Last year, fiscal trends were again seriously affected by the epidemic. The scope of measures taken to mitigate its impact was again substantial, however, the general government deficit decreased, mainly due to a marked rebound in economic activity and the resulting cyclically driven high revenue growth. Nevertheless, fiscal policy was pro-cyclically expansionary according to the latest available assessments of the cyclical position of the economy, which are in the current situation more uncertain than usual. The procyclicality was partly due to an increased investment activity and partly to a rise in public spending not related to the epidemic. While the growth in investment activity was as expected lower than budgeted, its increase was financed equally by European and domestic funds. The remaining part of public expenditures, which, in addition to investment, excludes interest expenditure and one-off expenditure, together with expenditure on COVID measures, increased last year by the most since 2008 and significantly exceeded estimates of potential economic growth. Despite the deficit reduction, a significant part of the unexpectedly high revenue growth thus also translated into higher current spending, which was in many respects of a structural or permanent character. Furthermore, a number of new discretionary measures were adopted at the end of last year, further constraining manoeuvring room for future fiscal policy.
Economic activity picked up significantly last year after a contraction in 2020, surpassing the pre-crisis level and growing at the highest rates in the EU. The high growth was mainly driven by the adaptation of business entities and households to the epidemic situation. The economic recovery also benefited from government measures, both directly through the strengthening of investment activity and indirectly through measures that contributed to an increase in disposable income and thus to private consumption growth. Economic growth exceeded all the available forecasts owing to, primarily, favourable trends at the end of the year when, contrary to assumptions and despite the worsening of the epidemiological situation, restrictive measures were milder than in the preceding outbreaks.
The general government deficit decreased to -5.2% of GDP last year and, while excluding the impact of expenditure on COVID measures, it amounted to -0.7% of GDP. The decrease was mainly due to strong revenue growth, notably from tax and social contributions, combined with growth in domestic consumption and improvements in the labour market. On the other hand, non-epidemic expenditure growth picked up further last year. This was only partly related to higher government investment activity, and partly stemmed from a strong pick-up in growth of other public spending. The deterioration of the public finance balance during the epidemic was among the largest in the EU Member States, both overall and when the impact of expenditure on COVID measures is excluded.
Last year, general government gross debt decreased to 74.4% of GDP, thus exceeding the pre-crisis level by around 10 pps of GDP. The decline in the share was largely driven by economic growth, which more than offset the further deterioration in the primary balance. Last year, borrowing continued in a favourable financial market environment, mainly as a result of the ECB’s accommodative policy. The central bank’s share of government debt securities owners further increased to almost 40% last year due to the government bond-buying programme introduced in the epidemic.
The epidemic also led to the application of exceptional circumstances last year in accordance with the legislation. This means that, in particular, due to the growing uncertainty in the calculation of key input variables, the Fiscal Council’s ex-ante and ex-post quantitative assessments of compliance with the fiscal rules are only indicative and, similar to the European Commission, place more emphasis on qualitative assessments. Despite the application of exceptional circumstances, the Fiscal Council must determine, based on national legislation, whether the actual volume of general government expenditures was in line with the last applicable maximum set by the amendment of the Framework under Article 13 of the Fiscal Rule Act. The threshold of the Framework for the maximum permitted level of general government expenditures was increased three times between November 2020 and September 2021, i.e. by EUR 900 million. The level of expenditure outturn was lower than the last maximum defined by the ordinance, but the ex-post assessment based on the latest known estimates of the output gap shows that the realisation was slightly higher than the current estimates of the maximum permitted level of expenditure.