Business Czech Convergence Programme sees economic growth covering increases in public spending

05-05-2014 12:26 | Chris Johnstone

The Czech coalition government has outlined it economic predictions to 2017, seeing public spending recovering but the overall burden of increased generosity being largely covered by higher growth. Details are still thin on efficiency and cost saving initiatives.

Photo: Barbora KmentováPhoto: Barbora Kmentová The government finally published what amounts to its short-term economic forecast on April 29 after the last squabbles over the shape of Value Added Tax were solved between the coalition parties.

The settlement included the introduction of the lower 10 percent VAT rate from 2015 but the existing 15 and 21 percent rates look like being retained for some time to come although there had been some talk earlier of cutting these to 14 and 20 percent respectively. That option, as well as the possibility of pushing through a single higher rate at 17.5 percent, are now in the political long grass. Some issues still need to be clarified, such as if nappies will be allowed into the lower VAT rate by authorities in Brussels.

The so-called Convergence Programme will be dispatched to Brussels as the government’s best assessment about its policies and the overall economic outlook. The headline figures of the report are of GDP growth advancing from 1.7 percent this year to 2.0 in 2015, 2.1 percent in 2016, and 2.5 percent in 2017. The public deficit should climb to 1.8 percent of GDP this year and again to 2.3 percent in 2015, before easing to 2.0 percent in 2016, and 1.7 percent in 2017.

Some of the reasons for the jump in central government spending this year, the highest over the past four years, are the abandonment of public sector wage freezes, increased capital spending to make up for past cuts, and the need for some Czech spending to pump the last possible EU funds under the current period.

Unemployment is seen slipping to 6.0 over the same period.

Central government debt is expected to mount from 45 percent of GDP to 47 percent of GDP by 2017, slower than the previous predictions which had already seen it pushing through the 50 percent mark already this year.

The main forecast is accompanied by other scenarios which are also worth noting. If overall European growth is around 2 percentage points lower than expected in 2015 then Czech will slump to 0.7 percent in the same year and 1.9 percent in 2016, the report warns.

A sharper firming of the Czech currency to around 25 crowns/euro after the Czech National Bank, as expected, abandons its weak crown policy in 2015 would push growth down to 1.8 percent in the same year and to 1.6 percent in 2016 before recovering to 2.5 percent in 2017.

For those seeking to put some meat and figures on the coalition government’s promises of more effective and efficient central government, the programme will be a disappointment. Already mentioned initiatives, such as the introduction of a single state authority to collect taxes and insurance contributions and prevent cash falling between the gaps when more institutions are involved, are repeated but not expanded on and no figures are given for the likely savings. So Minister of Finance Andrej Babiš is not leaving too many hostages to fortune from this point of view.

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