PRAGUE, Dec 17 (Reuters) - The interim Czech government
passed a 2010 budget last week with a public sector deficit of
5.9 percent of gross domestic product, above an original plan of
5.3 percent.
The leftist Social Democrat party caused the overshoot by
approving extra spending on public sector wages, social
programmes and farm subsidies, angering centre-right parties and
prompting Finance Minister Eduard Janota to threaten to quit.
Janota later agreed to stay on and Prime Minster Jan Fischer
has agreed to try to keep the gap below 5.3 percent next year.
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This year's budget is expected to swell to as much as 200
billion crowns ($11.31 billion), above earlier estimates for 175
billion, for a total fiscal gap of 6.6 percent of GDP.
The Czechs have a low deficit compared to most euro zone
states and financing costs are lower than their non-euro-using
peers, but the country's technocrat government, backed by the
centre right, has fought hard to bring the fiscal deficit back
to the European Union's 3 prescribed percent ceiling.
Following are potential risks to the Czech budget:
STRUCTURE
The total share of non-discretionary spending, costs
required to be paid by law, is 80 percent of the budget.
Pensions taking up more than half of all mandatory payments.
Welfare payments, sick leave, health insurance and debt
servicing are the next biggest items, although none of these
accounts for more than 10 percent of total spending. Other
items, such as public sector wages and transfers to regional
governments, further raise the proportion of non-discretionary
spending.
GROWING BORROWING NEEDS
The Finance Ministry has forecast the country's gross
borrowing need to grow to around 8.0 percent of gross domestic
product in 2012, from 4.9 percent in 2008.
The country's gross borrowing was twice the planned level
this year at 269.3 billion crowns, up from 184.4 billion in
2008. By 2012, the figure should reach 312.9 billion crowns.
Interest payments on the nation's debt will almost double in
that time to 84.5 billion crowns from 47.1 billion this year.
SHRINKING TAX REVENUE
More than half of the central state budget revenue comes
from the main tax groups: value-added, excise, corporate and
personal income taxes. Overall tax income fell to 747 billion
crowns ($42.25 billion) at the end of November, from 834 billion
for the same period last year.
Of that, some 67 billion crowns came from corporate income
tax, only about half of what the government expected and much
less than the 105 billion collected a year ago, illustrating how
companies are suffering under the economic crisis.
PENSIONS
The Czech Republic has an unreformed pension system based on
the pay-as-you-go principle. The number of pensioners, including
old-age and disability payments, stood at 2.8 million as of
end-September and is expected to rise every year to peak at
around 3.9 million in 2050, with a sharply falling ratio of
working population that supports the pay-as-you-go system.
BUDGET PARAMETERS: Overall income was set at 1,022 billion
crowns ($58.17 billion), overall expenditures at 1,184 billion.
The central state budget gap, the main part of the overall
public sector balance, was approved at 162.7 billion crowns. The
budget assumes GDP growth at 0.3 percent in 2010, annual average
inflation rate is seen at 1.1 percent.
TREASURY BOND YIELDS: The 3-year government bond
<CZ1001887=> was traded at 2.367/187 percent at 1006 GMT. The
10-year benchmark paper <CZ1002471=> was quoted at 4.00./3.966.
Related stories:
STORY on keeping gap below 5.3 pct/GDP []
STORY on 2009 budget gap.............. []
STORY on 2010 budget approval..........[]
ANALYSIS on 2010 budget................[]
FACTBOX on 2010 budget.................[]
(Reporting by Prague bureau; Editing by Stephen Nisbet)
