6/4/2010 - The main challenge for the next Czech government taking over after the May elections will be to repair the deterioration in public finances caused by the economic crisis, says a new OECD report. To promote medium-term growth, more should be done to improve the regulatory environment for business, lower the administrative burden and make the tax system less distortive.

Presenting the OECD Economic Survey of the Czech Republic in Prague, OECD Secretary-General Angel Gurría said:  “The economy has shown considerable resilience in the face of extraordinary challenges. The authorities now need to lay the foundations for stronger performance over the long term. This means strengthening public finances and making the business environment more growth-friendly.”

The survey says the consolidation of public finances needs to be ambitious. Reducing the public deficit from a projected 5.6% of GDP in 2010 to below the Maastricht Treaty threshold of 3% will be an important milestone, but the government should go further and aim for a balance close to zero to prepare for future challenges, such as  population ageing and to leave fiscal space for responding to future shocks.

The focus should be on spending restraint, buttressed by improvements to the budget-setting process, increasing the efficiency of public spending and stronger government procurement practices.

To boost medium-term economic growth and make the Czech economy more robust to possible adverse developments, the report recommends shifting the tax burden more on to consumption, environmental and property taxes and less on labour and income.

The report also argues that more can be done to strengthen competition, particularly in network sectors, to ensure against possible exploitation of market power by dominant players, and in food retailing, where the report calls for the repeal of recent anti-competitive legislation.

Because of the openness of the Czech economy, the strength of the recovery will depend chiefly on the growth in world trade, the report adds. Domestic demand is expected to remain weak in the near term as household consumption remains constrained by rising unemployment and a tightening of public budgets.

The report says Czech banks appear to have emerged from the crisis in reasonably good shape, helped by prudent economic management, limited borrowing in foreign currency and a reluctance to invest in “toxic” assets. Another strength is that domestic lending is financed by domestic deposits.

The report argues that a clear strategy for joining the euro area in the medium-term needs to be put in place to help strengthen the country’s fiscal consolidation efforts, reduce uncertainty for business and create momentum for the reforms needed to support sustainable economic growth.

To obtain a copy of the Economic Survey of the Czech Republic, journalists should contact the OECD’s Media Division (tel; + 331 4524 9700).

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