STATE BUDGET IN THE CZECH REPUBLIC IN ITS RELATIONS TO THE EU

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USTATE BUDGET IN THE CZECH STATE BUDGET IN THE CZECH REPUBLIC IN ITS RELATIONSREPUBLIC IN ITS RELATIONS

TO THE EUTO THE EU

Bohdan HejdukCzech Ministry of Finance

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Seminar on Budget and EU FundsSkopje, 14-15 May 2007

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A. The Public Sector

B. Preparation for the EU accession

C. Relations of the Czech Republic to the

EU budget

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A. The Public Sector of the Czech Republic

The Budget System

Two Fiscal Statistical Systems

The Public Finance Reform

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The Budget system -Legal Framework

The budget process of the central government (the state budget and extra-budgetary state funds) is set by the Act on Budgetary Rules in addition to the special acts on extra-budgetary state funds.

State Agricultural Intervention Fund, State Cultural Fund, State Fund for the Support and Development of the Czech Cinematography, State Fund of Transport Infrastructure, State Environmental Fund, State Fund for Housing Development, Estate Fund of the Czech Republic

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The Schedule of the Budget Process

The schedule of the budget process starts in February and finishes at the end of the year and is obligatory according to the Act on Budgetary Rules.

The state budget act and medium-term expenditure frameworks for years n, n+1,n+2 as well as the limits of expenditures and revenues for the chapters` (e.g.line ministries ) budgets are approved annually.

The draft state budget, medium- term expenditure frameworks and limits of expenditures and revenues for the chapters` budgets are drawn up by the Ministry of Finance followed by the approval of the government and the House of Deputies.

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Medium-term expenditure frameworks

The medium-term expenditure frameworks for years n, n+1, n+2 were included into the Act on Budgetary Rules in connection with the decreasing of the general government deficit and fulfilment of the commitments towards the EU.

The medium-term expenditure frameworks involve :

state budget expenditures,

extra-budgetary state funds.

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The Budget Process

The budget process has four main phases: Formulation of the draft state budget and

medium- term expenditure frameworks for years n, n+1, n+2 by the Ministry of Finance

Government`s approval Parliamentary scrutiny Implementation

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Two Fiscal Statistical Systems

There are two fiscal statistical systems monitoring the general government/ public budgets from the different points of view:

The European System of National and Regional Accounts ESA 95 (accrual-based)

National Methodology –Fiscal Targeting (cash-based)

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Comparison I

The Fiscal Targeting includes just so-called public budgets involving the central, regional and municipal governments as well as regional councils of cohesion regions.

The ESA 95 covers the entire Government sector, in other words, public health insurance companies, government agencies, subsidiaries, funds, state universities and other set allowance organizations.

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Comparison II

In accrual system (ESA 95), recognition occurs with the exchange of liabilities and /or assets, which is usually before the cash flow and closer to actual economic impact of the transaction.

In contrast, the cash basis (Fiscal Targeting ), which is used in most traditional budget systems, records outlays and receipts only when they involve cash transactions.

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The Public Finance State – The General The Public Finance State – The General Government DeficitGovernment DeficitThe public finance state remains steadily deficitThe public finance state remains steadily deficit

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-7

-6

-5

-4

-3

-2

-1

0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

% H

DP

Saldo vládního sektoru

•

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The Proposed Public Finance Reform

The Proposed Public Finance Reform follows the government`s objectives in its programme declaration.

1. to reverse the unfavourable development of public finances, especially in the area of mandatory expenditures (pensions, social benefits)

2. to reduce the general government deficit

3. to halt government debt growth

4. to reduce unemployment and the tax burden

5. to reduce the level of corruption and regulation

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Ratio of state budget, extra-budgetary state funds, and public budget balances to GDP in %indicator

2007 2008 2009 2010

GDP in curr. pr. in mld (bil) CZK 3 442 3 718 4 019 4 340

Ratio of state budget balance to GDP in % -2,5 -3 -2,8 -2,3

Ratio of extra-budgetary state funds balance to GDP in % -1 -0,2 -0,1 0

Ratio of other units of public budget balance to GDP in % -0,5 -0,7 -0,7 -0,7Ratio of public budget balance to GDP in %(without reform) -4 -3,9 -3,7 -3Objective according to the Government Programme Declaration

  -3 -2,6 -2,3

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B. Preparation for the EU accession

Formulation of the National Programme for the Preparation of the Czech Republic for Membership of the EU

National Development Plan Creation of the Institutional, Administrative and Legal

Backgrounds State Aid European Communities` own resources Act on Budgetary Rules The Changes in Budget Classification of revenues and

expenditures Usage of carryovers

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Formulation of the National Programme for the Preparation of the Czech Republic for Membership of the EU

In order to strengthen the pre-accession strategy and allow EU assistance to be channeled to meet the Czech Republic`s specific needs, The EU prepared an Accession Partnership document in 1998, which served as the basis for the National Programme for the Preparation of the Czech Republic for Membership of the EU, which was updated each year.

In 2002, the National Programme was replaced by a Summary of the remaining tasks of the Czech Republic for Accession to the European Union.

The Ministry of Finance was responsible for the chapter Financial Needs.

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The EC areas of interest

Information systems for the monitoring of the EU flows

Levies into the ECs` own resources Possibilities of co-financing the EU projects

and programmes

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National Development Plan

The CSF (Community Support Framework) for the Czech Rep. is based on the National Development Plan covering a strategy for economic and social cohesion, including a problem analysis for Prague.

The State Budget Department of the Ministry of Finance was involved in the preparation of the NDP for 2004-2006, mainly in overall outline concerning the financing of the operational programmes for the period in question and setting the limit for the additionality.

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Additionality

Additionality means that the funds of the European Community should not replace, but be an addition to national economic and social cohesion policy funds.

With respect to the principle of Additionality, the NDP included the level of public structural expenditures that the Czech Republic was to maintain during the programming period.An ex-ante verification provided a frame of reference for the whole programming period.

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Creation of the Institutional, Administrative and Legal Backgrounds

The Czech Republic tried to create a wide and effective association of all the relevant bodies, according to national rules and practice :

To make the drawing on support from the EU`s Structural Funds as easy as possible.

To be able to manage the EU appropriations from the state budget`s and public budget`s points of view.

To provide necessary national appropriations for the co-financing and link them up with the EU appropriations including cutting down the national programmes

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State Aid

Producing an overview of state aid granted in the Czech Republic was a necessary prerequisite for ensuring transparency of state aid and its compatibility with the EU rules.

On the basis of the State Aid Act, the monitoring institution`s competencies were transferred from the Ministry of Finance to the Office for the Protection of Economic Competition effective

1 May,2000 because of conflict of interest concerning a double role of the Ministry of Finance.

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European Communities` own resources – where do they come from?

Own resources currently come from customs duties, agricultural levies, sugar contributions, a fixed-rate portion of value-added tax (VAT) receipts and a fixed-rate levy on gross national income (GNI).

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Own resources- institutional framework

Czech Statistical Office- the harmonisation of the GNP in relation to compiling of national accounts according ESA 95.

General Directorate of Customs- the administration of collection and remittance of customs duties and their tranfer to the EC account, and their statements in accord with the EC regulations.

State Agricultural Intervention Fund - the collection of sugar contributions.

Tax Department of the Ministry of Finance – the creating VAT assessment base and submitting the statement concerning the tax base to the EC.

National Fund Department- the whole system of own resources, payments according to VAT and GNI, communication with the EC, representative of the Czech Republic in ACOR meetings and work groups of the Council for the own resources.

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Own resources- simulation

On the basis of agreement with the EC, the Ministry of Finance submitted a simulation of own resources calculation for the Czech Republic to the EC as well as the government from 2001 until the accession 2004.

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Own resources-questionnaire

The EC made a questionnaire which provided the total list of administration terms for the area of own resources. The Ministry of Finace was supposed to fill in the questionnaire. It included the detailed description of the own resources system`s administration.

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Own resources – Additional tasks

Opening accounts of the EC on behalf of the ECs with the Czech National Bank in CZK and EUR for the transfers of own resources.

Regular evaluation reports about a progress in preparation for the levies to own resources for the EC.

Providing detailed written procedures concerning the administration of own resources in Czech Rep.

Regular inspections of EC on spot in the area of traditional own resources (customs duties, sugar contributions).

Inspections of the system of own resources and their levies carried out by the MoF and SAO.

The system of collection of own resources will be subjected to the internal audit of the Ministry of Finance.

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Act on Budgetary Rules

In 2004 amendment to Act on Budgetary Rules enabled harmonisation of Czech and European legal framework in the area of the state budget:

Financing of the programmes and projects co-financed from the EU budget through the NF and accepting other appropriations from the EU provided that they flow through the state budget.

Own resources after the accession of the Czech Republic to the European Union.

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The amendment resulted from the following preconditions:

NF is responsible only for the appropriations for the programmes and projects co-financed from the EU budget (Structural funds and Cohesion fund).

Originally the EU appropriations should flow through the state budget in case the beneficiaries were either state`s organizational units or state allowance organizations. Later, this rule was changed.

The contribution of the state budget on the EU programmes is set as a binding indicator of a chapter in question.

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Own resources are considered as expenditures of the state budget.

The chapters` administrators are in charge of financing of the EU programmes for the whole time of financing of the programmes.

Technical and administrative procedures had to be adjusted in relation to the implementation of the ECs`regulations and in the area of own resources.

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The customs duties were credited to the account out of the state budget. The state budget gets only the Customs Administration costs.

A special account named EC was opened with the Czech National Bank.

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The Changes in Budget Classification of revenues and expenditures

1.Pre-accession stage

Items for: International institutions` appropriations

revenue, Transfers to supranational bodies

(non-capital tranfers, recovery of the unjustifiably used the EU appropriations),

Tranfers of the NF and from the NF.

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2.Accession to the EU (2004)

The Czech Rep. share of selected customs duties and sugar contributions (the total collection of sugar contributions has been divided between the EU and Czech Rep. since 2007).

The EU appropriations revenue (capital, non-capital subsidies, compensations).

Tranfers to the EU ( levies to own resources according to VAT and GNI).

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Usage of carryovers The state`s organizational units have been allowed to

carry over the saved appropriations in unlimited amounts into reserve funds at the end of the year and use them in the following years according to the stated purpose since 2004:

The appropriations for

1.Financing of projects or programmes co-funded from the EU budget,

2.Financing domestic investment programmes, 3.EU funds outside investment programmes,4.Social benefits,5.Events insured against damage,6. Other expenditures.

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Problems and solutions

Problems:

Rapid increase of the amount of carryovers in reserve funds since 2004.

Total amount in bil CZK

Programmes and the EU funds

in bil CZK

2003 7,1 -

2004 32,2 7,0

2005 58,0 21,2

2006 68,8 34,9

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Instability of budgeting. Different results in comparison with the

ESA 95.

Solutions: Adjustment of Budgetary Rules – only

carryovers of claims for exceeding the budgetary expenditures in the following years, not part of cash expenditures.

Government`s power to regulate carryovers.

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C. Relations of the Czech Republic to the EU

The Net Position in relation to the EU budget

in 2006 The Development of the Net Position

in relation to the EU budgetwithin 2004-2006

The Development of the EU appropriations share of total revenues and expenditures of the state budget within 2004-2006

State Budget and financial flows in relation to the EU budget

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The net position in relation to the EU budget in 2006

2006

mil EUR mil CZK

Pre-accession aid 90,4 2 568,10

Agriculture 503,5 14 251,00

Structural actions 468,3 13 300,30

Internal actions 52,1 1 480,80

Compensations 201,1 5 710,20

Total revenues from the EU budget 1316,2 37 310,30

Payments to the EU budget  

Traditional own resources 149 4 233

VAT resource 173,7 4 934

GNI resource 667,5 18 958

Reserves    

Correction UK 80,2 2 277

Total payments 1 070,50 30 402,30

Net budgetary position in relation to the EU budget 245,7 6 908,00

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The dev. of the net position in relation to the EU bud.

2004-2006

2004 2005 2006 2004-2006

mil EUR mil CZK mil EUR mil CZK mil EUR mil CZK mil EUR mil CZK

Pre-accession aid 157,1 4 960,00 72,2 2 309,80 90,4 2 568,10 319,7 9 837,80

Agriculture 90,8 2 813,70 398,1 12 739,30 503,5 14 251,00 992,3 29 804,00

Structural actions 193,4 6 190,10 212,1 6 788,50 468,3 13 300,30 873,9 26 278,80

Internal actions 26,9 860,80 59,5 1 904,30 52,1 1 480,80 138,6 4 245,90

Compensations 332,3 10 466,50 300 8 940,00 201,1 5 710,20 834,2 25 116,70

Total revenues from the EU budget 800,4 25 291,00 1 041,90 32 681,80 1 316,20 37 310,30 3 158,60 95 283,20

Payments to the EU budget                

Traditional own resources 58,9 1 910,10 136,7 4 373,70 149 4 233,00 344,7 10 516,80

VAT resource 78,6 2 548,80 140,9 4 507,80 173,7 4 934,20 393,3 11 990,80

GNI resource 365,1 11 833,90 607,1 19 426,40 667,5 18 958,40 1639,8 50 218,60

Reserves 1 31,40 1,2 37,00     2,1 68,40

Correction UK 50,6 1 639,00 73,7 2 359,00 80,2 2 276,80 204,5 6 274,80

Total payments 554,2 17 963,20 959,5 30 703,90 1 070,50 30 402,30 2 584,20 79 069,40

Net budgetary position in relation to the EU budget 246,2 7 327,90 82,4 1 977,90 245,7 6 908,00 574,4 16 213,80

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The Development of the EU funds share of total revenues and expenditures of the state budget within 2004-2007

mld CZK

State final account EU funds SFA EU funds SFA EU funds State budget EU funds

Total expenditures 862,9 x 871 x 967,1 x 1036,6 x

Total revenues 769,2 25 ,3 813 32,7 862,7 37,3 946,1 61,6

2004 2005 2006 2007

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State Budget and financial flows in relation to the EU budget

The ECs` own resources are funded from the state budget (except for customs duties).

The appropriations of the CAP are integrated into the state budget.

The SFs and CF appropriations originally flew through the state budget only for the state`s organizational units and state allowance organizations. The rule has been applied for all of the beneficiaries since 2007.

Pre-accession instruments appropriations go only through the NF.

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Thank you for your attention.

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