The draft state budget for 2027 projects an increase in the deficit of CZK79bn yoy, to CZK389bn. As a percentage of GDP, this would represent the largest deficit since 2022. The public finance deficit is expected to widen from 2.8% this year to 3.5% of GDP, meaning the expansionary impact of fiscal policy will intensify further. However, given the virtually unchanged share of public capital expenditure in GDP and the robust condition of the domestic economy, we anticipate that further fiscal easing next year will provide only temporary support for economic activity. At the same time, heightened inflationary pressures may keep interest rates and bond yields relatively higher for longer. Unless there is significant consolidation as projected in the Ministry of Finance’s published medium-term outlook, the debt-to-GDP ratio will likely continue to rise and could exceed 50% by the end of the decade.

The draft state budget for 2027 projects an increase in the deficit of CZK79bn yoy, to CZK389bn. As a percentage of GDP, this would represent the largest deficit since 2022. The public finance deficit is expected to widen from 2.8% this year to 3.5% of GDP, meaning the expansionary impact of fiscal policy will intensify further. However, given the virtually unchanged share of public capital expenditure in GDP and the robust condition of the domestic economy, we anticipate that further fiscal easing next year will provide only temporary support for economic activity. At the same time, heightened inflationary pressures may keep interest rates and bond yields relatively higher for longer. Unless there is significant consolidation as projected in the Ministry of Finance’s published medium-term outlook, the debt-to-GDP ratio will likely continue to rise and could exceed 50% by the end of the decade.

The Ministry of Finance has proposed a state budget deficit of CZK389bn for next year. Revenues are expected to increase by CZK71bn (3.4%) yoy to reach CZK2,189bn, while expenditure is expected to increase by CZK150bn (6.2%) to reach CZK2,578bn. Consequently, the deficit is projected to widen by CZK79bn compared to this year. Despite solid economic growth, the proposed deficit as a percentage of GDP would be the largest since 2022.

The year-on-year increase in revenue of CZK71bn is primarily driven by social security contributions, which account for the largest share of total revenue. Solid wage growth and the resulting strong domestic demand are expected to drive increased revenue not only from social security contributions, but also from VAT and personal income tax. However, this is partially offset by a yoy decline in corporate income tax revenue of CZK8bn (-3.5%) and, in particular, a decline in other non-tax revenue. This is due to significantly lower investment and non-investment transfer receipts, including those from the EU, totalling CZK24bn and CZK11bn respectively.

Current expenditure is expected to be the main contributor to the yoy increase in total spending of CZK150bn next year. Indeed, current expenditure account for over 80% of the total increase. Of the individual items, ‘other non-investment expenditure’ were the main contributor, with two-thirds of this amount relating to higher non-investment transfers abroad and the cost of servicing the national debt (interest payments). According to the proposal, CZK128bn (1.4% of GDP) will be spent on the latter next year. There has also been an increase in capital expenditure (+CZK26bn; +10%) and social benefits (+CZK25bn; +2.6%). The latter accounts for a 38% share of total expenditure and is by far the most significant item on the expenditure side of the budget.

In terms of ratio indicators, the proposed budget does not differ significantly from previous years with regard to capital expenditure. Next year, the share of capital expenditure in total state budget expenditure will rise only slightly, from 10.8% to 11.2%. In proportion to the size of the economy, investments from the state budget currently account for 2.9% of GDP and are expected to increase to almost 3.1% next year.

A widening public finance deficit generally increases inflationary pressures while only temporarily supports economic performance. Our previous empirical analysis (available here: https://bit.ly/CEO_4Q25_EN), based on historical Czech data, shows that the positive stimulus to economic activity gradually fades as the central bank responds to increased inflationary pressures caused by looser fiscal policy with a relatively tighter monetary policy. Tighter monetary conditions then contribute to a relative decline in private investment, consumption and net exports. This results in the so-called crowding-out effect. In general, the impact on the real economy should be weaker when fiscal stimulus consists predominantly of current expenditure rather than effective investment, and also when the economy is not suffering from unused production capacity. In our view, both of these characteristics are broadly met in the case of the Czech economy.

Economic growth enables the debt-to-GDP ratio to be stabilised, even when public finances are in deficit. The key factor here is the difference between the effective nominal interest rate (i) and the growth rate of nominal GDP (g). If nominal GDP growth exceeds the interest rate on existing debt, a primary deficit (the balance net of interest payments) of approximately (i − g)*D can be incurred, where D is the debt-to-GDP ratio. If the interest on the debt exceeds the nominal GDP growth rate, however, debt can only be stabilised if there is a primary surplus. This is why a situation where i > g is sometimes referred to as the ‘snowball effect’. In the case of the Czech economy, nominal GDP growth has long exceeded the nominal interest rate. Nevertheless, the budget proposal for next year is heading towards a further increase in public debt, as we believe that the primary deficit will exceed the level consistent with stabilising the debt-to-GDP ratio by the widest margin since the start of the COVID-19 pandemic.

The Czech Republic ranks among the least indebted one-third of EU countries; however, its debt increase over the past five years has been the fifth highest. Its strong starting position has enabled it to relax budget rules and intensify fiscal expansion without significantly impacting financial markets. Nevertheless, the rapid increase in the debt-to-GDP ratio since the onset of the pandemic suggests that debt servicing costs will increasingly crowd out other expenditure. Without consolidation measures, the current trajectory will be difficult to sustain in the medium term due to an ageing population and the general depletion of available fiscal space.

At the public finance level, the deficit is likely to widen from this year’s 2.8% of GDP to 3.5% of GDP. The overall deficit will continue to be offset by the surplus in municipal and regional budgets, which we estimate will reach approximately 0.4% of GDP in 2027. Although the deficit is likely to exceed 3% of GDP, it should remain in line with EU budget rules. This is because the government has announced its intention to invoke the defence escape clause in the amount of 0.7% of GDP. We estimate the aggregate fiscal impulse—which captures the impact of discretionary fiscal measures on GDP growth—at +0.4pp for this year and +0.5pp for 2027. Thus, despite solid economic growth, fiscal policy remains clearly expansionary, a trend that will intensify further next year.

The widening public finance deficit next year increases the risk of the CNB further tightening its monetary policy. In our July Czech Economic Outlook (available here: https://bit.ly/CEO_3Q26_EN), we projected a deficit of 3.2% of GDP for 2027, whereas the CNB anticipated a deficit of 2.9% of GDP in its August forecast. Amid other pro-inflationary risks, this more expansionary fiscal policy thus exerts additional pressure on the Czech central bank. A larger-than-expected public finance deficit could also impact the bond market due to a significant increase in bond supply next year. However, recent developments in domestic bond spreads relative to market rates and foreign yields do not yet show a clear trend. This suggests that the recent rise in bond yields is more related to developments in global bond markets than to a deteriorating trajectory of domestic public finances. The Ministry of Finance’s relatively subdued activity in financial markets, connected with the substantial volume of retail bonds issued, may also contribute to this temporarily.

Public debt could exceed 50% of GDP by the end of the decade. According to our estimates, the debt-to-GDP ratio will increase by an average of 1.6pp a year between 2026 and 2030, reaching 52.2% in 2030. The MinFin’s medium-term outlook assumes consolidation of public budgets, particularly in 2029 when the next regular elections to the Chamber of Deputies are scheduled to take place. However, as the measures required to achieve this outcome are unclear, we currently expect the deficit to remain near 3% of GDP throughout the forecast period.

The current energy crisis poses a risk to public finances. Although nominal spending on fuel — and thus VAT revenue — may increase in the short term, this is likely to be offset by a reduction in consumer spending on other items. At the same time, the negative supply shock is leading to a slowdown in economic activity, which generally weakens revenue. If tensions persist, there is a risk that compensation for higher prices will be introduced for businesses and households (similar to what occurred during the energy crisis following the outbreak of war in Ukraine). Furthermore, the higher inflation associated with the energy shock may lead to increased spending on major budget items such as pensions and healthcare (public health insurance payments), which are indexed to inflation.

Announcement date: Thursday, September 17, 2026, before the market

According to our estimates, Colt CZ is set to report a significant improvement in its financial performance in 2Q26, mainly due to the consolidation of high-margin SNC. We anticipate revenue growth of +55% yoy in 2Q26 to CZK8.5bn. We also expect Colt to report EBITDA of CZK2.2bn, up +89% yoy. These would be the best figures in the company’s history. We expect Colt to reiterate its FY guidance and aim for the upper end of the target range.

Announcement date: Thursday, September 17, 2026, before the market

According to our estimates, Colt CZ is set to report a significant improvement in its financial performance in 2Q26, mainly due to the consolidation of high-margin SNC. We anticipate revenue growth of +55% yoy in 2Q26 to CZK8.5bn. We also expect Colt to report EBITDA of CZK2.2bn, up +89% yoy. These would be the best figures in the company’s history. We expect Colt to reiterate its FY guidance and aim for the upper end of the target range.

We estimate Colt’s total revenue for 2Q26 at CZK8.5bn, representing yoy growth of +55%. We anticipate growth in both the Firearms and Ammunition segments, while the new Energetics segment will also be included in the quarterly report. The acquisition of Synthesia Nitrocellulose (SNC), completed at the beginning of this year, was already reflected in the 1Q26 results. Sales in Europe will be crucial, partly because we expect the US firearms market to remain weak. By contrast, Europe should benefit particularly from increased sales of ammunition and energy materials, which should more than offset weaker overseas sales. EBITDA is expected to increase by +89% yoy to CZK2.2bn. We estimate the 2Q26 margin at 25.5%, implying yoy growth of 4.6pps. Net profit for 2Q26 is expected to reach CZK735m, representing a yoy increase of +61%.

2026 Guidance: We estimate that Colt’s 1H26 revenue and EBITDA will reach 50% and 55% of the midpoints of the respective FY guidance ranges. We anticipate that Colt CZ will reaffirm its full-year outlook. EBITDA is expected to reach CZK7.4–8.2bn on revenue of CZK30–33bn, with Colt CZ likely aiming for the upper end of these ranges.