Analysts warn reforms or tax increases will be needed to keep Czech public finances sustainable

The draft state budget for 2026 suggests that without structural reforms or higher taxes, the Czech Republic will struggle to keep public finances under control, analysts told the Czech News Agency. They point out that much of the budget is tied up in mandatory spending, such as infrastructure investments, social insurance contributions, and public sector wages, leaving limited room for government priorities and increasing pressure on fiscal stability.

Petr Dufek, chief economist at Creditas Bank, said that the government’s consolidation efforts began too late and are now essentially over. “The trend of reducing the structural deficit has stopped, and according to the outlook, it is set to deteriorate again,” he noted. He added that the scope of mandatory spending means the government will eventually have to consider reforms or tax increases.

Helena Horská, chief economist at Raiffeisenbank, warned that without reforms and measures on both the revenue and expenditure side, Czech public finances could follow the path of France, where debt-to-GDP ratios are high. She argued that the state cannot continue to provide its current range of services without either increasing taxation or reducing its role. “We must finally choose – either a small state with a limited but functional range of services with an emphasis on personal responsibility, or a larger state with significantly higher taxes,” Horská said.

Lukáš Kovanda, chief economist at Trinity Bank, highlighted that the current path will not meet the requirements of the Budget Responsibility Act, which sets a structural deficit ceiling of 1.25% of GDP by 2027. “Further consolidation efforts will be necessary, and in reality, this means at least some form of tax increases,” Kovanda said.

Michal Skořepa, chairman of the Committee on Budgetary Forecasts, added that although the draft budget meets legal requirements for reducing the structural deficit when including regional and municipal balances, it still shifts part of current spending onto future taxpayers, raising sustainability concerns. He noted that more than CZK 100 billion will go toward servicing past debts next year. Horská also pointed out that if the government had not adjusted pension indexation, early retirement, and other cost-saving measures, deficits would be even larger.

Pavel Sobíšek, chief economist at UniCredit Bank, said the draft budget is based on sound macroeconomic assumptions but warned that upcoming political negotiations could change its direction. “It would be a failure of this government, which presents itself as one of budgetary responsibility, if it eventually went into Parliament with a deficit larger than what is currently proposed. If it wants to add spending in one area, it should cut elsewhere,” he said.

The government must approve the budget by the end of September, but the Chamber of Deputies elected in October will ultimately decide on its adoption. Analysts caution that if the new majority does not endorse the proposal and demands an overhaul, the country could enter 2026 under a provisional budget, which would restrict government spending.

Source: CTK