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October 12th, 2008
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Budget deficit to shrink in 2008

State aims to curb unlimited growth of mandatory expenses

By Michael Heitmann
Staff Writer, The Prague Post
December 12th, 2007 issue

Soaring Finances

The state says 2008's deficit should meet EU-required standards.

State revenues will pass the 1 trillion Kč mark ($561.5 billion) for the first time ever in 2008, but the government’s budget for next year, recently passed by the Chamber of Deputies, does little to address further reforms the country needs, critics say.
“Next year’s expenditures will rise faster than the gross domestic product [GDP] — that’s a very risky strategy,” said Raiffeisenbank analyst Aleš Michl. “There has been a lot of talk about reforms, but little action.”
The lower house passed next year’s budget 100 votes to 97 Dec. 5. Government spending is set to reach 1.1 trillion Kč, with revenues set at 1 trillion Kč. This will result in borrowing estimated to reach 70.8 billion Kč, a deficit projected to be 2.95 percent of the country’s GDP, down from an expected deficit of 3.4 percent this year.
In the past, the state’s budgets have tended to be empty promises, with the deficit overshooting its target by almost 14 billion Kč in 2006, according to the Czech Statistical Office. In 2007, this trend could be reversed as, barring “exceptional circumstances,” state expenditures will be 15 billion Kč less than expected, said Finance Minister Miroslav Kalousek.
Three ministries emerge as clear winners in the fight for additional funds during budget debates, according to Kalousek. Schools, within the Education Ministry, gained 1.7 billion Kč; the Culture Ministry’s funds increased 1.2 billion Kč; and an additional 1 billion Kč will be spent on agriculture, compared with original government proposals discussed in June.
Part of the government’s increased revenues originates in Brussels. While next year the Czech Republic will contribute 30 billion Kč to the European Union, whose single largest expenditure is the Common Agricultural Policy, it will gain 76 billion Kč in return through EU projects.
The 2008 state budget, formed by a center-right coalition stronger than last fall’s brief regime, is about fiscal responsibility, according to Milan Bouška, spokesman for the Civic Democrats (ODS), the government’s senior partner.
“The government and parliament sent out signals in past years that fostered a culture of debt,” Bouška said. “The state belittled the need for providence, responsibility and rational behavior by acting this way.”
The 2008 budget aims to stop the unlimited growth of mandatory expenses and is a first step toward a balanced budget, he added.
However, the new budget is neither a reform package nor is it particularly ambitious, Michl said. The state’s citizens might end up paying 60 billion Kč in interest payments by the year 2010, he predicted.
Part of the budget’s swelling between its second and third readings was for a process known in the Czech media as porcování medvěda, or “portioning the bear.” Between the two readings, deputies added pork-barrel appropriations of an additional 2 billion Kč, most aimed at benefiting particular constituents.
As the budget shows, future adoption of the euro is not the major force driving the government’s reforms, simply because the Czech Republic has already fulfilled most of the EU’s criteria, Michl said. The Maastricht Treaty of 1993, which guides euro adoption, delineates that national deficits may not exceed 3 percent of GDP. Given an estimated deficit of 70.8 billion Kč, or 2.95 percent of GDP, the Czech Republic should easily meet this criterion in 2008.
Despite its passing by the lower house, the 2008 budget is still a work in progress. A new law that would have cut the benefits companies receive for employing people with disabilities met fierce criticism from the unions and opposition Social Democrats. The latter subsequently introduced an amendment to the law that, if passed, could alter the government’s budget projections.
On Dec. 6, the ODS-controlled Senate rejected this amendment and returned the bill to the Chamber of Deputies for further discussion.
“Groups that won’t receive the funding they are used to will stir social tensions in the Czech Republic,” Bouška said. “The budget does not disturb social cohesion and does not threaten people with disabilities, but those that make improper use of state money might and should feel threatened.”
The coalition’s decision to cut disability and child benefits was more of a “political decision” than a great money saver, Michl said.
“We have to save elsewhere, in the range of several dozens of billions,” he said. “The highways we build are more expensive than those in Germany and I don’t know why.”

Michael Heitmann can be reached at mheitmann@praguepost.com


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