Although the unsustainably high externalcurrent account, and fiscal deficits may be financed withthe country's capital account surplus (twenty percentof GDP), such situation is not likely to last. Thecountry's policy impact on the real exchange rate,undermines the employability of large segments of thepopulation, which will ultimately hamper growth. The studyproposes an agenda on key issues, such as curtailingenterprise subsidies, and other guarantee payments,redirecting, rather than expanding, existing expenditureprograms to meet the eligibility criteria for structuralfunds financing. In addition, further increasing theretirement age, would put public pensions on a sustainablefooting, and avoid the massive fiscal deficits thedemographic transition is bringing, and, postponing therevenue reduction (from 38 percent of GDP in 2000 to aprojected 35 percent in 2002, to a target of 33 percent ofGDP in 2004) until such time as the expected cutback inexpenditure has actually materialized, should be part of thedevelopment agenda. The tax burden should be balanced awayfrom payroll taxes, e.g., streamlining Value Added Tax (VAT)refunds, or trimming tax incentives for investment toEuropean Union-compatible levels. Moreover, the plannedincreases in electricity, and natural gas tariffs should bebrought forward, and, the internal trade border within theCzech-Slovak customs union should be brought down ahead ofEU accession. Longer term reform efforts should focus onsocial protection, health care, and education, based on agovernance approach built on transforming budget frameworks,consolidating decentralization efforts, and launching amajor judicial reform.
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