OECD Economic Survey of Czech Republic 2020 Presentation

OECD ECONOMIC SURVEY OF THE CZECH REPUBLIC

04 December 2020, Prague and Paris

Advancing reforms to boost the recovery www.oecd.org/economy/czech-republic-economic-snapshot/ @OECDeconomy

@OECD

Key messages Continue to support households and businesses.

Gradually shift towards facilitating resource reallocation.

Improve the business environment and boost R&D investment to foster productivity growth.

Raise labour-market participation of mothers with young children and improve education and training of the disadvantaged.

Make local government less fragmented to deliver public services more effectively.

2

Supporting the economy to exit the crisis

3

The crisis interrupted an impressive convergence GDP per capita USD, current prices, current PPPs, OECD = 100 110

110

100

100

90

90

80

80

70

70

60

60

Czech Republic

50

CEECs

40 30

50 40

EA19

1995

1998

2001

2004

2007

2010

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

Source: OECD Productivity database.

2013

2016

2019

30

4

The Czech Republic has experienced a strong second wave Daily COVID-19 related deaths Per million inhabitants, 7-day moving average 21

Czech Republic

18

21

OECD countries

18

15

15

12

12

9

9

6

6

3

3

0

Mar 20

Apr 20

May 20

Jun 20

Jul 20

Aug 20

Sep 20

Oct 20

Nov 20

0

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

5

Strict containment measures were reintroduced The Oxford stringency index 90 80 70 60 50 40 30 20 10 0

.

Note: The aggregate stringency index produced by the Oxford Blavatnik School of Government records the strictness of containment measures.

6

The economy contracted sharply Real GDP 2019 Q4 = 100 105

2019 Q4 = 100 105 100

100

95

95

90

90

85

85

2017

2018

2019

2020

Source: OECD QNA database.

7

The economy is exposed to global shocks Vulnerability to foreign demand Share of domestic value added in foreign final demand, %, 2015 90

80

80

70

70

60

60

50

50

40

40

30

30

20

20

10

10

0

0

COL USA AUS JPN TUR CHL NOR GRC MEX GBR NZL CAN ROU ESP ITA ISR FRA POL FIN LVA DEU KOR SWE NLD PRT LTU DNK AUT ISL BEL LUX CHE CZE EST SVN HUN SVK IRL

90

Source: OECD Trade in Value Added (TiVA) database.

8

Unemployment is rising

% of labour force 10

Unemployment rate

2010 = 100 114

Employment (right scale)

8

110

6

106

4

102

2

98

0

94

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Source: OECD Economic Outlook database; Czech Statistical Office.

9

Inflation remains elevated Headline CPI Y-o-y % change 4

4

3.5

3.5

3

3

2.5

2.5

2

2

1.5

1.5

1

1

0.5

0.5

0

0

2015

2016

2017

2018

2019

2020

Source: OECD Economic Outlook database.

10

There is ample fiscal space to tackle the crisis Public debt Maastricht definition, % of GDP, 2019

ITA

PRT

BEL

FRA

ESP

GBR

AUT

HUN

0

SVN

0

DEU

20 FIN

20 IRL

40

NLD

40

SVK

60

POL

60

NOR

80

LVA

80

LTU

100

SWE

100

DNK

120

CZE

120

LUX

140

EST

140

Source: OECD Economic Outlook 108 database.

11

Fiscal and monetary policies eased markedly General government financial balance

Two weeks repo rate % 2.5

% of GDP 4 2

2.0

0

1.5

-2 -4

1.0

-6

0.5

-8 -10 .

2017

2018

2019

2020

2021

2022

2017

2018

2019

2020

0.0

Note: OECD estimates and projections for the 2020-22 period.

12

The recovery is expected to be slow Real GDP 2019 Q4 = 100 105

2019 Q4 = 100 105 100

100

95

95

90

90

85

.

2019

2020

2021

2022

85

Source: OECD Economic Outlook 108 database (updated with available information as of December 1st).

13

Spending on training and job support can be increased Active Labour Market Policies spending per unemployed

% of GDP per capita, 2017

Training programmes – spending per unemployed

% of GDP per capita, 2017

70

18

60

16 14

50

12

40

10

30

8 6

20

4

10 MEX GRC AUS SVK CZE POL JPN SVN ESP USA KOR LVA HUN CAN CHL EST NLD ISR SWE PRT BEL IRL NOR CHE FRA LUX DEU FIN DNK AUT

MEX CHL LVA USA SVK CAN SVN ESP LTU AUS ISR PRT JPN IRL EST KOR POL FRA CZE NOR CHE FIN NLD BEL AUT LUX DEU SWE HUN DNK

0

2 0

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

14

Main policy recommendations to promote economic stability ďƒ˜ If weakness persists and inflation pressures are low, further reduce interest rates and the countercyclical capital buffer. Consider undertaking asset purchases. ďƒ˜ Be ready to continue providing fiscal support until the economic recovery fully sets in. Allow for flexibility in the planned fiscal consolidation given economic conditions. ďƒ˜ Boost well-targeted active labour market policies while phasing out job retention schemes in a timely manner.

15

Addressing long-term fiscal sustainability challenges

16

Czech workers retire early Average effective age of labour-market exit, 2018 Men

.

75

70

65

60

Women

KOR JPN ISR PRT ISL USA SWE CHE TUR NOR IRL CAN OECD AUS NLD DNK GBR FIN DEU AUT HUN ITA CZE SVN POL ESP GRC BEL SVK FRA LUX

55

50

45

Note: Effective retirement age shown is for five-year period 2013-18 Source: OECD (2019), Pensions at a Glance 2019.

45

50

55

60

65

70

75 17

Ageing will exert strong pressures on public finances General government debt Maastricht definition, as a percentage of GDP

180

180

Balanced budget scenario

160

160

Impact of ageing on pension spending

140

140

Impact of ageing on total ageing-related spending

120

120

Mitigation scenario

100

100

80

80

60

60

40

40

20

20

0 2010

2015

2020

2025

2030

2035

2040

2045

2050

2055

0 2060

Note: Scenarios consist of projections for the Economic Outlook until 2022, 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.

18

The tax mix could be more growth-friendly General government tax revenues % of GDP, 2018 40

40

Other taxes Taxes on goods and services

30

30

Taxes on property

20

Taxes on income, profits and capital gains of corporates Taxes on income, profits and capital gains of individuals

10 0

20

Social security contributions (SSC)

Czech Republic

10

OECD average

0

.

Source: OECD Revenue Statistics database.

19

Main policy recommendations on fiscal sustainability ďƒ˜ Continue to raise the retirement age and link it more tightly to increases in longevity. ďƒ˜ Shift taxation from labour towards real estate, consumption and environmental taxes. ďƒ˜ Reduce tax advantages for the self-employed, including by increasing the assessment base for social security contributions.

20

Restarting investment and raising productivity

21

The recovery is an opportunity to decrease energy and carbon dependency Energy intensity Primary energy supply per unit of GDP

CO2 intensity CO2 per unit of GDP 0.6

ktoe/USD (2015 PPP) 0.20

kg/USD, 2015

Czech Republic

Czech Republic

0.5

0.16

0.4

0.12

0.3 0.08

0.2

OECD

0.1 0

2000

2005

2010

2015

OECD

0.04 0.00

2000

2005

2010

2015

Source: OECD (2020), Green Growth Indicators, OECD Environment Statistics (database).

22

R&D and innovation activity is below par Business enterprise expenditure on R&D, % of GDP, 2018

Summary Innovation index Relative to EU, 2018

4.5

160

4.0

140

3.5

120

3.0

100

2.5

80

2.0

60

1.5

40

1.0

20

.

POL TUR LVA HUN SVK LTU GRC ESP ITA SVN CZE PRT EST EU FRA IRL ISR ISL AUT DEU NOR GBR BEL LUX NLD DNK FIN SWE CHE

0.0

MEX CHL LVA LTU SVK TUR GRC EST LUX PRT ESP NZL CAN POL IRL ITA AUS NOR HUN GBR CZE ISL FRA SVN NLD OECD FIN DNK BEL USA DEU AUT CHE SWE JPN KOR ISR

0.5

0

Source: OECD MSTI database; European Commission, European Innovation Scoreboard 2019.

23

SMEs invest little in R&D

100 90 80 70 60 50 40 30 20 10 0

JPN DEU USA LUX GBR KOR SWE CHE DNK FRA CZE AUT ITA GRC FIN HUN TUR SVK EST AUS SVN POL BEL NLD IRL CHL ESP PRT NOR CAN NZL LVA ISL

SME share of business R&D expenditure %, 2016

Source: OECD SME and Entrepreneurship Outlook 2019.

24

The business environment can be further improved Doing Business indicators 2020 Ease of doing business scores, from low to high, OECD average = 100 120

120

110

110

100

100

90

90

80

80

70

.

Czech Republic Dealing with Enforcing construction contracts permits

Starting a business

Protecting Paying taxes Ease of Registering minority doing property investors business

Trading across borders

OECD Getting credit

Resolving insolvency

Getting electricity

70

Source: World Bank Doing Business indicators 2020.

25

Main recommendations on productivity and investment ďƒ˜ Better target R&D support to small and young dynamic firms. ďƒ˜ Adopt the new Building Act and reduce the time and number of procedures for starting a business. ďƒ˜ Promote investment to facilitate the transition to lowemission technologies and increase energy efficiency.

26

Increasing labour market participation of mothers and building skills

27

Having children has a big effect on labour market activity of women At-work rates for women with children (aged 0-14) By age of the youngest child, %, 2018 100

100

80

80

60

60

40

40 Youngest child aged 6 to 14

20

ITA

SVK

GRC

CHL

IRL

HUN

DEU

FRA

AUT

ESP

CZE

POL

GBR

OECD

FIN

EST

BEL

LTU

LVA

CAN

LUX

USA

NLD

DNK

SWE

SVN

Youngest child aged 0 to 2 PRT

0

20 0

Source: OECD estimates.

28

Generous cash benefits and lack of childcare places discourage mothers from resuming work Public expenditure on family benefits % of GDP, 2015 and latest available year 3.0 2.5

Cash benefits and tax breaks

Services

3.0 2.5 2.0

1.5

1.5

1.0

1.0

0.5

0.5

0.0

0.0

TUR KOR MEX USA ESP CHL LTU GRC ISL JPN PRT ISR POL NLD SVN LVA DNK SWE FIN CAN OECD NOR IRL CHE AUS SVK ITA DEU AUT EST NZL BEL FRA HUN CZE GBR LUX

2.0

Source: OECD Social Expenditure Database, http://www.oecd.org/social/expenditure.htm 29

Disadvantage should be better targeted in schools Likelihood of low performance among disadvantaged students Relative to non-disadvantaged students, odds ratio 4.0

3.5

3.5

3.0

3.0

2.5

2.5

2.0

2.0

1.5

1.5

1.0

1.0

EST TUR LVA SVN NLD GBR FIN KOR ISL CHL CAN NOR USA JPN POL AUS GRC AUT ITA OECD NZL PRT IRL DNK SWE LTU CHE FRA MEX LUX BEL SVK DEU CZE ISR HUN

4.0

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

30

Adult education should reach those that need it most Participation in formal and non-formal education and training Adult Education Survey (AES), 25-64 year-olds, %, 2016 100

100

Tertiary Upper secondary or post-secondary non-tertiary Below upper secondary

80

80

CHE

NLD

SWE

AUT

NOR

FRA

ITA

SVN

PRT

LUX

IRL

DEU

GBR

HUN

DNK

CZE

FIN

LVA

EU28

BEL

0

ESP

0

SVK

20

EST

20

TUR

40

POL

40

LTU

60

GRC

60

Source: Eurostat database.

31

Main policy recommendations on labour market participation and skills  Keep expanding the supply of affordable and highquality childcare facilities.  Shorten parental leave and incentivise fathers to take more of the parental leave.  Better target disadvantage in the school-funding formula.  Consolidate the school network to ensure quality of education in all schools and encourage small schools to cooperate and share administrative resources.

32

 Better target adult education to low-skilled workers.

Enhancing administrative and fiscal decentralisation

33

The Czech Republic has the highest number of municipalities per capita in the OECD Number of municipalities per million inhabitants 2016 60

50

50

40

40

30

30

20

20

10

10

0

0

KOR GBR IRL JPN NZL DNK TUR CHL MEX NLD AUS SWE PRT ISR GRC BEL FIN EST LVA POL NOR SVN OECD CAN USA ITA DEU EU28 LUX ESP ISL AUT CHE HUN FRA SVK CZE

60

Source: OECD Subnational Government Structure and Finance database.

34

Czech municipalities are very small Size distribution % of municipalities with less than 2 000 inhabitants, 2016 100 90 80 70 60 50 40 30 20 10 0

POL SVN OECD ITA DEU HUN SVK FRA CZE

Source: OECD Subnational Government Structure and Finance database.

35

Small size impacts the efficiency and effectiveness of local government Expenditure per capita is higher in small municipalities Average, CZK thousand, 2018 70

Small municipalities invest comparatively less per capita Median, CZK thousand, 2018 10

Municipalities with extended powers

60

8

Rest of municipalities

50 40

6

30

4

20

2

Municipal population

> 100 000

50 001 - 100 000

20 001 - 50 000

10 001 - 20 000

5 001 - 10 000

2 001 - 5 000

1 001 - 2 000

501 - 1 000

201 - 500

101 - 200

1 - 100

> 100 000

50 001 - 100 000

20 001 - 50 000

10 001 - 20 000

5 001 - 10 000

2 001 - 5 000

1 001 - 2 000

501 - 1 000

201 - 500

101 - 200

0

1 - 100

10

0

Municipal population

Source: Ministry of Finance of the Czech Republic.

36

Main policy recommendations on enhancing administrative and fiscal decentralisation  Introduce financial and non-financial incentives for municipal mergers.  Make inter-municipal co-operation mandatory and multi-purpose at the level of micro-regions with clearly specified tasks.  Encourage self-funding of inter-municipal cooperation (from own tax sources and by member municipalities).

37

 Gather information on the quality of services provided at the local level to increase understanding of best practices and allow the use of benchmarking.

For more information Disclaimers: The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.

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