In the eyes of a considerable part of the public and the journalistic community, the most watched indicator of the government’s finances is the balance of the state budget. Although the state budget is only a certain section of public budgets and is not the best indicator of the (im)balance of the entrusted finances, its development provides an understandable picture.
Let’s leave that aside for now. The fact that the so-called cash fulfillment of the state budget shows two results does not bring clarity to the whole matter either. The state budget at the end of October, which ended with a deficit of 210.7 and 237.2 billion crowns, is no exception. Why are we informed of two balance sheets and how are they different?
The state budget is compiled on a so-called cash basis. This means that we look at income and expenses based on when the money actually enters the budget and when it is spent from it. Cash flow offers a view of inflows and outflows of money, without addressing whether it materially belongs to the given period. In corporate jargon, we could say that this is ordinary cash flow.
But key figures (such as the balance of public budgets against GDP) are always expressed “on an accrual basis” not only in public finances. That is, in a way where we look at income and expenses according to the period in which they actually and materially fall, and regardless of when the bank accounts move.
In the case of the state budget, the discrepancy between “cash” and “accrual” is connected mainly with financial relations with the European Union. Income from the EU and expenditure related to EU projects are budgeted as balanced every year. This means that the standard financial operations associated with the Union will never affect the accrual balance of the budget. However, the cash reality is almost always different. The reason for this is the fact that the expenses for financing EU projects are in most cases first covered from the state budget and only in the following years will there be a real inflow of funds from Brussels.
The opposite case can also occur, when money comes from the EU first (e.g. advances) and we actually spend it only in the following years. European money thus causes considerable fluctuations in the cash implementation of the budget. Sometimes they improve it, sometimes they make it worse, depending on when the money from the EU budget “physically” arrives in the Czech state budget. It is for this reason that the Ministry of Finance always publishes numbers two. First, the balance of the state treasury as such (cash flow of all income and expenses) and at the same time the balance after adjustment for financial relations with the European Union.
While in 2022 the cash balance of the state budget ended in a deficit of 360 billion crowns, after adjusting for relations with the EU, the deficit amounted to “only” 316 billion. The difference arose as a result of the pre-financing of European projects from national sources with the expected inflow of EU funds in the following years.
For the same reason, this year let’s expect a worse balance after adjusting for relations with the EU than what the cash payment will be. This also brings me back to explaining the October results of -210.7 billion and -237.2 billion after adjusting for relations with the EU. Although such significant differences arise between the two figures in individual calendar years, in the longer term the European “underpayments” and “overpayments” balance out.
Time variability in the flow of money from the EU is not the only phenomenon that creates a discrepancy between cash flow and the result that enters the state budget into the overall balance of public budgets. This year there are also high corporate tax surcharges. Although companies paid over 30 billion in additional payments for corporate income tax in July, this is a consequence of profits in 2022.
Although these additional payments will affect the cash balance of the state budget this year, they are materially related to last year. Therefore, in October, there was a retrograde improvement in the deficit of public budgets against GDP for 2022 from -3.6% of GDP to -3.2% of GDP, and there will be no improvement in this year’s result (through the lens of the three percent Maastricht criterion).
It is these and other important and often overlooked elements of public finances that are key to better orientation in the given issue. This motivated us (the National Budget Council) to write the text A guide to the world of public budget deficits, which aims to provide readers with a guide to better understand the jumble of figures related to public budgets.