Czech Budget Gap Narrows Less Than Planned on Lagging EU Funds

The Czech budget deficit narrowed less than the government planned and exceeded the target in 2011 as the inflow of funds from the European Union was smaller than budgeted.

The central state budget deficit was 142.8 billion koruna ($7.25 billion), compared with 156.4 billion koruna in 2010, the Prague-based Finance Ministry said today. The government targeted a shortfall of 135 billion koruna for 2011. According to European Union methodology, the gap was 124.2 billion koruna.

Premier Petr Necas’ Cabinet is preparing measures to boost revenue and cut spending as the debt crisis in the euro area, the largest market for Czech exports, threatens to curb gross domestic product growth. The plan to cut the public-finance shortfall to less than the EU limit of 3 percent of economic output helped the Czech koruna outperform currencies in Poland and Hungary in 2011.

The public finance deficit, a broader fiscal gauge and a yardstick for assessing an EU member’s readiness to adopt the euro, was 3.7 percent of GDP in 2011, less than the targeted 4.6 percent.

The 2012 budget, which targets a deficit of 105 billion koruna and sets the public-finance shortfall ceiling at 3.5 percent of GDP, is based on an assumption of 2.5 percent economic growth, while the Finance Ministry on Oct. 31 cut the outlook to 1 percent.

The new forecast carries downside risks and the ministry may need to amend the budget law if the economy slows more than forecast or even contracts, Finance Minister Miroslav Kalousek said during the debate preceding the approval of the budget bill on Dec. 14.

The yield on the 10-year koruna-denominated Czech government bond fell 36 basis points, or 0.36 percentage points, in the past year, compared with a 20 basis-point decline in the yield on a local-currency Polish government security with a similar maturity and a 183 basis-point increase in yield on the Hungarian government debt, according to datya compiled by Bloomberg.

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