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Czech Finance Ministry Sees Shift to Expansionary Policy by 2016

Czech fiscal policy will shift to expansionary by 2016, according to the Finance Ministry, which also sees a stable budget gap and a return to economic growth.

After the longest recession since records began in 1996, a moderate revival should begin in the second quarter, the Prague-based ministry said in a fiscal outlook published today. Still, gross domestic product will stagnate “at best” this year, it said. The budget deficit will be 2.8 percent of GDP in 2013, 2.9 percent in 2014 and 2.8 percent in 2015 and 2016, it estimated.

“With this deficit trajectory, and in light of the expected closure of the negative output gap, the restrictive fiscal policy should transform into an expansionary policy mainly toward the end of the fiscal outlook’s horizon,” the ministry said.

The $217 billion economy has shrunk for six straight quarters as Europe’s debt crisis curbed demand for exports and households and businesses spend less amid austerity measures. The recession has tamed inflation and pushed the central bank to cut rates to effectively zero, sparking a debate among policy makers about whether to weaken the koruna with interventions.

After cutting investment and raising taxes to narrow the budget deficit since taking power in 2010, Prime Minister Petr Necas’s government agreed in April to target a wider shortfall than initially planned in 2014, when elections are next held, to boost growth.

The government credits its fiscal measures with helping to cut borrowing costs to record lows, with the yield on the 10-year government bond falling to an all-time low of 1.52 percent on May 9, according to data compiled by Bloomberg. The yield has since risen, standing at 1.706 percent today.

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