Former finance minister says budget plans based on over optimistic forecast of economic growth
Analysts and economists began getting to grips with the final format of next year’s budget on Thursday morning. Former Social Democrat finance minister, Pavel Mertlík, now chief economist at the Czech unit of Raiffeisen Bank, gave his impressions of the overall package.
Twinned with that problem, many economists and even the Czech National Bank already questions the Ministry of Finance’s growth prediction for next year of 2.3 percent, saying that this is far too optimistic.
Mr. Mertlík is one of the sceptics here. “We see the prediction as overly optimistic. Our own forecast is for 1.5 percent growth only and that includes the consequences of the budget cuts.”
So if economic growth falls short of ministry expectations, tax and other revenues are also set to undershoot the hoped for levels. That could then necessitate further budget moves next year to recoup some of the losses.
The former finance minister says such steps are already being worked on. “What we actually expect next year is that the government in the first months of next year will have problems with the income or revenue side of the budget and as a result of that they are already working on increasing Value Added Tax (VAT). So we expect is that they will increase the lower rate of VAT to balance the budget at the level of the deficit already agreed.”
Mr. Mertlík says steps are needed to curb a steep rise in the overall level of Czech government debt. “I think it is really very important to cut budgets and get closer to balanced public finances. If you look at the situation of the Czech Republic prior to the recession total debt related to GDP was something like 30 percent, which is not very much. Currently it is close to 40 percent and at the end of the next calendar year it will be close to 45 percent. So you see the growth is really steep. The level is still comparatively low. But if it is not stopped, let’s say by 2016, and if a recession comes along, which will definitely happen one day, then the Czech Republic will reach the levels of 60, 70 or 80 percent and will definitely be in a difficult position.
“And speaking about West European countries, some are already there at around 80 and 90 percent not to mention the disastrous cases of countries like Greece. So I think that it is very important. The question is how to do it because the crucial point is to balance the changes in fiscal policy with the needs of economic growth. At the end of the day, without economic growth it is not possible to balance budgets.”
But the latest budget measures could bring some reward for the government in the possibility of the all important credit rating agencies improving their evaluations of the country. This would normally mean that its costs, currently around 70 billion crowns a year, in servicing its existing debt burden would fall because there would be a lower risk premium for borrowing.
