Abstract
The Czech Republic adopted a new set of numerical fiscal rules in 2017. The rules include an expenditure rule that links the planned expenditures to cyclically adjusted revenues, a debt brake, and the Fiscal Council has been established.
Using a novel real-time fiscal dataset and a simple counterfactual simulation we show that the new expenditure rule will decrease the structural deficit. However, the rule might not deliver sufficient room for countercyclical fiscal policy, since the cyclically adjusted balances are hard to forecast and prone to large prediction errors.
Furthermore, most of the countercyclical pattern that appears in counterfactual budget balances is driven by unanticipated growth surprises, not by intentional fiscal policy stance itself. On top of that, the real-time data reveal the rules are not sufficient to prevent from breaching the 3% deficit limit, a result that does not appear when ex-post data are used for evaluation of the rule.
Finally, we propose a modification of calculation of cyclically adjusted balance that would improve the performance of the rule, without a need for a change in the legislation.