The debt brake is, at least on paper, the “institution of last resort” against governments that would like to squander public funds. It is activated when public sector debt exceeds 55 percent of gross domestic product.
When such a situation arises, the government and municipalities must come up with balanced or surplus budgets. By the way, this is quite unimaginable in today’s reality.
However, the debt brake has a practical catch – the entire institute is part of the “ordinary” law on budgetary responsibility, and any government that relies on at least a 100% majority in the Chamber of Deputies can change the legislation at will. For example, with the argument that it is urgently necessary to find new resources for students, single parents or seniors. Add to the social group as you wish.
This is exactly what Finance Minister Zbyněk Stanjura (ODS) wants to prevent. According to him, the principle of the debt brake should take the form of a constitutional law (by the way, this is how the legislation was originally supposed to be created, the politicians finally chose a compromise version of the ordinary law), which would mean that a “stepping stone” is not enough to change it, but 120 deputies and three fifths are needed senators present.
If the debt of the public institutions sector reaches 55% of the nominal gross domestic product, measures leading to a long-term sustainable state of public finances are activated on the basis of Act 23/2017 Coll., on the rules of budgetary responsibility. For example, on the basis of the so-called debt brake, the government approves and submits to the Chamber of Deputies a draft and medium-term outlook for the state budget and budgets of state funds, which lead to a long-term sustainable state of public finances, and also submits to the Chamber of Deputies proposals for balanced budgets of health insurance companies. In addition, territorial self-governing units approve their budget for the following year as balanced or in surplus.
Source: National Budget Council
However, for the debt brake to become constitutional law, Stanjura et al. first find the necessary quorum. In practice, this means that in addition to all coalition legislators, he must win over at least 13 opposition MPs in the lower chamber.
In the realities of the current House, such a development is relatively unlikely. Moreover, according to current pre-election polls, the ANO and SPD movements are on course to win 120 parliamentary seats, so if these parties form a new government next year, they could have the power to throw the law off the table anyway.
Good servant, bad master
However, the establishment of the debt brake is not only about the number of deputies, it concerns the very meaning of this institute. For context – while the public debt of the Czech Republic is approximately 45 percent of GDP, the average in the European Union is over 80 percent, and even 10 percentage points more in the Eurozone. In other words, if the debt brake set in this way applied in the countries of the European Union, most states, including, for example, Germany, Finland or Austria, would have already encountered it.
Of course, this does not mean that the entire institution of the debt brake is useless, it just illustrates that it makes sense to criticize the still low level of indebtedness of the Czech economy before the parenthesis.
Moreover: borrowing is not the same as borrowing. The type of debt that, by the spirit of the law, the debt brake targets is primarily the debt that politicians use to rehabilitate the operational functioning of the state: the payment of ever higher pensions, more generous social programs, endless subsidies, supports and subsidies. It is a debt that sooner or later will catch up with the economy – and it certainly won’t be in a good way.
If politicians used the debt primarily for investments, to finance infrastructure projects, the transformation of the economy and energy, or to strengthen the education of the labor market, it would in principle not matter whether the total debt of the Czech Republic amounted to 50 or 60 percent of GDP. The growth of the economy arising from these projects in the following years and decades would pay off these “interests” handsomely.
Prime Minister Petr Fiala wants to bring the Czech Republic to the crossroads of Europe within a few years – economically, infrastructurally, and educationally. This cannot be done without new debt. However, it is essential that the borrowed money goes primarily to investments, development and transformation projects. Today, the situation is such that we have to borrow at all to pay for all mandatory and quasi-mandatory expenses.