Fiscal Pact is symbolic but delayed step to discipline public spending
The Czech Republic has signalled it will take steps to sign up to tough rules on public deficits and overall state debt designed with the main aim of forcing euro zone government to get their public finances in order. For prime minister Bohuslav Sobotka the move is a low cost, symbolic, step which will mainly shackle the next government rather than this one.
The Czech Republic and United Kingdom were the only two countries out of the now EU 28 that refused outright to sign up to the EU fiscal pact two years ago. But Czech adherence now seems likely with a minimum of fuss and amid general public indifference. Czech prime minister Bohuslav Sobotka said after the regular Cabinet meeting on Wednesday that steps to prepare adhesion to the fiscal pact will be launched and a final decision on the move made in the summer.
For Sobotka, the beauty of this step is that he can send out pro-European signals at no short term cost. Adhesion to the fiscal pact will only take effect when the Czech Republic joins the single currency euro and that is not on the cards for this parliamentary term.
One of the issues still to be solved is whether the move needs a simple majority in parliament or requires the more demanding three-fifths majority for constitutional changes. All three coalition parties are in favour and the biggest opposition party, TOP 09, is an enthusiast for the move.
The pact amounts to a much tighter set of rules on public deficits and debt than those set out for joining the single currency euro. And it calls on national governments push through their own local legislation to make sure corrective steps are taken if they fall out of line.
The main Maastricht euro adoption targets for a balanced budget, defined as not being more than 3 percent of Gross Domestic Product (GDP) and the goal for accumulated public debt not to exceed 60 percent of GDP are still in there.
But the rules also look at whether countries have a fundamental and ongoing problem of state spending exceeding income from taxes and other revenue sources, a so-call structural deficit. Under the rules, this structural deficit, as opposed to the extra cyclical spending sometimes needed to boost the economy in recession, should not exceed 0.5 percent of GDP. It can climb to a slightly higher 1.0 percent of GDP if the country is in the fortunate position of having an overall debt significantly below the 60%.
For the Czech Republic, overall central government debt is expected to come in at around 46 percent of GDP for 2013 and, according to some predictions, rise to 47.5 percent this year. Within a few years it could be hovering around 50 percent unless annual savings in spending of around 50 billion crowns or increased taxes by the same amount take place.
The structural deficit is currently estimated, according to Czech figures from the start of 2013 to be running at a fairly high 2.2 percent though this is supposed to ease towards 1.0 percent in the mid-term time frame of five or more years.
The pact also contains the so-called debt brake, according to which the overall debt must be cut by 5 percent a year when it climbs significantly higher than 60%. All in all, this is a strict framework and if Czech finances are not sorted out by the end of this government’s normal four year term will put a severe straightjacket on whatever government takes its place.