Reports on Observance of Standards and
1. This chapter provides an assessment of fiscal management practices in the Czech Republic against the requirements of the IMF Code of Good Practices on Fiscal Transparency—Declaration on Principles. Box 1 highlights key aspects of this code.2
Clarity of Roles and Responsibilities
2. The roles and responsibilities of the government sector are defined and distinguished from the private sector in the Constitution and in several laws. The general government includes the central government (including state financial assets and extrabudgetary funds) and the local and municipal governments, and general government data are prepared and reported according to the ESA, as well as the IMF’s Government Financial Statistics (GFS).
3. The fiscal operations of the central government are governed by the Law on Budgetary Rules and some secondary legislation. In addition, there are specific laws governing individual extrabudgetary funds.
4. The Constitution and the Law on Municipalities give spending autonomy to local governments. While local governments have the right to borrow and issue guarantees, they are heavily dependent on revenue from the central government in the form of direct transfers and revenue sharing. Both the taxes subject to sharing and the sharing formula are specified in the Law on Budgetary Rules. The distribution of responsibilities between the individual levels of government will be redefined in several public sector reform acts currently under consideration by the government, including the Public Administration Reform Act, which is expected to be passed into law in late 1999. One of the purposes of this act is to create a regional level of government as defined in the Constitution, primarily since transfers from the EU are effected at the regional level.
5. The legal framework for Czech budgetary operations tends to rely more on principles of handling public funds—combined with detailed instructions and regulations rather than on high-level codified procedures and strong administrative control. The Parliament approves state budget revenues and expenditures (including grants for local governments) and the budgets of the
extrabudgetary funds,3 but there is no statute that prohibits the government from changing the appropriated budget after it is approved by Parliament (see section on budget execution). However, a new Law on Budgetary Rules, which is expected to be passed by end-1999, will provide a more comprehensive fiscal framework emphasizing greater transparency and accountability. The new law contains provisions: (i) requiring a medium-term fiscal framework and medium-term budget forecasts; (ii) limiting the power of government to change the budget after parliamentary approval; (iii) improving monitoring and reporting, including of information on guarantees, tax arrears, equity holdings, and the use of appropriate methods of asset valuation; and (iv) limiting spending from unanticipated revenue.
6. The general procedures relating to taxes (and fees), including appeals, are determined by the Act on Administration and Collection of Taxes and Fees. Rules governing specific issues relating to each tax are covered in individual tax laws. There is no separate statute or code of conduct, but the behavior governing tax officials is covered in the various tax statutes. Tax administration is supported by a tax information system which records taxpayers on the basis of taxpayer identification numbers (TIN) linked together for all taxes. Information is kept in a central database, and the statutes dictate that information from tax procedures, including the returns, are confidential.
7. While the distinction between fiscal and private sector activity is generally clear, there are several areas where the distinction is blurred, which is not surprising for a country in transition. There are several institutions that were established under the Commercial Code which are not a part of the government sector, but neither respond completely to private market incentives. The obligations of these institutions are either explicitly or implicitly guaranteed by the government, but their operations, which are of a fiscal nature, are not completely captured in the fiscal accounts. Important examples include:
8. Another area where the distinction between the government and private sector activity is blurred relates to the government holdings of equity. The government, through the National Property Fund (NPF)—an extrabudgetary fund, has equity in various enterprises which the government argues is primarily for the purpose of preparing them for privatization.5 The activities of these enterprises are reported to the NPF. There are also a limited number of government commercial entities, such as the Czech Railway and Transgas, which are explicitly classified as public sector entities, but the Commercial Code is applied to their activities. It is estimated that the activity of all enterprises with full or partial government ownership accounts for over 20 percent of total economic activity in the Czech Republic. However, there is no consolidated report of the government’s equity holdings. The new Law on Budgetary Rules would require that all government equity holdings be recorded. In addition to the equity interest in the non-financial enterprises, the government holds equity in two commercial banks which are being prepared for privatization (Komerčni Banka and Česka Sporitelna). These banks now account for about 35 percent of the total amount of outstanding loans in the economy. They comply with the banking sector regulations and the government does not use them for fiscal purposes, although they are not profitable.26
9. The CNB is independent in setting monetary policy and does not appear to have used monetary policy tools for fiscal purposes (e.g., inflationary finance). However, there is evidence of non-transparent QFAs, notably, the provision of financial support to banks by the CNB. However, the CNB has recently taken steps to be transparent about its non-standard operations by isolating in Česka Finančni (a subsidiary of the CNB) all of the assets of the troubled small- and medium-sized banks acquired by the CNB in connection with the recent bank stabilization program.7 While the CNB does not receive funds from the central government, it does not transfer profits to the budget.
Public Availability of Information
10. The MOF releases a substantial amount of fiscal information on its website in a timely manner that goes beyond the requirements of the SDDS.8 The coverage of the state budget is extensive and available by economic, functional, and vote (i.e., administrative) classification. The state budget is publicly available, and includes a policy statement and the underlying macroeconomic and fiscal assumptions.9 In addition to standard budgetary data for the central government for the current and past two fiscal years, there is detailed information on intergovernmental grants, revenues and expenditures of extrabudgetary funds, and transfers to local governments. In 1998, the government began publishing information in the budget on the outstanding value of state guarantees granted by the MOF and other agencies. Although the reporting of guarantees is not required by law, a statement on guarantees will be required in the state budget document under the new Law on Budgetary Rules.
11. The state budget document is comprehensive. Line ministries prepare detailed budgets covering activities within their areas of responsibility. These budgets, which are included in the budget document, are further broken down by individual agencies within each ministry. All entities fully financed from the central budget are required to produce both individual budgets and information about their activities. Contributory organizations—which finance part of their activities from fees and charges—are shown in budget documents on a net basis. While their budgets are reported to an individual spending ministry, they are not required to publish their accounts. The transfers they receive from the government account for about 122 percent of total state expenditures. Since these organizations are in the areas of health, education, and road maintenance, among others, they are engaging in fiscal activities, and by including only their net transfer, the fiscal accounts underestimate the importance of these activities.
12. The state budget document includes a projection for the local government sector, which allows the fiscal position of the general government to be evaluated, although this projection tends to be inaccurate because of poor information. In the tax area, all tax laws and their amendments are officially published in the Collection of Laws and ample assistance is available to assist taxpayers in filling out their returns.10 Tax expenditures are not reported, although the EU will require that tax incentives to industry be monitored and reported. There is little or no information reported on QFAs.
Open Budget Preparation, Execution, and Reporting
13. Although not required by law, the official budget document contains a fairly precise policy statement including a projection of economic fundamentals and the main fiscal priorities.11 The macroeconomic forecasts prepared by the MOF used in assessing the fiscal outturn are updated on a quarterly basis and are publicly available. The budget distinguishes between existing and new policies by vote, although this information is not aggregated or comprehensive. While the government provides data on what it refers to as hidden debt, this is not a statutory requirement (see Box 2).
14. The Czech Republic is increasingly placing budgetary decisions in a medium-term framework. Although currently there is no legal requirement to do so, the new Law on Budgetary Rules proposes that medium-term forecasts of the main revenue and expenditure categories should be included in the annual budget. A medium-term forecast is also needed in preparation for EU accession, and the MOF has recently released some "unofficial" fiscal forecasts; the government has indicated that the 2000 budget document will include a medium-term forecast. Together with the IMF, the MOF has begun developing medium-term and 10-year fiscal forecasts.12 In addition, long-term strategic studies have been undertaken in specific areas (e.g., social security) on an ad hoc basis. The MOF also very recently began calculating structural and cyclical balances and measures of fiscal sustainability.
15. There is not a formal statement of fiscal risk, nor is fiscal risk quantified.13 The recently produced medium-term fiscal forecasts give some indication of risk related to output variability, possible slippages in spending, and the possible investment costs associated with EU accession.
16. There are two problems in budget execution. First, and most critically, the government can alter spending from the amounts that are appropriated in the budget by Parliament. The new Law on Budgetary Rules will limit this flexibility to 5 percent of expenditures, by ministry and in aggregate, depending upon revenue performance (i.e., increased expenditures will be allowed if revenue is higher than budgeted). As regards control over budget execution, financial control, and internal and external audit control have
been strong, but there has been some difficulty controlling off-budget activities of ministries and there has been little in the way of performance accountability. Second, monitoring and control over general government finances are complicated by the relative high degree of autonomy and flexibility granted to local governments. Therefore, actual local government finances can vary substantially from what was assumed when the state budget was approved. Furthermore, there is often a long lag between the outturn in local government finances and when they are reported to the central government. Weak control over local governments, and thus general government deficits, may become problematic as the Czech Republic prepares to enter the EU.
17. The budget and accounting system of the Czech Republic is modern and effective, and uses a modified cash accounting basis (i.e., allows for some accrual accounting). As indicated earlier, fiscal data comply with ESA and GFS standards. Budget execution is monitored and controlled internally at various stages, and detailed and timely reports from the treasury account can be produced by vote and in aggregate. The final accounts of the central government reflect high standards of coverage and reliability, and include a reconciliation with bank accounts. Indeed, the MOF reconciles spending on a daily basis using reports from the banking system. The various outturns using treasury accounts are compared to budget appropriations as well as revised spending authorization. The Supreme Audit Office (SAO) audits the government accounts on an ad hoc basis and provides a report to the Parliament and the Cabinet.
18. The procurement law that governs purchases by the government complies with EU standards. It is strictly adhered to, and subject to internal and external audit. All private sector labor laws are binding for the government and the rules governing pay, hiring, and firing practices are well understood.
Independent Assurances of Integrity
19. The SAO performs high quality auditing.14 The responsibilities of the SAO are mandated in the Constitution and its head is appointed by the President and approved by Parliament. It audits and assesses management of revenues and expenditures, state property and funds, as well as the performance of various programs within the state budget. It audits the accounts of the ministries and government agencies, guarantees by the state, state securities, including their amortization, and the awarding of state contracts. On an ad hoc basis, it offers opinions on government reports dealing with budget performance, drafts of new legal regulations, various government programs, and the performance of ministries and agencies. The SAO exercises only ex-post audit control. There is no formal mechanism to follow up its recommendations. The SAO produces a quarterly report of its findings that is available to the public. Twice a year and before the budget forecasts are released, a panel of experts, including individuals from the private sector, scrutinize the macroeconomic assumptions.
B. IMF Staff Commentary
1 Prepared by Mr. Symansky (Fiscal Affairs Department), in consultation with the Czech authorities and the European I Department.
2 The IMF's Code of Good Practices on Fiscal Transparency-Declaration on Principles, the manual explaining the code, a blank questionnaire, and a blank self-evaluation report are all available on the IMF external web site (www.imf.org/external/np/fad/trans/index.htm).
3 The budget of the health funds is an exception. Although the health funds are extrabudgetary, their budget is not included with those of the central government or the other extrabudgetary funds.
4 The following internet sites provide further information on these institutions: www.kobp.cz - Konsolidacni Banka Praha; www.ceb.cz - Czech Export Bank.
5 See www.fnm.cz/fnm/web.nsf for more information on the NPF
6 See www.csas.cz and www.kb.cz for more information on the two banks that will be privatized.
7 The CNB website is at www.cnb.cz and the act establishing the CNB can be found at www.cnb.cz/en/zakony/cnb/index.htm. The website of Ceska Financni is www.czfinanc.cz
8 Fiscal data on the budget and actual out-turn can be viewed at www.mfcr.cz/scripts/hpe/default.asp?VlfinSta
9 Many of the documents of the State Buget are available at www.mfcr.cz/scripts/HP/default.asp?Rozpocet and an example of the local government budget can be seen at dokumenty.prague-city.cz/rozpocet/index.html
10 Tax instructions can be viewed at http://www.mfcr.cz/cps/rde/xchg/
11 The key macroeconomic assumptions can be viewed at www.mfcr.cz/scripts/hpe/default.asp?MakroPre
12 See Medium-Term Fiscal Policy Projections and Analysis in Czech Republic: Selected Issues , Chapter IV, July 7, 1999.
13 There is a section of the budget entitled "fiscal risk" but it relates exclusively to hidden debt.
14 Information on the SAO can be viewed at www.nku.cz