Deficit cutting budget proposal now given higher chance of success

Photo: European Commission

The Czech budget has taken centre stage in political discussions after Tuesday’s surprise retreat from early October elections. Caretaker Prime Minister Jan Fischer has said he will only stay on until elections in the middle of next year if politicians agree a 2010 budget where the deficit is kept below 170 billion crowns, or around 5.0 percent of Gross Domestic Product.

Eduard Janota, photo: CTK
A package of tax increases and spending cuts aimed at doing just that was put forward by Minister of Finance Eduard Janota before the summer. But leaders of the two main political parties refused to discuss it then ahead of the expected elections. With the elections scuppered and Prime Minister Fischer staking his government’s future on acceptance of the finance minister’s budget package, Patria Finance chief economist, David Marek, was asked whether it now stands a chance of being waved through and what are the risks if it is not.

“Despite the political turmoil we saw in the last days, I guess that the chances of passing the state budget proposal now are higher than before. Now there is more space and time to discuss the proposal prepared by Mr Janota. And I guess that maybe it is an advantage that this proposal is prepared by a caretaker government because there is no direct obligation for political parties to say it is their work and that it is their responsibility for it. Now it is the responsibility of the caretaker government.”

And if the politicians are difficult about the level of cuts or tax increases, at what level of budget deficit does international confidence start to slip in the Czech Republic.

Photo: European Commission
“It is hard to say. We can see that even developed countries can increase their deficits to 10 or 12 percent of GDP without any consequences for (interest) rates caused by a worse outlook for their credit rating. Now we are facing a deficit higher than 5.0 percent of GDP and if there are no changes it could be 6.0 percent of GDP. I guess if the economic situation improves it could be sustainable and it may not have a negative impact on the Czech Republic’s rating. In the case of a ‛W’ shape recovery with the possible return of recession next year and possibly in 2011, then we are facing a much higher risk of a further deterioration of our fiscal situation with implications for the rating.”

If international institutions start to get frightened about the Czech situation, what does this mean in concrete terms. How would this affect normal citizens.

“Interest rates could increase, interest rates not only for the state debt but also for infrastructure projects and household debt as well. That is something that could slow down the expected recovery of the Czech economy.”

Some people are warning that if politicians do not seal a deal on this then the Czech Republic could end up like Hungary with a big debt and budget deficit problem. How worried are you about that.

“So far, I think it is not a problem for the next months. But it is true that if there is another big financial crisis or recession we could hit the wall in the same way as Latvia, Lithuania or Hungary. So it is up to us to prepare for a future crisis that could be expected at some time. Right now we are not prepared enough to survive without damage.”