Timid budget for 2026 doesn’t wish away fiscal risks for Czech Republic

Despite the new government’s 2026 budget being slightly more timid than anticipated, we don’t plan major changes to our outlook. However, this doesn’t mean the government will show fiscal restraint in the coming years. A smaller deficit will slow but not halt the rise in bond yields in 2026, as markets price in higher current spending-driven borrowing and relaxed fiscal rules.

We forecast the consolidated deficit at 2.2% of GDP this year, up from 2% in 2025. The boost from looser fiscal policy was already baked into our outlook. The increases and shifts in spending are too small to alter it, and we continue to expect the economy to grow 2.3% this year. Aside from infrastructure spending, the budget is very light on structural reforms or investments that could meaningfully lift the slowing rate of potential output growth.

Despite the smaller-than-expected deficit, the government will nonetheless break the fiscal rule of a structural deficit below 1.75% of GDP this year, though there are no repercussions. We expect the fiscal rule to be scrapped and replaced by the EU rule of maximum deficits of 3% of GDP later this year, paving the way for broader fiscal loosening from 2027.