Czech Government Weighs Easing Fiscal Rules, Raising Deficit and Debt Concerns
Overview of Proposed Fiscal Rule Changes and Economic Implications
By Jan Lopatka
Government Proposal to Exempt Infrastructure Spending
PRAGUE, May 5 (Reuters) - The Czech government is fast-tracking legislation to exempt investment in roads, rails and dams from fiscal rules, a move the budget watchdog has warned is a "paradigm shift", reversing a tradition of fiscal constraint.
The bill, presented to parliament by the ANO party-led cabinet, and which includes last minute additions, would apply exemptions from deficit reduction rules to a long list of road, rail, nuclear power and airport construction projects.
Budget Watchdog’s Concerns
The country's budget watchdog said this could easily push the deficit over 3% of GDP and set the country on a path of rising debt from today's comparatively low level of 44% of GDP.
Emergency Spending Provisions
The plan, going into final reading in the lower house on Wednesday, would also allow the government to raise spending by up to 10% above budget in the event of a loosely defined security emergency.
Government’s Rationale and Fiscal Targets
Finance Minister Alena Schillerova said the aim was to follow Germany in excluding some infrastructure spending from fiscal rules. This change would not in itself increase the deficit, she said.
Under existing rules, the Czech budget deficit would have to be cut to 0.9% of GDP next year, from this year's forecast 2.6%, she said.
Minister’s Warning on Consolidation Pace
"Such a pace of consolidation would be completely unrealistic and there is no conceivable scenario for this which would not lead to a paralysis of the state's basic functions," she said.
Click here for an interactive graphic:
Recent Fiscal Developments and Policy Changes
The previous government, which left office in December, cut the deficit from COVID-era highs, though it let it creep up to 2.1% last year and the new government needs to find money for uncovered road projects.
The new government has also introduced subsidies for renewable power costs and cut taxes for the self-employed. It has pledged further tax cuts while facing pressure to raise defence spending to meet NATO commitments, after cutting defence this year.
Prime Minister Andrej Babis has said he could not exclude a deficit increase next year.
'Paradigm Shift' and Market Reactions
Credit Ratings and Market Risk
'PARADIGM SHIFT'
The Czech Republic has among the highest credit ratings in the eastern EU, with S&P giving it an 'AA-', a notch above France.
It may not be in immediate danger in the debt markets, and would likely avoid EU scrutiny for some time, said Chairman Mojmir Hampl of the budget watchdog the Czech Fiscal Council.
Risks Highlighted by Budget Watchdog
But the move is "risky and dangerous", and would ease pressure on savings in non-investment expenses, he told Reuters.
Potential Deficit Increases
Hampl said next year's central government deficit - a major part of the overall fiscal balance - could exceed 400 billion crowns ($19.18 billion), from around 190 billion mandated by the current fiscal rules, and this year's 310 billion.
Central Bank’s Position
The central bank has pointed to inflation risks from high deficits and to potential risks from large debt issuance. It declined to comment on the proposal.
($1 = 20.8540 Czech crowns)
Click here for an interactive graphic:
Click here for an interactive graphic:
Reporting and Editorial Credits
(Reporting by Jan Lopatka; Editing by Alexandra Hudson)
