Government's prudence pays off

A smaller budget deficit in the first two months of 2010 compared with the same period in 2009 could be a cautious sign of economic recovery after Finance Minister Eduard Janota's austerity package was put into effect Jan. 1. Analysts said it is too early for a serious evaluation but call the austerity package proof the government learned a lesson from the financial crisis.

Total VAT, or value-added tax, revenue for January and February 2010 is 2.9 billion Kč higher than the first two months of 2009, and excise tax revenue is 6 billion Kč higher, according to the Finance Ministry. Government spending was curbed as well, resulting in a 16 billion Kč lower deficit than the first two months of last year, when the financial crisis was in full force.

The government's plan to significantly lower the budget deficit - a strategy that the latest International Monetary Fund (IMF) report calls the "main challenge" facing the Czech economy this year - seems to be working.

Janota's austerity package is made up of spending cuts and tax increases to lower the budget deficit from 195 billion Kč to about 160 billion Kč. Besides a lower deficit, the Finance Ministry now forecasts a gross domestic product (GDP) growth of 0.2 percent, more pessimistic than market forecasts, according to David Navrátil, head economist at Česká spořitelna.

"The deficit will stand at 4 percent this year, which is lower than expected, thanks to the austerity package and the development of the Czech economy. GDP growth should hit 1.8 percent, which will lead to a budget deficit of 20 billion to 25 billion Kč lower than last year."

The disparity between market forecasts and those released by the Finance Ministry indicate a more cautious optimism by the government after the financial crisis exceeded even their grimmest estimates. The government's overt optimism and slow reaction to the financial crisis increased the effects of the crisis on the Czech economy, Navrátil said.

"Everyone expected lower growth in 2009, but one problem was the government's slow reaction to the changing economic conditions," he said.

The final 2009 budget deficit of 195 billion Kč was more than five times higher than the 38.1 billion Kč budget deficit originally approved in the 2009 budget. The predicted 2009 GDP growth - at 5 percent - was nine percentage points off the actual GDP growth of -4 percent.

"I think the Finance Ministry learned a lesson and should be quicker now in changing financial forecasts. It's clear their forecasts are now more purposefully pessimistic," Navrátil said.

Indeed, in the months approaching the depth the financial crisis, then Finance Minister Miroslav Kalousek expressed optimism at the Czech economy's ability to weather the storm.

"The only thing that will happen is the Czechs will gain a little slower than before, but they will still gain," Kalousek told the daily Hospodářské noviny in October 2008.

Radek Ležatka, spokesman for the Finance Ministry, defended the ministry's response to the financial crisis. According to Ležatka, the ministry can't be blamed for not predicting the severity of the financial crisis, because no one predicted it.

"We anticipated the slowdown of the economy in 2009, but not such a deep global recession. It is important to say that no institution anticipated what would really happen," he said.

Regarding the caution in the ministry's forecasts this year, Ležatka said, "The Finance Ministry is always conservative when estimating economic development."

The first Czech economic figures for 2010 come on the heels of the latest IMF report on the Czech economy, which states "the revival of the Czech economy [will] be gradual and dependent on the global recovery, supported by exports and a buildup of inventories."

Time will show how effective Janota's austerity package will be. But, according to Navrátil, in a market dependent on consumer confidence, making any move to combat economic problems is half the battle.

"It was important to the market that the government shows it is taking the budget deficit seriously and it aims to decrease the deficit as much as possible," he said.

- Petr Cibulka Jr. contributed to this report.

Stephan Delbos can be reached at
sdelbos@praguepost.com