The Czech Parliament approved a budget for the year 2010 that includes a series of new spending measures pushed through by left-wing parties.
A makeshift alliance of Social Democrats, Communists and independents boosted spending on teachers, social services and state officials, adding 12 billion crowns – 7.4% – to the originally planned deficit of 163 billion crowns.
PM Jan Fischer commented: “The Czech Republic has a state budget approved for 2010. We are not dealing with a provisional budget but with a 2010 budget where the problems with public finances are more acute and apparent than I would have expected or imagined, and which would have been radically diminished if the budget as prepared by the government had been approved.”
Petr Nečas, a leading MP with the Civic Democrats (ODS), labelled the vote “a victory for populism, irresponsibility and the short-term election campaign of the Socialists”.
The additional spending will probably push next year’s budget deficit to roughly 5.7% of GDP from the original forecast of 5.3%.
Analysis and forecast: increasing risk
As Political Capital warned in its latest risk warning, Most Significant Risk Factors that Could Hinder Economic Recovery: Czech Republic: “It remains uncertain whether the government will be able to stay on the road to fiscal discipline until the final vote [on the budget].” This risk has now become reality. It is also clear that the instability that has characterized Czech politics for years remains its greatest risk factor. While the Czech Republic is theoretically ruled by a caretaker government with broad support from both left and right, in reality the Czech Social Democratic Party (CSSD) – a member of the caretaker coalition – feels free to team up with the opposition Communists and a handful of independents to sabotage budgetary discipline.
The task of lowering the budget deficit will fall to whoever wins the general elections due in spring 2010. The scenario may be similar to what happened in Hungary after the 2006 elections, when members of the victorious Hungarian Socialist Party (MSZP) had to clean up the mess they themselves created through their lavish 2006 “election budget.” The Hungarian example also shows that deficit-reduction measures will be meaningless unless they are accompanied by structural reforms. The Czech Republic’s 2010 budget provides no basis for fundamental changes: PM Jan Fischer’s primary aim was to pass a strict anti-crisis budget that would pave the way for medium-term reforms. He failed. The budget also represents a defeat for ODS, which needs to find a new leader in order to remain a credible rival to the Social Democrats. Still, it is not certain that the spending increases will benefit the CSSD in the upcoming campaign: Opponents will have an easier time labelling them as irresponsible spendthrifts, and the groups that benefit from the extra spending may not connect their good fortune to the left-wing parties.
The looser budget sends a bad message to investors. This can be partly counteracted by GDP data showing that the Czech economy is recovering more quickly thank its regional peers’: GDP fell 4.1% in the third quarter of 2009 year-on-year, but grew 0.8 percent over the second quarter.