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2018/06/26 / Erste Group Research

CEE fiscal: good so far, but challenges ahead

Over the past few years, CEE countries managed to cut their public debt levels considerably. The gross public debt-to-GDP ratio for the CEE region as a whole declined from 53.9% in 2013 to 48.3% in 2017. Debt reduction was helped by the pickup of nominal GDP growth and fiscal deficit reduction. As for the latter, several CEE countries managed to run fiscal surpluses in 2017, namely the Czech Republic, Croatia, Serbia, and Slovenia. The Czech Republic managed to deliver this result after several consecutive years of budget surpluses, while Croatia and Serbia also stand out for cutting their deficit figures quickly and substantially.

All CEE countries currently comply with the 3% of GDP deficit limit requirement, so none of them is under the European Commission’s Excessive Deficit Procedure (EDP). However, beneath the shiny numbers, the CEE countries’ structural deficits are usually worse than the headline figures suggest and in some cases are deteriorating, while the expected increase of costs related to the demographic developments (ageing populations and rising health care costs) also cast a shadow over whether their fiscal situation is truly sustainable and whether the countries will have large enough fiscal buffers in case of a downturn. Their fiscal sustainability could be called into question as the narrowing of their fiscal gaps was strongly supported by the massive reduction in interest costs and the cyclical economic upswing. Additionally, as consumption-oriented spending has been increasing lately, the region’s governments appear to like keeping their budgets in-check by cutting investments, which are however essential for the countries’ long-run growth potential. Although it is easy to carry out, this approach could create an unfavorable mix in government expenditures.

While no CEE country is currently under the EDP, the lack of progress towards a sustainable fiscal path has been highlighted by the Commission’s recent decision to put Hungary (following Romania) under the Significant Deviation Procedure due to its strong divergence from its medium-term budgetary objective (MTO). Apart from Croatia and the Czech Republic, the other EU-member CEE countries are expected to diverge from their MTOs, while they also fail to meet expenditure benchmarks most of the time. As non-Euro Area countries do not face any formal penalty for such non-compliance, recommendations from the European Commission are mostly being ignored.

For these reasons, the further adjustment of fiscal figures, changes in the composition of public spending, and structural reforms are essential. These necessary steps are underlined all the more by the likely reduction (and, in the long-run, complete disappearance) of EU fund inflows, which puts pressure on funding sources for a large part of public investments. CEE countries are likely to see much stricter rules on the spending of EU funds in the 2021-2027 Programming Period (e.g., the need to comply with the rule of law requirement). The likely end of the ECB’s QE in the foreseeable future also increases the pressure to carry out reforms as the interest rate environment might become less favorable than what they have enjoyed over the past few years. It is thus essential that CEE countries do more to create adequate fiscal buffers to prepare for a possible downturn and to find funding for public investment.

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General information

AuthorErste Group Research
Product nameCEE Economies Special Report
Topic in focusFX, Macro/ Fixed income
Economy in focusCroatia, Czech Republic, Hungary, Poland, Romania, Serbia, Slovakia, Slovenia
Currency in focusCroatian Kuna, Czech Koruna, Euro, Hungarian Forint, Polish Zloty, Romanian Leu, Serbian dinar
Sector in focus-


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