In a statement issued yesterday after its annual review, the IMF said the country should take a ‘neutral’ fiscal stance until 2015 at the earliest. The Czech Republic is currently in recession and the IMF expects growth to be ‘weak’ throughout this year.

Despite this, the country’s budget deficit is expected to fall from 4.4% of its gross domestic product last year to 2.8% this year, enabling it to leave the European Union’s Excessive Deficit Procedure, which applies to eurozone states whose deficits are above 3% of GDP.

‘The structural consolidation of around 4.5% of GDP over 2010–2013 has resulted in a stronger fiscal position than before the crisis,’ the IMF noted.

As a result, the Czech government should avoid ‘fiscal over-performance’, and in particular reducing capital spending. It should also avoid further pro-cyclical budget tightening, such as spending cuts and tax increases. Instead, the IMF said automatic stabilisers – such as unemployment benefits, income taxes and interest rates – should be allowed to take effect.

‘Over the next few years, until the economic recovery gains strength, a neutral fiscal stance would be appropriate,’ the IMF said. ‘This neutral stance could be followed by a moderate, gradual consolidation after 2015 with the aim of achieving the structural balance target incorporated in the new fiscal framework.’

It noted, however, that in a ‘severe adverse scenario’, fiscal policy could have a part to play with ‘temporary and targeted’ measures.

The IMF welcomed plans for a new fiscal rule to ensure the structural government budgetis in balance overseen by an independent National Fiscal Council. The country is also planning to place a cap known as a ‘debt brake’ on local governments. This would mean that if their debt exceeds 60% of the revenues they have accumulated over the previous four years, central government can take steps to reduce their income.

This would ‘enhance the transparency and predictability of fiscal policy and reduce pro-cyclicality’, the IMF said.

‘The final version of the framework would benefit from ensuring independence of the fiscal council and adopting a structural target that strikes the right balance between long-term sustainability considerations and short- and medium-term demand concerns,’ it added.