age can attend a pre-school facility has been increased from 46 hours per month to 92 hours, without the parent losing the parental allowance.
Increase the flexibility of jobs by better enforcement of rights for part-time work, flexible teleworking and shared jobs.	Job sharing was introduced in legislation in June 2020 to increase flexibility.

Making education and skills more inclusive and better adapted to a changing labour market

Technological change, globalisation, and the ensuing changes in the labour market and in demands for skills present significant opportunities and challenges (OECD 2019b and 2017b). These trends are set to continue and may be accelerated by the economic disruption and the distancing requirements triggered by the coronavirus outbreak. Over the past decades, the Czech Republic has already experienced a rise in the share of high-skilled jobs at the expense of low-skilled jobs (Figure 1.46). OECD estimated that close to half of current jobs (Figure 1.46) would face a high risk of automation or would be significantly changed by technology (Nedelkoska and Quintini, 2018). With the exception of some relatively low-skilled jobs – notably, personal care workers – rising routinisation and further expansion of ICT applications will increase demand for skills that are complementary to technology. Occupations will increasingly require professional training and/or tertiary education.

Figure 1.46. High-skilled jobs are replacing low-skilled jobs and many jobs will be changed by technology

1. High-skilled occupations include jobs classified under the ISCO-88 major groups 1, 2, and 3., that is, legislators, senior officials, and managers (group 1), professionals (group 2), and technicians and associate professionals (group 3). Middle-skilled occupations include jobs classified under the ISCO-88 major groups 4, 7, and 8, that is, clerks (group 4), craft and related trades workers (group 7), and plant and machine operators and assemblers (group 8). Low-skilled occupations include jobs classified under the ISCO-88 major groups 5 and 9, that is, service workers and shop and market sales workers (group 5), and elementary occupations (group 9).

2. Jobs are at high risk of automation if the likelihood of their job being automated is at least 70%. Jobs at risk of significant change are those with the likelihood of their job being automated estimated at between 50 and 70%.

Source: OECD Employment Outlook 2019.

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Moreover, the world of work is changing and working lives are getting longer. Over the span of their careers, Czech workers will likely change jobs and employers, and will need to reskill. Strong core skills such as information processing, problem solving and communication – and not only ICT specialist skills - can ensure that individuals are able to adapt more easily and become resilient to change (OECD, 2017c and 2016b). Endowing workers with the right skill sets – through education and lifelong learning – is therefore crucial. Resilient skills – and easy access to learning - will also help workers more easily transition to new jobs and sectors following economic shocks.

More inclusive schools

The Czech education system can be improved by better delivering core competencies to everyone. PISA results – which measure proficiency of 15 year-olds in reading, mathematics and science -, are above the OECD average for mathematics and science and at the OECD average for reading. According to the PIAAC Survey of adult skills, Czech adults also have above-average skills in literacy and numeracy, and they show good computer skills. On the other hand, there are persistent inequalities (Figure 1.47) and much of the gap in performance stems from differences between schools (OECD, 2019a), pointing to variation in school quality. Resources for education are among the lowest in the OECD. Attractiveness of the teaching profession is low with very low teacher salaries and limited career progression (OECD, 2019i, Shewbridge et al., 2016). The Czech Republic also lags behind in tertiary education attainment, despite increases over time.

Figure 1.47. Socio economic status has a strong impact on student performance and schools differ in quality

1. A socio-economically disadvantaged student is a student in the bottom quarter of ESCS (PISA index of economic, social and cultural status) in his or her own country/economy.

Source: OECD (2019), PISA 2018 Results (Volume II): Where All Students Can Succeed, PISA, OECD Publishing, Paris, https://doi.org/10.1787/b5fd1b8f-en.

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The Government’s Strategy for Education Policy 2020 sets reducing inequalities as a priority. A compulsory participation in pre-primary education for one year prior to primary school has been introduced, and more resources have been dedicated to teacher salaries.

Inequalities could be further addressed by reducing differences in quality between schools that are partly related to high regional disparities (Shewbridge et al., 2016). Recent changes to funding of schools (primary and secondary) goes some way towards this goal, within the constraints of a highly fragmented territorial administration that encourages the existence of many small schools. The previous system of per-student funding – which favoured schools in urban areas and left some rural schools starved of resources – has been replaced by funding for the actual extent of education in a school. In this way, small schools with fewer children will not be penalised with lower funding. Yet, further consolidation of the school network is needed and could raise efficiency and quality. Many localities face a declining school-aged population and it has become increasingly difficult to create school units of appropriate “size efficiency”. To consolidate the school network the government could establish a set of guiding principles, rules and even target quotas for capacity at different key stages of schooling (Shewbridge et al., 2016). Moreover, small schools could be encouraged to cooperate by sharing resources and common services. Clusters of schools could be formed, that would come under the umbrella of common school leadership and a shared pool of administrative stuff.

Adding explicit and objective criteria in the funding formula for schools to target economic and other disadvantages could further help address the inequities. After a recent reform in Australia, funding is based on a “standard” which comprises a base funding amount for every student plus six additional “loadings” that provide extra funding for disadvantage (disability, low English proficiency, Aboriginal and Torres Strait Islanders, socio-educational disadvantage, school location and school size). The criteria and specific loadings can then evolve in step with strategic priorities of the government.

Improving information on skills demands and boosting lifelong learning

High-quality information (data and analysis) on current and future labour market demand, trends and earning potential can help governments as well as students in making choices. This can help the education sector and skill providers keep up to speed with shifts in skill demand, and can help tune public education funding to labour-market developments. The Czech Republic is aiming to make labour market forecasts with a focus on emerging skill needs within the framework of the KOMPAS project. There is room for upgrading the information on employment prospects in different sectors and linking it to education choices of students, which could direct them towards study pathways where large labour demand is expected. It is good practice to develop a centralised online platform, such as in New Zealand, that provides information about careers and education pathways, and their employment outcomes, for both higher education and VET courses.

Adult training could also be better developed, notably by better targeting low-skilled and older workers. In the Czech Republic, low skilled workers rarely take part in adult education programmes and most of them rarely learn from their peers at the workplace (Figure 1.48). The Czech Republic scores poorly in the inclusiveness dimension of the OECD Priorities for Adult Learning Dashboard, with large gaps in adult learning for older workers, women and the unemployed. Financial support to employers for retraining their workers with formal courses is offered via the “Support for Vocational Training for Employees II” (POVEZ II) programme. Support should be directed at sectors and courses with the largest needs for reskilling and upskilling. More generally, the vocational sector should be able to adapt to delivering education to (full-time employed) adults, by developing short and flexible courses (OECD, 2019l).

Figure 1.48. Adult education for low-skilled workers should be strengthened

1. The white triangles stand for the % of low-skilled workers who report to never learn from others. Bars show the % of low-skilled workers reporting learning every day from colleagues. Data for United Kingdom refer to England and for Belgium to Flanders.

Source: Eurostat database [trng_aes_102]; OECD (2017), Building Skills for All in Australia, Policy Insights from the Survey of Adult Skills.

Statlink

Recognising and validating various courses and informally acquired skills can encourage workers to undertake learning and help to facilitate job mobility by reducing uncertainty for employers. The Czech Republic is developing a National Register of Qualifications that allows candidates to obtain a nationally recognized certificate of their professional qualification. Workers can also obtain recognition for non-formal education and informal learning (Government of the Czech Republic, 2019).

Table 1.11. Past recommendations on education and skills

Recommendations in previous Surveys	Action taken
Increase resources to education, skilling, reskilling and upskilling.	Limited progress. Public funding for education has increased in absolute numbers, as well as in terms of GDP, both thanks to increases in salaries of pedagogical and non-pedagogical staff and thanks to the targeted support of the higher number of lessons taught (division of classes to smaller groups, overlaps of the kindergarten teachers, longer hours of kindergarten service, etc.). From 01/01/2020, funding of education is changed fundamentally. The per capita funding was replaced by a normative (amount) for one educational worker. Schools will receive money according to the number of lessons taught.
Encourage the participation of managers and workers in training and further education to increase the productivity of staff.	The Ministry of Labour and Social Affairs is preparing an “employment package” consisting, among other measures, of a support for those employees who are threatened by job losses by the introduction of new technologies or manufacturing processes. The project POVEZ II for the support of vocational training of employees is still ongoing (since 1/12/2015).
Increase the flexibility of jobs by better enforcement of rights for part-time work, flexible teleworking and shared jobs.	Since 2019, the institute of shared jobs has been in a legislative process (parameters of this measure are still under discussion).

Table 1.12. Recommendations

MAIN FINDINGS	RECOMMENDATIONS (key recommendations in bold)
Supporting the economy to exit the crisis
The economy has contracted sharply and the recovery is likely to be slow. Monetary policy reacted swiftly, but remaining room for conventional monetary policy is limited. The Act on the CNB was partially amended to extend the CNB’s authority to trade on the financial market in terms of possible instruments, their maturities and counterparties, but only with temporary effect until the end of 2021.	If weakness persists in the economy and inflation pressures are low, further reduce interest rates and the countercyclical capital buffer to facilitate credit to the economy. Consider undertaking asset purchases to lower borrowing costs and to ease financial conditions over the yield curve. Further easing of prudential regulations should be done conditional on transparent disclosures of financial exposures and regular stress testing. Once the recovery is fully under way, the easing of prudential regulations during the crisis should be reversed. Adopt a comprehensive amendment to the Act on the CNB to expand its monetary policy and financial stability instruments beyond 2021.
Some fiscal space is still available to continue supporting the economy and alleviating hardship while the crisis continues.	Be ready to provide further fiscal support until the economic recovery fully sets in. Pursue planned fiscal consolidation while allowing for flexibility given economic conditions.
The policy focus needs to shift from the initial broad support towards facilitating necessary resource reallocation across sectors to restore productivity growth.	Boost well-targeted active labour market policies to facilitate employment transitions while phasing out job retention schemes in a timely manner.
Ensuring long-term fiscal sustainability and raising public integrity
The Czech population is ageing rapidly and age-related spending will rise steeply over the coming decades.	Continue to raise the retirement age and link it more tightly to increases in longevity.
Tax revenue relies heavily on labour taxation (social security contributions in particular) and real estate tax is low. There is extensive use of the reduced VAT rate.	Shift taxation from labour towards real estate, consumption and environmental taxes.
The self-employed benefit from tax advantages vis-à-vis employees, resulting in significantly lower social security contributions and potentially inadequate pensions.	Reduce tax advantages for the self-employed, including by increasing the assessment base for social security contributions.
Public integrity could be improved further.	Adopt measures to strengthen the management and prevention of conflict of interest in the Parliament and the executive. Improve integrity and transparency in lobbying.
The Czech Republic is highly export-oriented and its exports include high-risk sectors for foreign bribery, such as machinery and defence materials. Only one case of foreign bribery has been prosecuted so far.	Continue efforts to guarantee greater independence to prosecutors so that political factors are not taken into account in foreign bribery investigations and prosecutions.
Raising productivity and restarting investment
R&D intensity is low, and R&D and innovation activity of SMEs is below par.	Better target R&D support to small and young dynamic firms.
Procedures to obtain construction permits and to start a business are cumbersome and lengthy.	Adopt the new Building Act and reduce the time and number of procedures for starting a business.
Carbon dependence and air pollution are high. Several tax exemptions reduce incentives to save energy or to switch to cleaner fuels.	Promote investment to facilitate the transition to low-emission technologies and increase energy efficiency.
The Czech capital markets are underdeveloped and young and dynamic firms lack sufficient sources of funding suited to their needs.	Continue efforts to develop capital markets.
Increasing labour market participation and enhancing skills for higher growth
Childbirth has a large impact on labour market activity of mothers and the gender wage gap is sizable. Family cash benefits and tax breaks are generous while public childcare support is low, particularly for children under age three.	Keep expanding the supply of affordable and high-quality childcare facilities. Reduce the maximum duration of parental leave and incentivise fathers to take more of the parental leave.
Socio-economic factors have a large impact on student performance and attainment. Much of the inequality stems from variation between schools. Many schools are too small to provide education effectively.	Introduce explicit and objective criteria in the funding formula of schools to further address inequities and disadvantage. Consolidate the school network to ensure quality of education in all schools and encourage small schools to cooperate and share administrative resources.
The recovery from the crisis and technological change will require flexibility and reskilling by workers. Low skilled workers rarely take part in adult learning.	Foster flexible courses for adult education, in particular targeted at low-skilled workers.
Tackling urban sprawl to counter environmental pressures
Ongoing suburbanisation and urban sprawl are putting pressures on the environment. Territorially fragmented cities hinder effective policy coordination, urban planning and investment.	Strengthen the governance system across the functional metropolitan areas and consider creating metropolitan governance bodies to coordinate investment on transport and energy infrastructure.

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