Czech Lawmakers Approve 2013 Budget Cutting Deficit Below EU Cap

The lower house of the Czech parliament approved the 2013 budget, cutting the deficit target to less than the European Union’s limit as the economy faces the risk of a record-long a recession.

In the vote in Prague today, 100 deputies in the 200-seat chamber endorsed a plan to set the public-finance deficit ceiling at 2.9 percent of economic output. The plan is part of Prime Minister Petr Necas’s goal of narrowing the shortfall to less than the EU’s 3 percent cap for the first time since 2008, when Lehman Brothers Holdings Inc. collapsed.

Necas is sticking to deficit cuts even as the economy struggles to overcome the economic slump caused by declining domestic consumption and weakening demand for exports from the crisis-stricken euro area. The government, which has staked its survival on several votes on trimming the gap, credits its fiscal strategy with helping to cut borrowing costs to record lows. The Cabinet expects a return of economic growth in 2013.

The plan assumes 0.7 percent economic growth next year, compared with the central bank’s forecast of 0.2 percent. The government’s estimate carries “downside risks,” Finance Minister Miroslav Kalousek said.

The yield on the five-year state bond has fallen 175 basis points, or 1.75 percentage points, this year to 0.74 percent today, according to data compiled by Bloomberg.

The deficit limit for the central state budget, which is the biggest part of public finances, is set at 100 billion koruna ($5.3 billion), 5 billion koruna less than this year’s target.

The Finance Ministry estimates gross borrowing needs at 230.7 billion koruna in 2013. The majority of state debt will be sold on the domestic market, while the Finance Ministry may also sell foreign bonds totaling an equivalent of 49.8 billion koruna next year, according to the debt-financing strategy.

The Cabinet has cut investment, raised the sales tax and curbed spending on public wages since taking power in 2010. The budget shortfall narrowed to 3.3 percent of gross domestic product last year from 4.8 percent in 2010. The Finance Ministry estimates it at 5 percent this year, due to a one-time inclusion of future payments for a settlement with churches.

The 2013 budget revenue projection is based on tax increases that the lawmakers approved earlier today. If President Vaclav Klaus, who’s criticized the tax plan, returns the legislation to parliament after Dec. 21, lawmakers won’t be able to meet again before year-end to override the veto, according to Pavel Suchanek, head of the parliamentary budget committee.

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

To contact the editor responsible for this story: Jeffrey Donovan at jdonovan26@bloomberg.net

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