Czech public finances post worst balance in a decade during first four months of 2010

The hole in Czech public finances is growing, and will be difficult to patch. Such is the warning message issued by the Finance Ministry on Monday, whose latest figures suggest that over the first four months of this year, the state budget reached the highest deficit in a decade.

Photo: Štěpánka Budková

Cuts in investments, operational costs of government-run agencies and salaries of state employees – these are some of the measures mulled by the Czech Finance Ministry to bring government spending under control.

In the wake of last year’s record deficit of 192 billion crowns, or more than 9.8 billion US dollars, the government pledged to keep this year’s deficit under 163 billion crowns, or below 5.3 percent of the gross domestic product.

But it will be a tough ride for the caretaker cabinet, or the next government to be formed after May’s general elections. On Monday, the Finance Ministry said the deficit for the first four months reached 78 billion crowns, the worst balance in a decade. Pavel Mertlík is the chief economist at Prague’s Raiffeisen Bank.

Pavel Mertlík

“First of all, the situation is better than last year because the development of the economy is more predictable. But public revenues, or the income of the government, are lower than expected and planned. There are two problems – social security contributions, which are lower they should be by some two or three percentage points, and even bigger gap exists in corporate profit tax.”

The ministry estimates this year’s growth of GDP at around 1.5 percent, but high unemployment and low corporate taxes will inhibit revenues for some time to come.

Finance Minister Eduard Janota said earlier he was considering a cut in government spending of 16 billion crowns. Confronted with the latest figures, Mr Janota showed a sense of humour, wondering which of the proposed cost cutting measures his colleagues in government would pick. Pavel Mertlík says we can expect anything but trimmed investments.

Eduard Janota, photo: CTK

“Some of them will be adopted as the government’s goal of reaching the fiscal deficit between 5.3 and 5.5 percent of the GDP is reasonable. So I think running costs and the wage bill will take a hit. On the other hand, I don’t think there will be big cuts in investments.”

The growing public debt has become one of the key issues of party campaigning ahead of the elections. While different parties offer different solutions, Mr Mertlík, who served for two years as a Social Democrat finance minister, says the new government will inevitably have to raise taxes if it wants to effectively lower the public finance deficit.