The Chamber of Deputies approved the first reading of the 2007 budget Oct. 26.

"This is one of the worst budgets we've had in the past 10 years," said Markéta Šichtařová, director of Next Finance. "I know of no economic theory that could explain or justify such a high deficit."

The budget will run a 91.3 billion Kč ($4.1 billion) deficit in 2007, with revenues of 949.5 billion Kč and expenditures of more than 1 trillion Kč. The outgoing Civic Democratic (ODS) government avoided a record-setting deficit for 2007 by proposing partial privatization of the energy utility ČEZ.

The deficit's size is no surprise, analysts say, and, in the context of next year, is manageable — many economies, like the U.S. economy, grow while running deficits. Here, the economy has grown at around 5 percent of gross domestic product (GDP) over the past five years, with an average deficit of 5 percent of GDP. But past success doesn't necessarily indicate future performance.

"What happens if the growth rate slows down?" asked Martin Kupka, chief economist at ČSOB.

He added, "If the budget policy gets out of control and the politicians become irresponsible," the country could end up like Hungary, which is in turmoil after its government admitted to public debt worth 10 percent of GDP. Czech politicians haven't been as generous in wage policies as their Hungarian counterparts, Kupka said.

If the government does not change its approach to public finance, Šichtařová said, it could hurt the country in the long term.

The root causes of the current deficit are the "very high mandatory expenses" that the government is committed to through its pension and healthcare programs, among others. If lawmakers do not reform these programs, Šichtařová said, the deficit will continue to grow. This could lead to higher interest rates as a state-prescribed check against inflation, and possibly higher unemployment.

The 2007 deficit has already dealt a major blow to the Czech economy: By exceeding a prescribed European Union deficit limit of 3.3 percent of GDP, the country has delayed its adoption of the euro, which had been scheduled for 2010. The country now has no timetable for euro adoption.

Energetic debate

The ČEZ privatization remains a potential stumbling block for an agreement between the ODS and the Social Democratic Party (ČSSD) on a final version of the budget. The second reading is due Dec. 6.

The ODS plans to raise 31 billion Kč by selling its stocks in the company. The ČSSD opposes it, but unanimously approved the budget's first reading after Finance Minister Vlastimil Tlustý (ODS) promised to consult with the ČSSD on it.

According to Šichtařová, the push-and-pull between the parties on ČEZ is "much ado about nothing" and "political." She also calls the one-time boost such a sale would give the budget a red herring.