Bloomberg News

Czech Premier to Ease Deficit Cuts After 2013 to Aid Growth

November 12, 2012

Czech Premier Petr Necas wants to ease the pace of budget-deficit cuts after next year to boost output in an economy that is in its second recession since 2009 due to weak domestic demand.

The government will aim to keep the public-finance deficit below 3 percent of economic output until 2015 after it cuts the shortfall to less than the European Union’s limit next year, Necas said in a Mlada Fronta Dnes interview published Nov. 10. The goals set in the latest convergence plan, a road map to euro-area membership, envisaged a deficit of 1.9 percent of gross domestic product in 2014 and 0.9 percent in 2015.

With the country facing the prospect of its longest recession on record, Necas is trying to avoid the fate of European leaders who were ousted as they pushed austerity measures that stunted economies from Romania to Spain. The premier, who credits previous cuts with helping to reduce borrowing costs, didn’t mention any new specific deficit goals.

“When we have economic growth of around 2 percent, we can return to deficit reduction again,” Necas said.

The yield on Czech government five-year koruna bonds fell four basis points, or 0.04 percentage points, to a record-low 0.70 percent today, according to data compiled by Bloomberg.

Weak Demand

The Czech economy is suffering from weak domestic demand after the government cut investments and raised taxes to trim the budget gap. Gross domestic product fell 0.2 percent in the second quarter from the previous three months, the third consecutive contraction, after consumers responded to the worsening economic outlook by spending less.

The Cabinet has cut investment, raised the sales tax and curbed spending on public wages. The budget shortfall narrowed to 3.3 percent of GDP last year from 4.8 percent in 2010. The Finance Ministry estimates it at 3.2 percent this year.

Necas has refused to allow the deficit to exceed the target in 2012 and 2013, adopting a series of measures that the central bank says are constraining household spending.

The government, which lost its parliamentary majority in April after personnel and budget rows, pushed through on Nov. 7 a new package of measures including increases in the sales levies and a new income tax rate for the highest earners, as Necas suppressed a revolt among his lawmakers that weakened the government.

Borrowing Costs

The central bank reduced the main two-week repurchase rate to a record-low 0.05 percent on Nov. 1, almost three-quarters of a point below the euro-area benchmark, responding to falling domestic demand that has tamed inflation. Most Czech central bankers agree the main interest rate should be kept at effectively zero until inflation risks rise significantly, according to minutes from their last rate meeting.

The government’s fiscal package will slow economic growth by about 0.8 percentage point next year, according to central bank forecasts.

“The impact on the economy will come through the price effect stemming from the higher value-added tax, as well as through lower nominal disposable income, with both these factors reducing real household consumption,” the central bank said in the quarterly Inflation Report published Nov. 9.

To contact the reporter on this story: Peter Laca in Prague at placa@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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