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Summary for: Czech budget proposal could weaken credit rating, warns FitchCzechia’s proposed 2027 budget marks a sharper loosening of fiscal policy than previously expected and raises uncertainty over when the country will begin reducing its deficits, Fitch Ratings said Friday.
The agency warned that persistent deficits above 3 percent of gross domestic product, new spending commitments and looser fiscal rules could weaken one of the principal strengths supporting Czechia’s credit rating.
Fitch has not downgraded the country. Czechia retains an AA- rating with a stable outlook, the strongest assessment among the four Visegrád Group countries.
Deficit exceeds earlier forecasts
The government has proposed a CZK 386 billion state budget deficit for 2027, equivalent to around 4.1 percent of GDP. That would be CZK 76 billion higher than this year’s approved CZK 310 billion shortfall.
The Czech Fiscal Council described the plan as strongly expansionary and estimated that the broader general government deficit could reach approximately 3.7 percent of GDP if all the budget assumptions are met.
Fitch had forecast a 2027 general government deficit of 2.7 percent during its latest rating review in July. The government’s own fiscal-structural plan had set a target of 2.8 percent.
The agency noted that much of the difference reflects defense expenditure covered by an EU escape clause. The mechanism allows member states to depart temporarily from their agreed fiscal path under specified conditions, including increased defense spending.
The budget would increase overall expenditure by 6.2 percent while revenues are forecast to rise by 3.3 percent.
It includes record capital spending of CZK 290 billion and approximately CZK 195 billion for defense, bringing military expenditure to around 2 percent of GDP. Planned measures also include a one-time CZK 2,000 payment to pensioners and higher pensions for people over 80.
Spending cuts postponed until election years
Fitch said the government’s revised medium-term plan was substantially looser than its previous framework.
Average deficits forecast for 2026 and 2027 are around 1.5 percentage points higher than under the earlier plan. A primary structural surplus of 0.4 percent of GDP, originally planned for 2028, is now not expected until 2030.
Fiscal consolidation has effectively been postponed until 2028 and 2029 without concrete measures explaining how it will be achieved, Fitch said.
The Czech Fiscal Council estimates that meeting the government’s 2028 target would require measures worth around 1.5 percent of GDP in a single year.
Fitch said such an adjustment could prove politically difficult because it would coincide with approaching presidential and parliamentary elections.
The agency now expects Czech general government deficits of between 3 and 3.5 percent of GDP in both 2027 and 2028. In July, it had anticipated deficits remaining slightly below 3 percent.
Fitch previously projected public debt to reach approximately 48 percent of GDP by 2028. Although Czechia’s debt remains relatively low compared with many EU countries, the agency said a prolonged period of larger deficits would accelerate its rise and erode a central advantage in the country’s credit profile.
