The Czech economy continues to operate in an environment of heightened geopolitical and economic uncertainty. Ongoing armed conflicts in Ukraine and the Middle East, fluctuating trade policies and the risk of further disruptions to international supply chains represent significant issues for the development of the global economy and external demand. In addition to these external factors, unfavourable demographic trends and growing pressures on public budgets remain a challenge, particularly in relation to ensuring the country’s defence capabilities and the long-term sustainability of public finances.

The Czech Republic’s fiscal policy framework is based on the reformed European economic governance framework, which is underpinned by Regulation (EU) 2024/1263 of the European Parliament and of the Council, Regulation (EU) 2024/1264 of the European Parliament and of the Council, and Council Directive (EU) 2024/1265 of 29 April 2024 amending Directive 2011/85/EU on requirements for budgetary frameworks of the Member States. Their requirements were transposed into Czech law by an amendment to Act No. 23/2017 Coll., on the Fiscal Responsibility Rules. At the same time, a new Fiscal-Structural Plan of the Czech Republic for the period 2027–2030 was drawn up during the year, defining the medium-term trajectory of fiscal policy through limits on the primary structural balance and the path of net expenditure. These parameters provide a basic guideline for the management of public finances and were also taken into account when drawing up the state budget. The current fiscal framework thus links the requirements of European rules with national fiscal rules and creates a framework for the management of public finances in the medium term. The Fiscal-Structural Plan anticipates fiscal easing in 2027, which takes into account current budgetary priorities as well as the structural framework. In the coming years, fiscal policy should gradually move towards consolidating public finances and improving the structural balance. This development should lead to the achievement of a primary structural surplus of 0.3% of GDP in 2030.

The macroeconomic forecast anticipates a continuation of the economic recovery, driven primarily by domestic demand, household consumption and investment activity. Real gross domestic product growth is expected to accelerate from 1.7% in 2026 to 2.5% in 2027. The favourable trend in economic activity is also expected to reflect in the labour market. The unemployment rate is projected to reach 3.0% in 2026 and fall to 2.8% the following year. The average inflation rate is expected to stand at 2.1% this year, whilst in 2027 it is expected to rise to 3.1%, mainly as a result of energy prices.

The general government sector is projected to post a deficit of 2.8% of GDP in 2026. This is expected to widen to 3.5% of GDP in 2027. This trend is in line with the scope provided by the Fiscal-Structural Plan, including the use of the escape clause for defence expenditure, which allows for an amount of CZK 70 billion to be taken into account in 2027. In subsequent years, we anticipate the general government deficit returning to below 3% of GDP. These deficits are linked to a further increase in the general government debt ratio, which is projected to reach 45.8% of GDP in 2026 and 47.4% of GDP in 2027. The rise in debt will be influenced, amongst other things, by the financing of the construction of new nuclear power stations through repayable financial assistance to Elektrárny Dukovany II. By international standards, however, the Czech Republic’s debt remains significantly lower than in many other European Union countries.

The long-term sustainability of public finances is closely linked to developments in the pension system, which in the coming decades will be affected in particular by population ageing and changes in the ratio between the number of people of working age and pensioners. Chapter 4 presents updated projections for the pension system and assesses the expected long-term trends in its revenue, expenditure and balance. Pension expenditure is expected to start rising from the 2030s and peak just before 2060, when it will exceed 9.9% of GDP. The pension system’s balance is also expected to deteriorate gradually as a result of demographic trends. From the current modest surpluses, the balance is expected to shift into deficit from the second half of the 2030s, reaching up to 1.8% of GDP around 2060. At the same time, the projections take into account the effects of the parametric changes adopted in the pension system, in particular the gradual increase in the retirement age and changes to the calculation of newly awarded pensions, which dampen the growth of future expenditure. The analysis also includes an assessment of the sensitivity of the projections to alternative demographic and macroeconomic assumptions, including developments in productivity, life expectancy, fertility and migration.

A thematic chapter is devoted to funding from the European Economic Area and Norwegian Funds and its utilisation in the Czech Republic. It presents the institutional framework and implementation of these funds, summarises the programme periods to date since the Czech Republic joined the support scheme, and outlines the current 2021–2028 period. Attention is also paid to trends in the allocation and drawdown of funds. The chapter thus offers a comprehensive overview of one of the instruments of financial cooperation with donor countries, which contributes to supporting development and the implementation of projects in selected areas of public life.