No one knows nuffink - Czechs pass budget based on unrealistic growth forecast

By bne IntelliNews December 15, 2011

bne -

No one knows anything as the Eurozone storm approaches. That's the message from the Czech Republic, as the parliament passed a 2012 budget which includes a growth forecast that no one - not even the Finance Ministry - believes possible.

The Czech parliament passed the plan on December 14. Whilst the fiscally conservative government quite reasonably aims to cut the budget deficit to 3.5% of GDP from the estimated 4.6% this year, the plan is based on a growth forecast of 2.5% - more than double that in the Finance Ministry's best-case scenario.

Finance Minister Miroslav Kalousek admitted that recession is also possible while also explaining that uncertainty over the impact of the Eurozone crisis makes a growth forecast impossible. Analysts across the board also see 1% as the peak of possible growth for 2012. However, Kalousek insists that the only important number is the budget deficit target of 3.5%, and that the cabinet stands ready to adjust the plan as it goes. "Nobody is able to estimate now how the Eurozone will deal with the crisis and what its impact will be on the Czech economy," Kalousek said after the vote, according to Reuters.

He then added for good measure that, "a mild recession of 1% or 2%" is also a possible scenario. "The priority will be to fulfill the fiscal strategy of reducing the deficit."

Since the governing coalition assembled the largest majority in the Czech Republic since 1993, it has followed a conservative fiscal policy that has put the economy in reasonable shape as it heads into the Eurozone storm. In particular, the government has relied on austerity measures to rein in the budget deficit, a policy that helped make the currency something of a safe haven until very recently, although it is still outperforming its regional peers.

The government insists the economy will maintain that performance despite the likelihood that the small, export-led economy will be hit very hard by slowing demand from the Eurozone, to which it sends 80% of its exports. A significant drop below the 2.5% growth target in 2012 - as is almost certain - will mean the government has to introduce further austerity measures to meet the deficit target of 3.5% (which is predicted in the plan to drop to 2.9% in 2013 - below the threshold for joining the euro). Indeed, Kalousek suggested the cabinet may need to amend the budget next year to meet that target, though he didn't mention any particular policies it has up its sleeve.

The Finance Ministry has said that a change to the country's VAT rates will boost tax revenue by CZK21.3bn (€832m) next year. In the autumn, the parliament approved an increase of the lower VAT rate - which is levied on food, drugs and public transportation - from 10% to 14%. The upper bracket will remain at 20% for next year, after which they will be unified at 17.5% in 2013. However, analysts worry these changes will depress domestic demand when it is already extremely low - which will only increase the economy's exposure to the Eurozone.

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