Lower investment paved way for smaller central government deficit

A better than expected performance on the central government deficit for 2013 was announced this week with the final figure for the annual overspend around a fifth better than originally budgeted for. But some economists have warned that the good news might not be as positive as it first seems.

Photo: Barbora Kmentová

The Czech government undershot its predicted budget deficit for 2013 by around Kč 20 billion with the final figure of Kč 80.9 billion for the amount by which spending exceeded tax and other income. The target for last year had been for the budget to be Kč 101 billion in the red.

In a wider context, last year's figure is the lowest deficit figure since the around Kč 20 billion deficit of 2008 and compares with this year's deficit target of Kč 112 billion.

Outgoing prime minister Jiří Rusnok explained on Thursday that the biggest factors for the better than expected performance were higher than expected income from value added tax and European Union funding as well as lower than expected spending.

Chief Economist at Patria Finance David Marek said that the overall figures are pretty reliable in spite of the fact that there is some evidence that some bills for last year, such as that for renewable power support, have not been fully covered in 2013 with partial payments delayed into 2014.

But he warns that the deficit result represents both good and bad news for the wider Czech economy.

David Marek, photo: Šárka Ševčíková

"The deficit is lower than expected and the Czech economy is heading in the direction of a sustainable deficit situation though it has not reached it yet." Marek said.

He says though that the bad news is that a lot of the central government under spend came in the form of lower capital spending in long term infrastructure, such a new roads and other assets, that could have helped the country climb out of its long term recession a lot quicker.

"Around half of the savings on the expenditure side was on capital investments which would have had a fiscal multiplier effect. The impact on the economy was negative and the timing of this consolidation and direction it took was unfavorable for the overall economic situation," Marek added.

A closer look at the Ministry of Finance figures bear out some of his concerns. On the revenues side, income from individual tax payers and companies was lower than expected with taxes on company profits in particular coming up short.

On the spending side, Kč 12.7 billion of the overall Kč 17.6 billion under spend for last year came from capital spending with lower state spending on transport infrastructure an overwhelming factor here. There was also a relatively small saving in the expected bill for payment of unemployment and other social payments though these still represented 41.6% of all central government spending last year.

Photo: Barbora Kmentová

Marek says that expectations of moderate levels of economic growth this year, he predicts an average GDP growth of 2%, will ease worries about central government deficits for any incoming Czech government. Growth will be fuelled by the continuation of the Czech national bank's policy of keeping a low exchange rate for the crown which boosts exports by making them cheaper for foreign buyers, he says. But the economist adds that even these advantages are unlikely to allow the government to balance its books in 2014.

The Czech central government deficit includes spending by ministries but excludes the performances of important sectors such as state social and health insurance.