Government approves 2012 draft budget

The Czech coalition government on Wednesday approved the 2012 draft budget with one priority in mind – fulfilling its promise to bring the country’s public finance deficit under control. The projected deficit of 105 billion crowns fulfills that target. It would narrow the gap in public finances to 3,5 percent of the GDP, but analysts say that the latest growth predictions for the Czech economy in 2012 will almost certainly throw a spanner in the works.

Photo: Barbora Kmentová

Meeting the set deficit of 105 billion crowns has not been an easy task for the finance minister. Individual sectors clamored for extra funds up until the last moment and just hours before the cabinet was due to vote on the draft budget a new estimate on the country’s economic growth by the IMF threw the minister’s calculations haywire. In its present form the draft budget was tailored to a growth of 2.5 percent. The IMF ‘s revised figure is 1,8 percent and analysts say it could slide even lower should Europe’s leading economies slip into recession and pull the export-oriented Czech economy down with them.

Despite the negative forecast the cabinet decided to push ahead with the draft budget in its present form and deal with the consequences later. Finance Minister Miroslav Kalousek:

Miroslav Kalousek, photo: CTK

“This budget was drafted on the basis of July’s economic growth forecast and we are not ruling out revisions and further cuts if, similarly as in 2008, the economy slows. We will be preparing a number of crisis scenarios which may or may not be used.”

While the government can be fairly confident of its ability to push the 2012 draft budget through parliament – wielding a comfortable majority in the lower house – analysts say its troubles with the budget are far from over. Raiffeisenbank’s chief economist, former finance minister, Pavel Mertlík had this to say:

“The government is obliged to deliver next year’s draft budget to the lower house by the end of September, so I understand that they are acting under time pressure. But, having said that, the budget is definitely not realistic. The predicted tax revenues are overly optimistic –much higher than they will be in reality. Not only is economic growth predicted at 2.5 percent, but consumer consumption growth is projected at 2 percent which is totally unrealistic if we take into account that the VAT on food and other basic necessities will increase from 10 to 14 percent. That will have a negative impact on consumption for sure and the revenue from VAT and excise taxes will be lower by several billion Czech crowns –maybe up to 20 billion Czech crowns.”

Pavel Mertlík

How serious a problem will this present?

“The government will have to propose an amended budget –one thing is certain the government will need to make more cuts in public spending if it wants to meet the set fiscal target.”