State budget deficit may reach record high at year end

The Czech Republic's economy has been doing quite well over the past few months, including favourable inflation, unemployment development and GDP growth. However, there is one major problem - a growing deficit of the public finance. Vladimir Tax has the details.

According to the latest data provided by the Ministry of Finance, the Czech state budget had a surplus in June mainly due to proceeds from the privatisation of the gas company Transgas and repayment of old Russian debts. However, the ministry warned that the deficit might reach a record high at the end of the year, although the Social Democratic government has pledged to fight the widening deficits of public finances.

The parliament approved a year-end budget deficit of 46 billion crowns, but the Minister of Finance, Jiri Rusnok, warned on Monday that the gap could almost double. The ministry expects that budget expenditures will be higher than planned, in addition to lower than expected tax collection and lower income from the Russian debt due to the strong Czech crown.

Some experts warn that even the revised budget deficit prediction might be too optimistic and that the ministry of finance is underestimating the impact on tax collection of the current unprecedented strengthening of the Czech crown against the euro and the US dollar.

The ministry says there are several ways the problem could be solved but how has not yet been decided. Analysts are rather sceptical as to the likelihood of expenditure cuts. The most probable option at the moment seems to be an issue of state bonds.

The deficit of the public finances also remains one of the unresolved differences between the potential coalition partners in a new government, the Social Democrats and the centrist Coalition of Christian Democrats and Freedom Union. While the Social Democrats want to decrease the deficit under the level of three percent of GDP gradually by 2008, the Coalition would like to reduce the deficit much faster through a radical reform of mandatory state expenditures.