Czech Deficit Undershoots Target on Austerity Drive

The Czech Republic’s fiscal deficit narrowed more than planned last year as the government adhered to an austerity drive through a record-long recession and political turmoil including the cabinet’s collapse.

The shortfall, the budget yardstick for euro adoption, narrowed to 1.4 percent of economic output in 2013 from 4.2 percent a year earlier and compared with the 2.9 percent target, the statistics office in Prague said today. Revenue rose 2.4 percent from a year earlier and spending fell 4 percent, including a 12 percent investment drop, it said.

The government of Prime Minister Bohuslav Sobotka is seeking to fortify a recovery from an 18-month economic contraction, exacerbated by budget cuts that helped push bond yields to the lowest in emerging Europe. Sobotka took office in January, ending a half-year political gridlock and promising to loosen austerity to foster growth.

The deficit number “comes as a surprise,” Pavel Sobisek, chief economist at UniCredit SpA in Prague, said by e-mail today. The “fiscal restriction undoubtedly prolonged the Czech economic recession.”

The koruna traded little changed at 27.45 per euro at 12:58 p.m. in Prague. It has weakened 4.7 percent in the past six months, the seventh-most among 24 emerging-market currencies tracked by Bloomberg. The government’s benchmark 10-year bond was little changed, with the yield at 2.11 percent.

Gathering Pace

The country’s recovery has gathered speed since the recession ended in the second quarter last year, helped by demand for Czech exports in European Union markets and improving consumer sentiment. The economy is set to benefit from the central bank’s $10 billion intervention to weaken the koruna and the government’s plan to boost state spending.

Gross domestic product expanded 1.8 percent in the fourth quarter, from the previous three months, while the full-year GDP declined 0.9 percent last year, the statistics office said in a separate statement today.

The fiscal deficit limit set for this year is 2.9 percent of GDP, and the Finance Ministry’s latest forecast from January sees the gap at 2.7 percent.

The government, which will start debating the 2015 budget next week, must overcome differences between Sobotka and Finance Minister Andrej Babis over how to finance increased welfare spending.

Billionaire Babis, who owns assets from fertilizer makers to forests to food producers, is opposing Sobotka’s proposals to increase corporate taxation to boost budget revenue.

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