Czech Lawmakers Endorse Deficit Cut as Cabinet Eyes Crisis Plan

Czech lawmakers approved the 2012 state budget draft in the first reading, locking in a 22 percent deficit cut, as the government prepares fiscal changes to minimize the impact of the euro area’s debt crisis.

The draft, which will have to go through second and third readings during which the lower house of parliament can’t change the deficit goal, is part of Premier Petr Necas’s plan to trim the fiscal gap after assembling the largest majority in parliament since independence in 1993. The pledge to cut the shortfall to less than the European Union limit of 3 percent of economic output has helped Czech bonds outperform debt of other eastern EU members in the past year.

The budget plan sets the shortfall limit at 105 billion koruna ($5.76 billion), compared with a gap of 135 billion koruna planned for this year, according to the bill approved by 102 members of the 200-seat lower house parliament in Prague late yesterday. The Cabinet may need to amend the budget next year as there is a risk of an economic contraction and lower budget revenue, Finance Minister Miroslav Kalousek said.

“The risk that the January forecast will have a minus sign, instead of the plus sign, is high,” Kalousek told lawmakers when presenting the budget draft yesterday. “The government will be ready to come to the parliament with an amendment to state budget law next year if the next forecast shows that the risks are materializing.”

Fiscal Yardstick

The government plans to narrow the broader public-finance shortfall, the fiscal yardstick for assessing an EU member’s readiness to adopt the euro, to 3.5 percent of gross domestic product in 2012 from the targeted 4.6 percent in 2011. The Cabinet expects to narrow the gap to 2.9 percent in 2013.

The yield on the Czech koruna-denominated state bond maturing in 2021 fell 39 basis points, or 0.39 percentage points, in the past year, compared with a 7 basis point increase in the yield on the Polish security of similar maturity, according to data compiled by Bloomberg.

The budget plan is based on an assumption of 2.5 percent economic growth next year, Kalousek said, while his ministry on Oct. 31 cut the outlook to 1 percent.

Forecast Risk

The new outlook carries downside risks and the ministry is working on crisis scenarios that may include spending cuts and measures boosting budget revenue if the economy slows more than forecast or even contracts, Kalousek said, without elaborating.

The lower house of parliament on Sept. 2 approved a plan to lift the lower value-added tax rate on goods and services including food, drugs and public transportation to 14 percent next year from 10 percent. The upper bracket will remain at 20 percent. Both rates will be unified at 17.5 percent in 2013, according to the legislation.

The Finance Ministry, which prepared the draft budget, said the VAT change will boost tax revenue by 21.3 billion koruna next year.

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