Czech Leaders Seize on Budget Surplus as Vote Race Heats Up

  • Finance minister proposes using surplus to pay down debt
  • Premier suggests using excess funds to balance 2017 budget

The Czech Republic posted its biggest ever budget surplus last year after the government spent less than planned and economic growth boosted tax receipts, a rare success that ruling party leaders seized on to stake out their positions before fall elections.

The 62 billion-koruna ($2.4 billion) surplus eclipsed the original plan for a 70 billion-koruna deficit. Social Democrat Premier Bohuslav Sobotka, who is struggling to bolster sagging support before the vote, said he wants to transfer the excess cash to 2017 to cover a planned 60 billion-koruna fiscal shortfall. Billionaire Finance Minister Andrej Babis, whose ANO party leads in opinion polls, proposed to use it to pay down state debt.

Andrej Babis

Photographer: Martin Divisek/Bloomberg

The spending plan has become the key battleground issue between Sobotka and Babis, who have shared a ruling coalition for three years despite embracing opposing fiscal doctrines. The prime minister advocates more spending on public employees and pensions, but Babis is pushing for a conservative approach that has resonated with cost-conscious Czechs and helped propel him to the top of popularity rankings.

“The surplus needs to be used to pay down state debt,” Babis told journalists after presenting the budget outcome in Prague on Tuesday. Sobotka retorted via Twitter: “The priority should be to use the budget surplus to eliminate the deficit in 2017 so that the country has a balanced budget this year as well.”

Negative Yields

With eastern European peers like Poland or Hungary still facing deficits, the Czech Republic’s fiscal performance places it in a small group of European Union members, including neighboring Germany, to finish 2016 without a shortfall. The result has helped boost demand for Czech government bonds, cutting the yield on 10-year notes to 0.49 percent, or 23 basis points above comparable German bunds, from 2.5 percent three years ago. Sovereign maturities of up to six years are now trading at negative yields.

Despite bickering over spending, the Social Democrats and ANO have agreed to increase pensions, welfare payments and the minimum wage, helping fuel recovery from a record-long recession. The surplus in 2016 was also the result of better tax collection and the drawing of more EU funds than originally envisioned.

While coalition partners, Sobotka and Babis are also political rivals and polls suggest they’ll be the main contenders to lead the next administration. A November survey by CVVM showed ANO would get 33 percent of votes if elections were held that month, with the Social Democrats in second place at 23 percent.

Tax Proposals

Sobotka is pinning his economic program on changes that may include progressive taxation of higher earners and special levies on selected industries. Babis, the second richest Czech with assets in the chemical industry and media, opposes higher taxes and his campaign focuses on a more restrained budget and rooting out what he sees as corruption among traditional parties.

Babis has said he couldn’t prepare the 2017 budget with a smaller deficit target because of spending demands by his coalition partners, which also include the junior Christian Democrats. Neither Sobotka nor Babis have offered more details of their plans for using the budget surplus.

Given the shortage of prepared investment projects, the Finance Ministry’s proposal to pay down debt “can be considered as the best solution, so that the election year wasn’t a motivation to use the excess funds for pre-election handouts,” said Jakub Seidler, chief economist at the Czech unit of ING Groep NV.

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