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Czech Lawmakers Back Deficit Cut, Cabinet Plans Crisis Steps

Czech lawmakers approved the 2012 state budget, endorsing a 22 percent deficit cut, as the government prepares crisis measures to mitigate the effects of the euro area’s debt crisis.

The budget law 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 reduce the shortfall to less than the European Union limit of 3 percent of economic output has helped the Czech koruna outperform currencies in Poland and Hungary this year.

The budget sets the shortfall limit at 105 billion koruna ($5.3 billion), after a gap of 135 billion koruna planned for this year, according to the bill approved by 104 members of the 200-seat lower house in Prague today. The Cabinet may need to amend the budget plan next year to meet the deficit target as there is a risk of an economic contraction because of the euro area’s debt crisis Finance Minister Miroslav Kalousek said.

“Nobody is able to estimate now how the euro zone will deal with the crisis and what its impact will be on the Czech economy,” Kalousek told reporters after the vote, adding that a “mild recession of one or two percent” is a possible scenario. “The priority will be to fulfill the fiscal strategy of reducing the deficit.”

Crisis Scenarios

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

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 Finance Ministry forecasts fiscal gap of 3.2 percent next year, compared with an estimated deficit of about 3.8 percent, Kalousek said Dec. 12.

The Czech koruna has weakened 2.4 percent against the euro this year, compared with an 8.4 percent decline in Hungarian forint and a 13 percent slump in Polish zloty. It traded at 25.635 per euro at 4:39 p.m. in Prague.

The lower house of parliament on Sept. 2 approved a plan to increase 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 budget draft, said the VAT change will boost tax revenue by 21.3 billion koruna next year.

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