Robert Muller, Jason Hovet

PRAGUE, Reuters – A bold start has been promised by the Czech centre-right government. It pledged to rewrite the state budget for 2022 to cut billions in spending and reduce the deficit.

As rising spending commitments (mainly due to public wage and pension increases) mean that it has little to no room for error, the actual savings may be less than what it promises.

In October, Prime Minister Andrej Babis was defeated by a three-party coalition. They blame him for the second-fastest-rising EU debt load. This has led to higher borrowing costs and warnings from one credit rating agency.

This month, power is assumed by the Civic Democrats (pro-low taxes and pro-business-friendly) who are joined by two additional parties in order to secure a majority of the parliamentary seats. The coalition aims to reduce the deficit in 2022 below 300 billion crowns (or $13.3 billion), compared with a plan that currently includes 377 billion. This is a significant reduction from its current plan which included 377 billion. It also targets record gaps for 2020 and 2021.

While the coalition had promised spending cuts of 70 to 80 billion crowns, equivalent to 1.4% gross domestic product, they have not provided any concrete recommendations.

Finance Ministry predicts that the fiscal deficit will decrease with the post COVID recovery, to 4.4% of GDP in next year’s growth. It was at 7.2% last year and above the EU’s 3 % ceiling.

The new ruling parties are being criticized by budget watchers for not being able to achieve the promised savings.

Jakub Seidler (Czech Banking Association chief economist, member of state Fiscal Council’s budgetary forecasts committee) stated that “on the expenditure side it’s quite difficult when large portions of the spending are mandatory.”

Babis’ government saw an increase of 50% in spending, much of it on mandatory pensions and public wage increases that make them politically hard to control. They account for almost 73% of the planned 2021 spending and nearly equal expected revenue.

State coffers are under pressure due to record taxes being cut and wage increases and pension rises above the standard, as well as pandemic spending and record income tax cuts of about 2% annually.

Economists were critical of the tax cuts, but they were supported by the coalition that came in place. This means there is no chance for them to be reversed. Fiscal Council states that future budget plans will need to include higher taxes.

LESS CUTS, MUCH MORE REVENUE

Jan Skopecek of Civic Democrats was an economic expert and Petr Fiala will become the new prime Minister. Pravo, Pravo’s daily newspaper, reported that on Dec. 2, the state would spend about 80 billion more crowns than it had planned.

Skopecek stated, “It is state operations, subsidies to companies, all of the things that the state cannot afford right now like reduced train fares.”

He was not able to answer Reuters questions regarding the plans.

Veslav Michalik from the Coalition’s Mayors Party said that cuts up to 70 Billion Crowns are possible.

“We calculated that that was doable, provided there’s a will,” said he, noting that “we don’t want to reduce investments.”

These revisions will mean that parliament won’t approve the budget on time, and the government begins 2022 with a provisional buget based upon this year. This is to limit new spending. Analysts said that this should not pose a threat for a few months.

The biggest item on the cutting block is the reduction of train fares for students and seniors, which will cost around 6 billion crowns in 2019. Fiala stated that ministers need to cut 6% off their operational budgets.

Analysts believe that improved revenue forecasts could eventually reduce the deficit to 300 billion crowns. However, longer-term consolidation is still difficult.

Jaromir Sindel from Citibank said that if they can deliver savings, “it will support the fiscal outlook going ahead.” The 6% target will provide a good indication of how the government can manage fiscal (policy), in coming years. This is a huge task.

IMF forecasts show that debt is projected to rise at the EU’s second-fastest rate of growth by 2025. It stood at 30% in 2019.

Rating agency Moody’s (NYSE 🙂 stated that the county’s fiscal medium-term plans lack meaningful consolidation in May.

High benchmark yields of 10-year bonds trade at record levels, as they did when Babis was elected to the government in 2014

According to the Fiscal Council, the debt level could reach 55% GDP in 2026 under the current budget. This is compared with a forecast of 2043. It would trigger automatic budget cuts according Czech law, which would reduce the state’s capacity to handle new shocks.