Czech Rep: Only EU state to increase deficit in 2011?

"A government of fiscal responsibility" fails

Written by Published on 10.05.2011 11:23 (updated on 10.05.2011) Reading time: 3 minutes

Jason Pirodsky

Written by Jason Pirodsky Published on 10.05.2011 11:23 (updated on 10.05.2011) Reading time: 3 minutes

When it was established in the middle of 2010, amid the first round of the European debt crisis, the center-right government of PM Petr Nečas called itself “a government of fiscal responsibility”. However, in 2011 the Czech Republic may become the only EU country to actually increase its budget deficit compared to the previous year.

This hardly flattering prognosis was published in Raiffeisen bank’s analysis of budgets of 14 larger EU countries.

Even though the Czech government plans to cut the Czech deficit from 4.7 percent of GDP in 2010 to 4.1 in 2011, the bank’s experts predict it will increase to 5.2 percent. 

This prediction is supported data published by the Finance Ministry on Monday 2 May, which show that in the first four months of 2011, the state collected 6 percent less in taxes than it planned. If this trend remains unchanged for the rest of the year, the state’s revenues will drop by CZK 30-35bil (EUR 1.2-1.5bil), and in spite of all cost-cutting measures the deficit will hit CZK 170bil (EUR 7bil). 

While the Czech Republic collected less in taxes in the first four months of 2011 in comparison with the previous year, neighboring Poland and Slovakia collected 10 percent more than in the same period in 2010.

Larger tax revenues in Slovakia and Poland were most likely caused by VAT hikes and also by their recovering economies creating more revenues from corporate taxes. On the contrary, the Czech Republic collected less in both VAT and in corporate taxes.

The VAT increase in time of economic recovery will enable Poland and Slovakia to cut their deficit more than any other EU country.

Growing deficit: Not a way to popularity

All three members of the current center-right coalition – ODS, TOP 09, and Public Affairs – received substantial electoral support in the 2010 polls above all thanks to their announced fiscal austerity plans to prevent the so-called “Greek scenario”. Especially Finance Minister Miroslav Kalousek’s TOP 09 based its electoral campaign on radical fiscal austerity plans, and eventually surprised by receiving 17 percent of the votes and becoming the second largest member of the coalition.

The fact that the coalition’s electoral mandate is based mostly on their promise to cut the budget deficit, and the fact that the coalition so far appears not to be very successful in fulfilling it, is of a particular importance.

According to an Eurobarometer poll, the credibility of a government is always determined by the degree to which it burdens the state with debt.

Last year, the four EU countries whose governments enjoyed the largest support were Sweden, Finland, Luxemburg and Estonia – the countries which also had the smallest budget deficits.

The six countries with least popular governments were Ireland, Greece, Spain, Portugal, Latvia and Great Britain – the same countries had the six largest deficits in the EU.

Last year, the Czech budget was average in comparison with the rest of the EU, the popularity of the government slightly below average. This year, both indicators can get worse, as implied by the worse-than-expected data on taxes collected so far in 2011, and also by a recent opinion poll conducted by CVVM, a Czech polling agency. The survey showed that in April 2011, one in five Czech citizens trusted the government, which is 10 percent less than in fall 2010.



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