MNI INTERVIEW: Czech Govt To Rewrite Fiscal, Debt Rules -Holub

Czech prime minister Andrej Babis must change national laws limiting deficits and borrowing in order to proceed with his costly fiscal plans, outgoing deputy finance minister Tomas Holub told MNI in an interview.

Babis, head of the ANO-led movement that won October’s general election, will need to draft and have swiftly approved a new state budget, after the version previously submitted by the incumbents failed to gain parliamentary approval.

While strong GDP growth means the macroeconomic framework has improved in recent months, high levels of mandatory spending mean wiggle room remains limited, Holub said. The new PM will, therefore, likely change the Fiscal Responsibility Act, with long-term consequences for structural fiscal deficits and borrowing requirements.

“Most probably a kind of short-term fix would be to achieve a relatively fast approval of the budget, then during the first year amend the Fiscal Responsibility Act. Currently the rules are actually stricter than the EU rules, so they might say that given we don't want to stop or slow down infrastructure investment because of overly constraining national rules,” Holub said.

NO SENSE

ANO’s aim of cutting taxes and lowering energy bills while reducing the fiscal deficits “arithmetically doesn’t make sense,” Holub said, noting the fiscal deficit could be stuck close to 3% for years to come. (See MNI EM INTERVIEW: Czech Fiscal Gap To Hit 3% GDP-Council Chair)

“The only way in which this could make sense, at least politically, is to claim that they are actually starting from a much weaker budgetary position than was submitted by the outgoing government,” he said.

Babis could shift funds intended for military expenditure to transport infrastructure, and defer for one year money meant for a new nuclear power station to offset the cost of paying renewable energy levies on behalf of voters and firms, but at a political cost, Holub said.

“If it’s their own MPs who will change the proposal submitted by the new government, not the old one, these changes will not be as credible,” he added.

HIGHER BOND ISSUANCE

Czech bond issuance will also rise, said Holub, leading to an eventual need for a relaxation of the debt brake.

“The cost of the nuclear project alone – in current prices – is roughly 5% of GDP, so over 10 years the issuance of Czech government bonds will need to be an extra 5% of GDP. If you then assume budget deficits of around 3% instead of the originally envisaged decline it’s quite likely that over time we will reach a debt to GDP ratio of 55%, which is the level of the national debt brake."

Despite inflation sitting close to the 2% target for some time, fiscal policy has been consistently identified by the Czech National Bank, led by sometime Babis advisor Ales Michl, as a potential source of upwards price pressure.