Current Affairs Record state deficit sparks fears that Czech finances are spiralling out of control

The figure that has sent a shudder through the Czech financial world is the 170 billion, or around 10 billion US dollar, total for the accumulated state deficit so far this year until the end of November. Basically, the deficit is the difference between government revenues and spending.

The 11-month figure is already nearly nine times the total deficit for 2008 and more than three times what the government planned for at the beginning of the year.

Pavel Mertlík is a former Czech finance minister and top economist at Raifeissenbank’s Czech unit. He says there was a sharp monthly deepening of the deficit but the year end figure could be even worse.

“Definitely there was a big drop between November and October. This happens every year that the last two months are highest as regards expenditures because there are annual bills and things like that. But I am afraid that the December expenditure level can be quite high, which happens regularly. So it is very difficult to say what the final deficit will be. But if it is 220 billion Czech crowns it should not be a surprise.”

Pavel Mertlík While there have been some increase in government spending, especially on social benefits such as unemployment, the real gravedigger for this year’s deficit situation has been a drop off in tax revenue from companies. That is down around 40.0 percent this year as businesses are not posting the sort of big or even medium sized profits that the state can pounce on.

The record public deficit for this year will automatically translate into a bigger overall national debt. Economists see this shooting up from 30 percent of Gross Domestic Product at the end of 2008 to 40 percent by the end of next year. While this is not an extremely high rate compared to some other European countries, there is rising concern that the Czech Republic seems to be sleep walking into a snowballing debt situation. More debt starts to mean more borrowing — usually at worse rates —leading to more debt and more borrowing. Once you get on this vicious debt slope it is very difficult to get off.

Pavel Mertlík has joined three other top Czech economists who have just penned a report warning of that approaching scenario based on the growing ratio between overall debt and national wealth production.

“If there are no changes in fiscal policies in the upcoming period, it will be quite difficult for the government to reduce the deficit even with a renewal of economic growth of around 3.0 percent. And this will mean a slow but steady increase of the debt ratio from 40 percent to 50 percent and more.”

Mr Mertlík says that big changes in the way the government raises taxes should be pushed through by 2015. If not, politicians and the country could soon start to be living not just on borrowed money but also on borrowed time.