Czech Lawmakers Approve Deficit-Cutting 2011 State Budget in 1st Reading

Czech lawmakers approved in the first reading the 2011 state budget draft that narrows the deficit toward the European Union’s limit by cutting spending on public wages and reducing family subsidies.

The first reading fixed the ceiling for the central state- budget deficit at the government-proposed 135 billion koruna ($7.6 billion). The state budget, the main part of public finances that serve as the fiscal measure for assessing a country’s readiness to adopt the euro, has a 163 billion-koruna deficit limit this year.

Prime Minister Petr Necas’ government, in office since July, plans to halve the public finance gap to within the EU’s limit of 3 percent of gross domestic product by 2013, from 5.8 percent in 2009, when the country fell into the worst recession since the end of communism two decades ago.

The government has engaged in “quite an ambitions fiscal maneuver which should allow a pushing of the deficit of public finances below 4.6 percent” of GDP in 2011, Necas told lawmakers when presenting the bill in Prague today.

The budget draft cuts the public finance gap from 5.3 percent estimated this year. The Cabinet plans to reduce the shortfall to 3.5 percent of GDP in 2012 and to 2.9 percent in 2013. Budget projections are based on an assumption of 2.3 percent economic growth next year.

‘Reality’

“If the reality is better than the forecast, then any resulting higher revenue will be used to reduce the deficit,” Finance Minister Miroslav Kalousek told parliament.

To cut the deficit, the government plans to reduce spending on public wages by 10 percent next year. The agenda has drawn the ire of state employees, with as many as 30,000 policemen, firemen and medical workers marching through Prague in protest on Sept. 21. The Cabinet also wants to reduce investment by 5 percent and social spending will by more than 10 billion koruna.

The economy, where exports such as cars made by Skoda Auto AS account for about 70 percent of GDP, will grow 1.6 percent this year, after a 4.1 percent contraction in 2009, as western European demand for its products recovers, the Finance Ministry forecasts.

Except for the budget draft, the government bills needed to cut the deficit may face a veto at the Senate after the opposition Social Democrats won a majority in the upper house of parliament in elections last week and threatened to block legislation it considers “restrictive.”

‘Legislative Emergency’

The ruling-coalition’s 118 lawmakers in the 200-seat lower house of parliament, the biggest government majority since the Czech Republic came into existence in 1993, gives Necas enough votes to override Senate vetoes.

The Cabinet will use the “legislative emergency” procedure to speed up approval of legislation needed to reduce the deficit, including measures to cut tax breaks and subsidies on some savings plans, Necas said yesterday.

The government’s plan to narrow the shortfall has helped the koruna strengthen 4.1 percent against the euro since May 28- 29 general elections, making it the third-best performing currency in the period, according to data compiled by Bloomberg.

The Czech Republic’s A debt rating may be raised if the government follows through on pledges to reduce spending, including an overhaul of the pension system, Standard & Poor’s said Aug. 10. S&P revised its outlook on the rating to “positive” from “stable.”

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

To contact the editor responsible for this story: Willy Morris at wmorris@bloomberg.net

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