Czech Budget Deficit

From Bloomberg Today:

EU Warns the Czech Republic to Cut Spending to Meet 2008 Target

By Meera Louis and Marketa Fiserova

July 10 (Bloomberg) -- The Czech government is failing to take advantage of fast economic growth to narrow the budget deficit, cut spending and overhaul the pension and health-care systems, European Union finance ministers warned today.

EU finance chiefs said after a meeting in Brussels today that the Czech cabinet may miss a 2008 deadline to cut the budget deficit in line with EU norms as it has pledged to trim next year's shortfall to 3.5 percent of gross domestic product from 4 percent of GDP projected for this year, well above the 3 percent target.

``The action taken by the Czech Republic'' is ``proving to be inadequate to correct the excessive deficit within the deadline,'' EU finance ministers said today. ``The new program postpones the planned reduction of the deficit below the 3 percent of GDP reference value by at least two years against a more favorable macroeconomic scenario.''

The government's efforts to keep spending promises while meeting terms needed to adopt the euro are drawing criticism. Separately, ministers said Hungary was on track to bring its deficit down to within EU limits by the 2009 target.

Ministers urged Hungary to take ``advantage'' of ``the better-than-targeted 2006 budget deficit.''

Deficit to Widen

A 17 percent jump in Czech welfare spending approved before elections last year has boosted spending and will lead to a widening of the deficit this year to 4 percent of GDP even as a record 6.1 percent pace of economic growth in 2005 and 2006 brought in more tax revenue than expected. The economy will expand 5.3 percent this year, based on a Finance Ministry forecast from April.

Strong growth gives ``ample opportunity to strengthen the consolidation effort and achieve a steeper reduction'' finance ministers said. ``The budgetary targets are not in line with the recommendations of the council for a correction of the excessive deficit by the 2008 deadline.''

The Czech cabinet lacks a clear majority in parliament, which may foil efforts to cut the deficit through a package of tax, welfare and health-care changes being considered by lawmakers.

The government in 2004 had made a commitment to the EU in 2004 to cut its budget deficit to 3.3 percent of GDP this year and below 3 percent starting from 2008.

Reduction Pledges

In the updated version of the so-called Convergence Report submitted in March, the new cabinet pledged to reduce the fiscal gap below 3 percent of GDP only from 2010.

``The adoption and implementation'' of the proposed measures including social spending cuts and the single income tax rate ``would be a step in the right direction,'' ministers said.

The council also pointed to political risk stemming from the government's lack of a sound majority in parliament and criticized the cabinet for failing to sufficiently describe how it aims to achieve projected spending cuts.

The council joined the European Commission in alerting the Czech Republic to lower the share of compulsory spending in total expenditures and revamp the pension and health-care systems as it faces above-average risks stemming from the aging population.

``The budgetary position'' expected at the end of the program ``constitutes a risk to sustainable public finances even before the long-term budgetary impact of an ageing population is considered,'' EU finance ministers said in the statement. ``The Czech Republic appears to be at high risk with regard to the sustainability of public finances.''

The ruling coalition has vowed to overhaul public spending more before its term expires in 2010, including a revision of the pay-as-you-go pension system.