Cee money low czech budget deficits may just add to economic gloom

← Homepage

* Budget deficit below target for third year in a row* Government continues with austerity, hurting consumption* Czech public debt at half of EU averageBy Jan LopatkaPRAGUE, April 5 For most European countries, beating budget deficit targets would be reason for fanfare, a break from the normal pattern of overspending to support the economy during a debt crisis. Yet when Czech statisticians said on Tuesday the central European country had cut its deficit more than planned last year, the media just yawned. While the government has undershot its deficit target for three years in a row, economists say that this in itself is one of the causes of the country's longest recession in two decades and that the government should ease up on austerity. Austerity-weary voters seem to agree and look set to give centre-right Prime Minister Petr Necas a drubbing in an election planned for next year, as they are fed up at the long downturn. The Finance Ministry itself was somewhat taken aback at 2012 public sector data showing the underlying deficit was a mere 2.5 percent of gross domestic product, well below the government's 3.2 percent forecast. It suggested that items outside the central budget such as finances at regional governments, universities, the health insurance system or various off-budget funds may be behind the outperformance."Honestly, it is too early for a detailed analysis. Please give us two weeks," Finance Minister Miroslav Kalousek said when quizzed by Reuters about the figure on Wednesday. He said if it turns out that regions or schools invested less than expected, that would be negative, even if it adhered to the government's mantra of fiscal responsibility.

"I represent the policy of a government which is convinced that it is not possible to build future economic development and macroeconomic stability on GDP growth based on debt," he said. While the headline deficit figure was 4.4 percent, that was mainly due to the inclusion of a plan to compensate churches over the next 30 years for property confiscated under communism. Under the current cabinet, the deficit has fallen steadily from 5.8 percent in 2009, the worst year of the financial crisis. PAIN, AS PROMISED

Necas and Kalousek have always championed austerity, which has helped cut Czech borrowing costs to record lows. The 10-year government bond yield trades at 1.8 percent , some 35 basis points above the equivalent German bond and below that of France, saving the country hundreds of millions of euros each year in financing costs. But the tax hikes and cuts in welfare that Necas's centre-right Civic Democrats have pushed through since forming a coalition in 2010 have undermined the economy at a time when it was already losing steam. Even though they have had a positive effect on the budget and investor confidence, the Czech public debt is at 46 percent of GDP - half of the EU average - meaning that much austerity measures may not really be necessary. The country has been in a decline for over a year and a half. The economy shrank 1.2 percent in 2012, and data shows the austerity has hit both government and private spending. February retail sales fell 1.7 percent year-on-year, indicating the end is not in sight despite hopes that demand home and abroad may pick up later this year.

"We now fear that full-year GDP will again show contraction this year, although any such decline should be still softer than in 2012," said Radomir Jac, chief analyst at Generali PPF Asset Management. Voters, who saw a 0.6 percent drop in real wages last year, are clearly unhappy. Opinion polls show support for the Civic Democrats, the main party in the coalition, at an all-time low of around 10 percent. The centre-left Social Democrats, in contrast, are riding high with ratings in the mid-30s. EASING A LITTLE Necas and Kalousek have conceded that more austerity could be counterproductive. Last July the cabinet slightly relaxed its deficit goals for 2014-2015, to 2.5 and 1.6 percent respectively, and plans no further pain for voters between now and the election. Yet it still went ahead with a hugely unpopular 1 percentage point hike in the sales tax as of January this year, a step that almost brought Necas down in an internal party struggle. It has worked for the budget so far. For January-March, the central government accounts showed a surplus of 14 billion crowns, the best result since 2006 and the first positive reading since the boom year of 2007. But the central bank fears the weak economy could lead to deflation. It has cut interest rates to just 0.05 percent and expects to leave them there for many months to come. It has also threatened to intervene to weaken the crown, which would raise import prices and keep consumer prices from falling. The opposition has capitalised on consumers' gloom. Social Democrat leader Bohuslav Sobotka has pushed an anti-austerity message, saying the "deadly cuts spiral" must end, although he also wants to keep the deficit below 3 percent, mainly by taxing top earners and utilities. The prospect of election may yet bring some looser fiscal policy in the next year, which may help engender a recovery. But with the government's commitment to keep narrowing the fiscal gap, no big change from the 2.5 percent target for 2014 can be expected.