State expenditures are dangerously increasing. The debt amounts to more than 342,000 crowns per each Czech citizen.
By the end of the year, the national debt is expected to increase to a total of 3.991 trillion. Finance Minister Alena Schillerová is planning further new expenditures for the future. This year, she will issue two more government bond series worth tens of billions. On the contrary, President Petr Pavel warns against the spiral of massive indebtedness. Central bankers are also cautious.
The Czech national debt increased by 49.2 billion crowns in the first half of the year, reaching a record high of 3.727 trillion crowns, as stated by the Ministry of Finance in its quarterly report on the management of the national debt. According to the ministry, this increase is primarily due to the sale of government bonds to cover debt repayments and the ongoing coverage of the state budget deficit.
Bonds are popular, but the risk of higher debt increases
Nevertheless, these securities are still expected to be used in the future. In the first state bond issue of this year, people purchased securities worth 74 billion crowns. There were approximately 92,000 interested buyers. The scope of the issue exceeded the original plan of the ministry from May, which anticipated the sale of bonds worth 20 billion crowns.
Finance Minister Alena Schillerová welcomes the high interest in the Republic Bonds.
"The success of the Republic Bond is astonishing. In 2019, the subscription in the first period reached 2.9 billion crowns, this year it is 74 billion. This is by far the highest value for a single subscription period. We have successfully reached new investors on a large scale, with more than 69 percent of subscribers choosing government bonds for the first time. More than 124,000 citizens currently hold the previously issued Republic Bond issues in a total amount of 130.7 billion crowns. This is the historically highest number of holders and the highest nominal value of government bonds for citizens in circulation, which now represents 3.4% of the national debt."
The minister euphorically described the first subscription period in a press release, without mentioning where the state treasury will find the money for it in the future.
Moreover, the tendency to incur debt does not end there. The second subscription period will take place from August 24 to October 4. And the third is planned for the autumn and pre-Christmas period.
The Governor of the Czech National Bank Aleš Michl explained to the server Seznam Zprávy in May that the central bank must remain vigilant, which also means implementing stricter monetary policy. This means higher rates, caution in reducing them, and willingness to slow down the economy if necessary for price stability. He admits that if investors assess risks as higher, yields on Czech government bonds may increase, further strengthening the danger of larger government expenditures.
Risk of Additional Expenditures
The central bank, in its spring Financial Stability Report, claims that in the short term, there may be an increase in national debt due to heightened unexpected fiscal expenditures. In the context of ongoing geopolitical tensions, there is especially an anticipated pressure to increase defense spending according to the cited source.
In the long term, according to central bankers, the development of public finances will also be influenced by the setting of the pension system.
“Any changes in the reform framework or adjustments to already adopted measures may manifest in the development of mandatory expenditures in connection with demographic aging. If there is no change in revenue development, these factors could lead to a deterioration in the sustainability of public finances and an increase in national debt.”
explains the report.
At the end of June, the state budget recorded a deficit of 183.6 billion crowns. According to the Strategy for Financing and Managing State Debt, the debt should increase to 3.991 trillion crowns by the end of the year. The debt ratio will then reach 44.4 percent of the gross domestic product. Is that a lot or a little?
The President Vetoed the Controversial Law
According to President Petr Pavel, further indebtedness represents a dangerous trend.
"We are tempted to continue living on credit, yet we are in a decade of high interest rates, and irresponsible management can cost us dearly,"
said the president to ČTK.
Pavel warns us not to get into a spiral, but also to be able to assess proposals to increase the deficit through investments. According to him, not all investments support growth.
In fear of further developments, he also vetoed a controversial amendment regulating the drafting of public budgets.
The law is supposed to allow the government, among other things, to increase defense spending above the framework approved by the Chamber until 2036, three years longer than current. Spending above two percent of GDP would also not be counted into the approved budgetary expenditure frameworks. Similarly, the government could increase spending on strategic infrastructure projects.
Pavel's main argument was that the draft, according to him, threatens the stability of public finances.
"In practice, this means that the government will have more room to finance expenditures through debt,"
Pavel stated for ČTK. According to him, the rules for state management must be set to protect both current and future generations.
At the same time, the president claims that debt is not always automatically bad. According to him, the challenge remains particularly the lack of investment in education, where there are significant regional differences in quality. The Czech Republic lacks sufficient qualified workers in many areas. He identified slow digitalization of state operations or fragmented management of science and research as other shortcomings hindering the development of the Czech economy.
Sources: original article, ČTK, Seznam Zprávy
