Threat of record budget deficit looms ever larger

The Czech government has just approved a draft budget for 2010 that includes a record deficit of 230 billion crowns, or more than 13 billion USD. The caretaker cabinet has also been debating measures that could save around 70 billion crowns. But, with elections set for later this year, the main Czech parties have shown little enthusiasm for the government’s proposals.

It’s very likely that the deficit of the state budget for next year will reach a record 230 billion crowns, or over 13 billion US dollars.

One of the reasons is the fact that the Czech economy has this year suffered a record slump – plunging by 5.5 percent year-on-year in the second quarter of 2009. This means that much less will be coming into state coffers than originally expected. The caretaker government of Jan Fischer had originally planned a deficit of some 165 billion crowns.

Jan Fischer and Eduard Janota (right), photo: CTK
But that’s not the worst news yet. The Constitutional Court had postponed the early general elections over a complaint from an independent MP. Prime Minister Fischer warned on Wednesday that if the elections were not held as planned - that is in the first week of October - the next Chamber of Deputies would not have time to approve the budget, and the country would have to function on a stop-gap budget instead.

Under such circumstances, this year’s budget would be used again next year, and would most likely result in an even higher deficit which, at the moment, experts dare not estimate.

However, Finance Minister Eduard Janota has put together a package that should bring the budget deficit down by some 80 billion crowns.

The proposed measures should raise the state’s income by some 33 billion crowns on one hand, and reduce spending by another 38 billion on the other.

One of the ways to increase revenues is by raising VAT levels by a couple of percentage points. The cabinet is also considering doubling real estate tax and raising consumer tax on petrol, diesel, tobacco and alcohol.

As far as cutting state spending is concerned, the Finance Ministry would like to cut social benefits, and freeze pensions as well as the salaries of state employees.

If all this is approved, the situation would improve significantly but again there is catch – general elections will probably be held at some point this autumn, and even though some parties support these ideas, it’s questionable whether the current lower house would approve them – not without lengthy and exhausting debates.

There is big uncertainty about the date of the elections in the Czech Republic right now, and therefore also about when the next lower house and government will take office. And time for the approval of next year’s budget is fast running out.