You are here: Home Články / Articles 1997 Will the Czech Republic have a balanced budget?

Will the Czech Republic have a balanced budget?

The Czech coalition government will find it extremely difficult to achieve its objective to have a balanced budget this year. In May, when a second package of austerity measures within just one month was announced, the government said it was determined to have a balanced budget, and perhaps even a surplus one. Such measures were prompted by rapidly growing foreign trade and state budget deficits as well as an attack by speculators on the Czech crown, causing the value of the currency to decline significantly.

In its two packages of austerity measures, the government announced budget cuts totaling some 25 billion crowns. Virtually all sectors of the economy were to be affected by the cuts, with social and welfare payments being the primary targets. In response to the proposed cuts, Czech trade unions announced mass protest actions for the fall. The significantly weakened government appeared to have little chance of surviving in the event of such protests. It was clear that the government would come under great pressure to refrain from implementing all of the cuts and, if caving in, would run a deficit budget.

Following July's catastrophic floods, the chances of a balanced or a surplus budget have become even slimmer. Although the government has been able to find funds outside the state budget, to help the floods' victims, those funds will not be sufficient. Flood damages are estimated at between 60 billion and 100 billion crowns, while the government has so far been able to come up with only 13 billion crowns. Some of this money has come from privatization proceeds, while another 5 billion crowns is expected to be raised by selling government bonds.

It is clear that the government will be hard pressed to come up with more money to help some 25,000 people whose houses or apartments have been entirely or partly destroyed. It will be asked to assist with the reconstruction of numerous industrial plants that have been damaged by the floods. And farmers affected by the flooding will want the government to provide more money than it has done so far to compensate for the loss of their crops, livestock, and livelihoods.

Finance Minister Ivan Pilip has announced that the government will lose at least 10 billion crowns in taxes from companies and enterprises that have sustained flood damage. The longer they are unable to operate, the more taxes will be lost. Under such circumstances, the government appears to have four options in seeking to come up with more funds: it can renounce its objective of having a balanced budget this year and, possibly, also next year; it can impose new taxes; it can borrow heavily abroad; or it can introduce new budget cuts.

The last option is unrealistic, as further cuts--especially if they were to affect social and welfare payments--could provoke social unrest. Introducing new taxes would probably be more acceptable to trade unions and the opposition. But since the government recently reduced taxes paid by companies in an effort to support economic growth, it is unlikely to increase them again. An increase in individual income taxes would, on the other hand, affect also the people who have been hit by the floods. An increase in value-added tax or the imposition of a new consumer goods tax would thus seem to be the only viable option.

But even such increases, combined with borrowing from abroad, are likely to be insufficient. A major political battle is almost certain to erupt in the fall over whether to have a balanced budget this year as well as next year. The Central Bank still recommends a surplus budget, claiming that it is essential to stabilize the crown and the economy as a whole. But that option seems increasingly unlikely.

The opposition Social Democrats (CSSD) had advocated a deficit budget even before the floods, saying that a temporary budget deficit of up to 3% would be in line with European Union standards. The CSSD will almost certainly demand a deficit budget now that the government needs to help areas affected by floods. The coalition Christian Democratic Union (KDU-CSL), too, does not seem to be opposed to deficit financing. Prime Minister Vaclav Klaus's Civic Democratic Party (ODS) appears to be increasingly uncertain about firmly opposing a budget deficit, while the Civic Democratic Alliance (ODA) remains strongly opposed to such a deficit.

Should the ODS agree with the KDU-CSL and the CSSD on the need for a deficit budget, the ODA may threaten to leave the ruling coalition. By the same token, if Klaus's party were to side with the ODA, the KDU-CSL may threaten to quit. It has already registered that it is unhappy with some announced budget cuts and price increases. In short, no matter what the decision taken, the ruling coalition will be under significant pressure.

In the past, budget debates have always been lively but the coalition has been able to unite and get its way in the end. The floods, however, have made the differences in ideology and goals between the coalition parties even more pronounced. Finding a common stance will be a daunting task. The CSSD, which wants early elections to be held next year, rightly sees the budget debate as one of the first major opportunities to bring down the Klaus government.

Reuters, Prague Business Journal - 28. 7. 1997