Economic Rally Cuts Czech Deficit to Smallest Since Lehman

  • Babis says government heading for `long-term balanced budget'
  • Sovereign bond yields below zero reducing debt servicing costs

The Czech Republic’s state budget deficit narrowed to the smallest in seven years in 2015 as faster economic growth boosted tax revenue and the country used more European Union funds.

The full-year central state budget shortfall shrank to 62.8 billion koruna ($2.5 billion) from 77.8 billion koruna a year earlier as tax revenue jumped by 72.2 billion koruna, Finance Minister Andrej Babis said in Prague on Tuesday. The result was below both the 100 billion-koruna plan for 2015 and the 70 billion-koruna limit laid out in this year’s budget. It was also the narrowest gap since 2008, when the collapse of Lehman Brothers Holdings Inc. triggered the global financial crisis.

Premier Bohuslav Sobotka’s Social Democrat-led government is benefiting from an economic expansion and says measures including a crackdown on tax fraud may help eliminate budget deficits by 2018. The cabinet is boosting investments in roads and other projects, frozen by the previous administration. It has also drafted a bill forcing retailers to link cash registers online to the Finance Ministry to curb value-added tax evasion.

“We’re heading towards a long-term balanced budget,” Babis, a billionaire with agriculture and media holdings, told reporters. “We want to invest massively. I’m convinced the new laws will help us collect significantly more tax money.”

The government is targeting the public-finance deficit, a broader gauge of spending used to measure readiness for euro adoption, to 1.2 percent of gross domestic product this year.

Helped by GDP growth that reached 4.5 percent in the third quarter from a year earlier, the budget performance and the central bank’s interventions to prevent koruna gains have driven the yields on shorter-dated sovereign bonds to below zero since early September. The rate on the two-year note traded at minus 0.24 percent at 4:27 p.m. in Prague.

The koruna was little changed at 27.02 percent, near the threshold that prompts the Czech National Bank to sell the currency in the market.

The public debt load fell to 37.3 percent of GDP last year from 39 percent in 2014 and a peak of 41.3 in the previous two years, Babis said.

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