MNI INTERVIEW: Czech Fiscal Gap To Hit 3% GDP-Council Chair

The Czech Republic’s new government is likely to increase the country’s fiscal deficit to 3% of GDP by the end of 2027, the chair of the Czech Fiscal Council told MNI in an interview, adding that while the chances of agreeing a 2026 budget have increased, there are still major gaps to be filled.

Failure to reach a budget deal before the end of the year would effectively leave the incoming right-wing government of potential new Prime Minister Andrej Babis bound by the terms of the 2025 budget, though it would be able to table amendments throughout 2026, the CFC’s Mojmir Hampl noted an interview.

“In which case they will have an approved budget but will not be operating within the terms of the provisional Budget,” Hampl said. “It is not ruled out that the Budget for 2026 can eventually be approved until the end of this year.”

Babis, who has said there are shortfalls worth billions of crowns in the previous government’s fiscal proposals, wants to make  long-term expensive changes to the pensions system and buy out the private stake in state-owned utility company CEZ, policies which Hampl said will mostly be in place by the end of 2027, and will likely cost the taxpayer an additional CZK100 billion. This and other policies will make it impossible to keep the deficit below 3% of GDP, from the 2% currently foreseen for this year and next, he added.  

“The first step, in January, might be cutting electricity prices in the same way as is happening in Germany, which is that a part of the regulated price which covers the costs of renewables for households and firms is transferred completely to the state budget. This can be done relatively easily, but you first need at least some form of Budget and a functioning government,” he said.

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Hampl, who was vice governor of the Czech National Bank from 2008-18, said extra government spending constitutes a pro-inflationary risk. (See MNI EM INTERVIEW: CNB Likely Done At 3.5% - Ex-Governor Singer)

"From the perspective of the central bank, I would be rather cautious and would start calculating to what extent in the economy - which doesn't have a negative output gap. 

“Governor [Ales] Michl has also been quite clear that it is important to get the public finances in order for that reason. At the same time, he is a former adviser to Mr Babis, so it will be very interesting to see whether the rhetoric will somehow be modified.”

The decision by the outgoing centre-right Spolus alliance to re-submit their 2026 budget proposal for debate, even though it is unchanged, brings an end to an “unprecedented” situation and “new level” of political dispute, according to Hampl.

“It’s not a constitutional crisis, but it is a crisis of the whole budgeting process in a country which was previously always fiscally very responsible,” Hampl said. 

“The outgoing coalition prepared a draft which, while technically within the limits of the rules of budget responsibility, had many holes in it. The incoming government has said it wants to spend much more, and at the same time cut tax, while keeping the Budget within the limits of the law. That is completely inconsistent with the rules,” he said.

“All of them – the outgoing and incoming politicians – are to some extent lying to the general public. It is up to us therefore to identify where the real problems are, and to speak loudly to whoever governs.”