After years of steady growth that lifted incomes and living standards, the Czech economy has been hit hard by the COVID-19 crisis and will only recover slowly. Once support to firms and workers has restored stability, the focus should be on stimulating investment and productivity growth and addressing other long-term challenges, according to a new OECD report.
The latest OECD Economic Survey of the Czech Republic says that with bankruptcies and job losses expected to rise, the government should stand ready to provide further support until a recovery is fully under way, then actively help those who have lost jobs to find new ones. Job retention schemes can then be gradually phased out. Finding ways to swiftly resolve bankruptcies, improve retraining for jobseekers, and bring more women into the labour market would help to restore productivity and growth. A key challenge will be to keep supporting viable firms and jobs while allowing for resource reallocation across sectors.
“This crisis has interrupted a period of strong economic growth in the Czech Republic and an impressive convergence towards average OECD income levels. After effectively containing the first wave, the country is now battling the consequences of a second wave. Uncertainty is high and growth will only resume slowly,” said OECD Secretary-General Angel Gurría, presenting the Survey at a virtual launch with Prime Minister Andrej Babiš. “The challenge now is to bring about a recovery that is inclusive, sustainable and resilient to future shocks.”
The Survey projects Czech GDP dropping 6.8% in 2020 then recovering by 1.5% in 2021 and 3.3% in 2022, but GDP will stay below pre-crisis levels over the next two years.
Prior to the pandemic, the Czech economy was performing well as sound economic policies and openness to foreign direct investment and global value chains helped to lift productivity, employment, wages and living standards. Since joining the OECD in 1995, the Czech Republic has seen real GDP per capita rise by almost 90%. The country has enjoyed some of the lowest levels of poverty, unemployment and income inequality of OECD countries, with an effective redistribution of income through taxes and transfers.
Yet, challenges to growth and well-being existed before the pandemic. Labour productivity, while improving, lags behind the OECD average. Firm innovation and investment in research and development is weak and some aspects of the business environment are burdensome, holding back entrepreneurship. The export-driven economy is also vulnerable to external shocks.
Low overall inequality masks large regional variations in income that have grown over time as some regions suffer disproportionately from declining, ageing or unskilled populations, or poor digital connectivity. The fact the Czech Republic has a highly fragmented subnational government, with more municipalities per head than any other OECD country, exacerbates the issue as it leads to inefficient and poorly funded local government services.
Czech workers retire earlier than the OECD average, and a rapidly ageing population will weigh on employment rates and growth over time while driving up age-related spending. Tax revenue relies heavily on contributions from labour, which is not good for job creation, and the self-employed enjoy tax advantages that result in low social security contributions and potential pension shortfalls. Generous cash benefits and limited childcare also discourage women with young children from returning to work.
Recommendations in the Survey include better targeting R&D support to young firms, reducing the cost, red tape and time required to start a business and promoting green investment. The Survey also suggests expanding the provision of childcare and progressively raising the retirement age in line with life expectancy gains.
On the tax front, the Survey recommends reducing tax advantages for the self-employed, and shifting more of the tax burden towards real estate, consumption and environment-related taxation. Raising taxes on carbon would help to decrease the economy’s reliance on coal and other fossil fuels, while improving quality of life by helping to reduce greenhouse emissions and air pollution.