By Jason Hovet and Robert Muller
PRAGUE (Reuters) – A year after embarking on a record spending splurge, the Czech Republic, one of the European Union’s star fiscal performers, is falling back into deficit and has started tightening its belt to prevent an economic slowdown from wrecking its budget.
The government is seeking savings worth 25 billion crowns ($1.10 billion), or half a percentage point of economic output, to keep its 2020 budget from breaching targets and, for the first time, forecasts a run of fiscal surpluses to end.
To critics, including economists from the state’s own budget council, the cost-cutting foreshadows uncomfortable budget choices ahead to offset slowing growth.
With a humming economy and record-low unemployment, Prime Minister Andrej Babis’s government had expected growth would pay for pension hikes higher than automatic adjusters, double-digit pay raises for a growing state workforce, and even free train tickets for seniors and students.
Instead, the Finance Ministry cut its 2019 gross domestic product growth forecast to 2.4 percent, from 3.1 percent, although that may still be optimistic as main trade partner Germany slices its own outlook.
The Czechs also cut predictions for an overall public sector surplus to 0.3 percent of GDP this year, from 1.0 percent.
The ministry sees a swing to a 0.2 percent deficit and deeper from 2020, according to a report for the European Commission seen by Reuters that erases previous predictions of surpluses.
(GRAPHIC: Czech fiscal balance to GDP – https://tmsnrt.rs/2IjoDX1)
That, critics say, is proof that Babis has wasted a strong economic stretch, failing to invest in roads and other critical infrastructure.
“We wasted the good times for (making) structural improvements and preparing for worse times… (and instead) we increased consumption expenditures and did not invest,” said David Marek, chief economist for Deloitte in Prague.
“We are eating our future.”
In surplus since 2016, Czech debt has fallen to the fourth lowest level in the EU, hitting 32.7 percent of GDP last year. Annual growth has ranged between 2.5 percent and 5.3 percent since 2015.
Babis, a chemicals and agriculture tycoon before entering politics, fought spending rises as finance minister in 2014-2017 when his ANO party was a junior government member and built his image with pledges to whip state finances into shape.
But after a landslide 2017 election win, he let rip.
The 2019 budget earmarked a 141 billion crown spending rise over the 2018 budget, equal to 2.7 percent of 2018 GDP.
(GRAPHIC: Czech budget expenditures – https://tmsnrt.rs/2Ilj9eA)
Critics complain that while spending surges, investments are lagging, below 4 percent of GDP annually since 2016. In nominal terms, 2018 investment spending was lower than in 2009, when the global financial crisis struck.
The central state budget – the main component of overall public finances that also include regional governments and some healthcare – posted a first-quarter deficit for the first time since 2012. Expenditure rose 13 percent against a 5 percent income gain.
Finance Minister Alena Schillerova wants savings to maintain a planned 40 billion crown deficit for 2020.
The Finance Ministry declined to say how the savings plan would look. It has until the end of May to submit a draft budget to the government.
So far, the ministry, besides calling for workforce cuts and administrative savings, hopes to raise around 9 billion crowns by increasing tax on cigarettes, alcohol and gambling.
The Social Democrats, the junior ruling party, wants a bank sector tax, which Babis opposes.
The Czechs are not alone in central Europe as others raise social spending, leading to an outlook of widening deficits in Poland while Slovakia may abandon its target of reaching a surplus next year.
But the state Czech Fiscal Council, which warned against exorbitant pension hikes, is still worried. Council member Richard Hindls said the government lacked a strategy and was avoiding reforms to ease future burdens.
“It is important to have priorities,” he told Reuters. “One thing bothers me… that this favorable period was not used to start with systemic (budget) change.”
(Graphics by Jason Hovet; Editing by Gareth Jones)