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Czech coalition to run budget deficit to support growth

Source: Reuters - Fri, 13 Dec 2013 02:48 PM
Author: Reuters
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* Centre-left coalition wants to keep deficit below EU limit

* Will not look at budget consolidation until growth allows it

* Country just getting out of recession, govt collapse

* New coalition wants to move country closer to Europe

* FACTBOX on coalition agreement: (Adds more programme details, analyst, next steps)

By Jason Hovet

PRAGUE, Dec 13 (Reuters) - The Czech Republic's next government will abandon efforts to balance the books but will keep its budget deficit below the EU's limit as it seeks to spur spending and economic growth, the man likely to be the next prime minister said on Friday.

Bohuslav Sobotka, whose Social Democrats are in coalition talks with centrist movement ANO and the Christian Democrats, said the three parties had agreed to target a fiscal gap below 3 percent of gross domestic product for the next four years.

That is in line with this year's deficit.

Fiscal tightening by the previous centre-right government, which had pledged to eradicate the budget shortfall, has been blamed for the country's year-and-a-half recession that only ended earlier this year.

The new centre-left administration will instead focus on lifting people's spending power by lowering sales taxes and health fees while raising pensions, said Sobotka, who as head of the largest party is expected to become the coalition's prime minister.

"In the near term, we are counting on holding the deficit below 3 percent of GDP," Sobotka told reporters. "We are not counting on any more consolidation in 2015. In the following years it will depend on economic growth."

The country has been run by a caretaker cabinet since the previous administration's collapse amid a scandal involving accusations of vote-buying in parliament and illegal surveillance in June, which has bogged down policymaking.

The new coalition wants to focus more on measures that will boost growth, but some analysts said it would do better to concentrate more on infrastructure investments.

"The government's aim will be to leave more money in people's pockets in various ways. It will cost several tens of billions (of crowns)," said Pavel Sobisek, UniCredit's chief economist in Prague.

"I don't see any ambition to reduce the deficit... which should be done just for the fact that the economy will be growing."


The Finance Ministry forecasts 2014 growth at 1.3 percent and 2.2 percent in 2015 after an estimated 1 percent contraction this year.

The country has a history of solid fiscal policy and avoided any financing stress during the global economic crisis. But its debt as a proportion of gross domestic product has risen to an estimated 46.1 percent from 28.7 percent in 2008.

The three parties, who combined won a majority in an October election, still need to agree on their cabinet lineup, which could be a hurdle in the talks after a long debate over tax issues. Sobotka wants to present his government to President Milos Zeman by the end of the year.

Voter anger over austerity and corruption scandals helped propel the Social Democrats' and ANO's popularity. The leading leftist party is set to take power for the first time since 2006.

ANO, an anti-graft movement founded two years ago by billionaire food and agricultural tycoon Andrej Babis, has yet to sit in parliament, which could test coalition unity later. The group had resisted any corporate tax rises wanted by the Social Democrats - a move that helped boost the stock market. It instead wants to find ways to cut budget fat.

But Sobotka has expressed doubt that the necessary savings can be found, and the coalition agreement leaves open the possibility of imposing a new sector tax on banks or utilities from 2015, which would raise 4 billion crowns annually.

The coalition agreement also includes pledges to raise the minimum wage and pensions, eliminate fees for doctor visits and lower the sales tax on medicines, books and babies' nappies.

To clamp down on corruption, the coalition wants a law to determine the beneficiary owner of companies, barring those that do not comply from public tenders, among other measures.

The new coalition also wants to bring the country closer to Europe's mainstream by joining the EU fiscal compact, Sobotka said. The treaty on fiscal management has been signed by all members apart from the Czechs and the United Kingdom.

The coalition programme also says the government would prepare the country to adopt the euro, but has no target date. (Additional reporting by Jan Lopatka and Jan Korselt; Editing by Catherine Evans and Hugh Lawson)

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