Czech President Vaclav Klaus signed a 2010 budget law that anticipates a record budget deficit of CZK 162 billion (€6.2 billion), or 5.7% of GDP. After signing the budget bill January 10, Mr Klaus criticized the massive shortfall and declared he would not sign any bills that might increase it.

The caretaker Czech government originally drafted the 2010 spending plan with a deficit equivalent to 5.3% of GDP. The lower house then made last-minute changes to the draft, increasing the deficit by 0.4% of GDP (see Regional Risk Watch, 11/2009). The Czech Finance Ministry plans to issue CZK 153 billion in bonds to help cover the shortfall and will finance the remainder by taking out long-term loans. Overall, the Finance Ministry plans to borrow up to CZK 280 billion this year in the framework of its state debt-financing and management strategy

Starting in January, the Czech Republic will raise taxes as part of an austerity package that aims to generate CZK 23 billion for the budget. The value-added tax will rise 1% and consumer taxes will go up as well. Alcohol, cigarette and automobile prices will be most affected.

Analysis and Forecast: Increasing Risk

The Czech Republic's 2009 budget deficit was more than five times the original target. At the outset, former Prime Minister Mirek Topolanek’s budget included overspending of CZK 38.1 billion. MPs raised that figure to CZK 52.2 billion in November 2008 to cover pensions. The final 2009 deficit came in at CZK 195 billion. The Czechs simply cannot allow this to happen again.

Lawmakers are already planning to break the record for overspending this year. But since 2010 is an election year, it will be no surprise if they surpass their goal. This risk has been detected by both President Klaus and interim Prime Minister Jan Fischer. The PM is planning to hold meetings on the budget with leaders of the main political parties in the coming days. However, Mr Fischer proved to be a weak advocate for fiscal discipline during the debates over the budget. Given the impending election, it is questionable whether Mr. Fischer’s resolve will become any firmer.

Efforts to combat the deficit are looking increasingly desperate. The country appears to be further from adopting the euro than any of its regional peers.