Czech Civic Democratic Party Wants Spending Cuts to Avoid Greece's Fate

The Czech Civic Democrats will cut budget spending and prevent rising debt from pushing the country into a Greek-style financing crisis if they lead a government following elections this month, the party’s leader said.

The party, known as ODS, wants to cut the public deficit, the fiscal gauge for assessing readiness to join the euro area, to below the European Union’s limit of 3 percent of gross domestic product by 2012 from 5.9 percent last year, Petr Necas, acting-ODS chairman, said in an interview. His party trails the Social Democrats in polls before a May 28-29 vote.

The Czech Republic, home to companies such as Volkswagen’s Skoda Auto AS, has attracted interest in bond sales this year after Greece’s financing crisis shifted investors’ focus to countries outside the euro area with lower debt than nations sharing the common currency. Czech public-sector debt will be less than half of the euro-area level, as a share of GDP, this year, according to the European Commission.

“The situation is good today, but it’s the dynamics of indebtedness,” Necas, 45, the social affairs minister in the previous government, said. “We are warning against a Greek scenario, which would happen if the promises of the Social Democrats and the Communists are realized.”

The Social Democrats, or CSSD, who are campaigning on promises of pension bonuses and higher taxes for the rich, led in an April survey by the CVVM polling unit of the Academy of Science with 30 percent, ahead of ODS with 22.5 percent. The Communist Party, which teamed up with CSSD to approve a last minute boost in welfare payments in the 2010 budget, was third with 13 percent.

Wider Deficits

Widening fiscal deficits have increased the cost of Greece’s financing and pushed the country to seek financial help. Greece reached agreement yesterday on the conditions of a 110 billion-euro ($145.5 billion) bailout from its euro-region allies and the International Monetary Fund, under which it pledged more budget cuts to bring a deficit of 13.6 percent of GDP back within the EU limit in 2014.

The Czech deficit widened last year when budget revenue tumbled after the country fell into the worst recession since the fall of communism 20 years ago. The “priority” for a government led by ODS, which won elections four years ago, will be to prepare a budget that will be “credible for the financial markets, won’t lead to higher bond yields and won’t increase debt servicing,” Necas said.

Euro Target

The ODS is unlikely to set a target date for adopting the euro in the government’s program if it leads the next administration.

“We would like to avoid a scenario when a date would be promised, and then it won’t be delivered, which has happened before,” Necas said. “The primary goal of deficit cuts is to have healthy state finances. That it will allow us to adopt the euro is a secondary effect of these steps.”

The global financial crisis “has highlighted the urgency” for fiscal adjustment after taking a “major toll on the fiscal position,” the IMF said in a country report in March. The next Czech administration needs to form “a credible and durable plan for fiscal consolidation,” it said.

The ODS is promising not to raise taxes and instead narrow the budget deficit through spending cuts, including trimming state administration and overhauling the pension system to give people more options to save for their own pensions compared with the pay-as-you-go program in which present workers fund the pensions of those who have already retired.

The party plans to sell state assets, possibly including a stake in energy utility CEZ AS, to generate funds needed to overhaul the pension system, Necas said.

‘Unpopular Measures’

“We have proven in the past that we have the courage to take unpopular measures,” Necas said, pointing to an increase in the retirement age, stricter conditions for disability and welfare benefits and introduction of medical fees by the previous ODS-led government.

An interim Cabinet was installed after the ODS-led administration lost a no-confidence vote in March 2009, half-way through the Czech Republic’s EU Presidency. Current Finance Minister Eduard Janota and central bank Governor Zdenek Tuma have said both spending cuts and higher taxes will be needed to bring the deficit to within the EU’s limit.

Necas said it is “practically out of the question,” that the ODS will team up with the Social Democrats in a grand coalition after the elections. He said the Civic Democrats would seek “center-right” ruling partners.

Two other parties, the TOP 09 party of Karel Schwarzenberg, the former foreign minister in an ODS-led Cabinet, and Veci Verejne, a group campaigning for curbing state administration, would gain representation in the lower house, the CVVM poll showed. Other polls have shown this year that the Christian Democrats, a former ruling partner with the ODS, may also cross the 5 percent threshold for entering the parliament.

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

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