OECD Supports Government Reforms

OECD Secretary General Ángel Gurría supported the reform efforts of Prime Minister Petr Nečas' government. During his visit to the Czech Republic, he presented the prime minister with the Economic Survey of the Czech Republic for 2011.

In their analysis, the OECD regularly assesses the state of national economies, analyses government policy and offers recommendations for further reforms.

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Strengthen Competitiveness

The OECD recommended that the Czech government continue with its reforms, especially efforts to increase competitiveness and long-term growth. The organisation also praised the government's target of improving the business environment, strengthening the education system, supporting innovation and reforming the pension, social and health care system.

It especially welcomes the government's recently-passed Competitiveness Strategy. The document is in reaction to the current situation and offers a comprehensive approach to structural reforms. According to Ángel Gurría, it will also help the Czech Republic in its transition to an innovative economy based on energy conservation. "I hope you'll let us borrow this so we can advise other countries," the secretary general said at a press conference.

The Czech Republic's Rating Increase Will Help

Ángel Gurría appreciated the Czech Republic's recent rating increase. "Today this counts double. You are moving upward and in the right direction," the secretary general said. He also pointed out that this increase was caused by better access to the domestic market. "Everyone has noticed this. The markets are going down and your evaluation is going up. These influences are also transmitted and this must be taken into account," he added.

At the same time, the report warns against a slowdown in the Czech economy's revival due to the large percentage of exports in the domestic economy. Precisely for this reason the organisation recommends implementing reforms as quickly as possible; the reforms must not only contribute to economic growth, but also increase its toughness against economic turbulence.

"As it is small, open and strongly integrated with the economies of the EU, the Czech Republic is very sensitive to the risks of a slowdown in global economic growth, and especially to the risks connected to current developments in the EU and the debt crisis in the eurozone. All of this is projected into the development of fiscal policy and budget consolidation has become our main challenge", Nečas said.

Budget Deficits Keep Falling Despite The Economy's Decline

Without a consolidation of public finances, the state budget deficit would not fall below 5 % of gross domestic product, the OECD report states, adding that a worsening of debt dynamics would also occur. At 4.8 % of GDP, the Czech public budget deficit was in the end even lower than forecasts predicted. The Czech Republic has managed to decrease costs on debt servicing and administrative costs.

Due to government measures, the deficit should stabilise at 3.7 % of GDP this year. A further decrease to 3.4 % of GDP should occur in 2012, and this even with an expected decrease in the tempo of gross domestic product growth to 1.6 %.

OECD Approves of Pension Reform

"The pension system performs well in terms of keeping old-age poverty low, but is providing much diversification. The introduction of a new voluntary defined contribution pillar is a step in the right direction," the OECD states.

The organisation also highlights an increase in the retirement age. It fundamentally improves the system's sustainability and strengthens the link between benefits and contributions. In addition, increasing the retirement age will maintain a constant mean life expectancy at retirement for twenty years after 2030, the report says.

Health Care System Is Functional

The organisation also positively evaluated the health care system in the Czech Republic. According to the OECD, it is functional, but despite this, there is room for further improvement. It criticises, for example, the redundant capacity of hospital beds, which would be appropriate to reduce. The efficacy of providing health care should also be increased by the new DRG payment system and the digitalisation of patient documentation.

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Main OECD conclusions and recommendations

According to the OECD, without consolidation in 2010 and 2011, the deficit would remain above 5 % of GDP and would lead to a worsening of debt dynamics. But the deficit in 2010 came to 4.8 % of GDP, which would be a better result than the original aim, and was especially due to lower costs on debt servicing and administrative costs.

Indicators of capital adequacy and liquidity continue to be satisfactory, and the recent stress tests carried out by the Czech National Bank confirmed a strong resistance to negative shocks. The OECD noted that the Standard and Poor's agency increased the Czech Republic's debt rating by two degrees to AA- (which helped to decrease the aforementioned debt servicing costs).

Pension Reform

• The OECD confirms the generally good direction of changes in the pension system, but at the same time it emphasises the importance of ensuring adequate financing for the system's transformation.
• In the OECD's opinion, an earlier increase in the legally-mandated retirement age, changes in indexation and other changes will fundamentally improve the sustainability of the public system and strengthen the links between benefits and contributions. In addition, increasing the retirement age will maintain a constant mean life expectancy at retirement for twenty years after 2030, the report says.

Health Care Reform

• The OECD analysis points to the Czech Republic's considerable potential for improving life expectancy through improved health care. Using the potential benefits as a result of increased cost effectiveness in the health care system would at the same time lead to marked savings. According to the evaluation, the health care system functions well overall, but there is still room for improvement. This includes such things as a decrease in redundant capacity, especially in hospitals, the introduction of the DRG payment system and the digitalisation of documentation.
• Generic prescriptions and positive lists of drugs should bring savings in the area of rising costs for medicines. The OECD appreciates that the Czech Republic is planning to exclude some of the premium services from the package covered by public health insurance.

More Transparent Public Contracts

• According to the OECD, an amendment to the existing public contracts law proposes important changes - especially in decreasing the limits for tenders, new organisational approaches and increases in the transparency of the entire process. These plans should be implemented as soon as possible, together with proposals for introducing the centralisation of state purchasing.
• Progress in the implementation of the Anti-Corruption Strategy can play an important role in increasing the efficacy of public contracts, which would potentially lead to widespread savings.

Competitiveness Strategy

• The government's Competitiveness Strategy reacts to problems in the middle term, which the OECD appreciates. This strategy, according to the OECD, offers a comprehensive approach to structural reforms through the involvement of the entire state administration.
• The OECD positively evaluated that three to six specific projects were created in every area of the Strategy with clear goals, timelines, responsible institutions and evaluating criteria.
• Individual areas of the Strategy correspond with many OECD recommendations from recent years.
• According to the OECD, there is an effort toward consistency between the Competitiveness Strategy and other existing strategies.

Labour Market

According to the OECD, certain improvements have occurred recently which improve the flexibility of the economic environment. These include:

• Increased flexibility in the labour market due to amendments to the labour code from 2007 and a gradual shift from taxing labour to taxing consumption.
• The OECD noted and positively evaluated the Czech Pointunified contact points for gaining information and taking care of formalities.

Cooperation With NERV

• The OECD considers the government's discussion with the National Economic Council (NERV in the Czech acronym) on issues of structural policy to be a commendable practice.
• According to the OECD, NERV came up with many economic-political base materials which examine various aspects of the Czech economy and which were used for the government's important political decisions, and at the same time stimulated a wider public discussion.