October 11, 2019 / 3:07 PM / a month ago

Czech Finance Minister prefers savings to raising deficit in 2020 if slowdown worsens

PRAGUE (Reuters) - Another round of administrative savings would be better than letting the 2020 Czech central state budget deficit swell if an economic slowdown worsens and hits state income, Finance Minister Alena Schillerova said in an interview on Friday.

Czech Finance Minister Alena Schillerova attends an interview with Reuters in Prague, Czech Republic, October 11, 2019. REUTERS/Robert Muller

Although the country’s economic growth has outpaced most of its European Union peers, the export-reliant economy is slowing as its main export market Germany teeters on the brink of recession and U.S.-China tensions rattle global trade.

The Finance Ministry expects growth to ease to 2.2% in 2020 from 2.4% this year. Despite that, the draft budget, approved by the centre-left government of Prime Minister Andrej Babis, sees a 5.7% rise in spending next year.

Schillerova said that although the economy was slowing - mainly due to external factors - she would not be too pessimistic. “I don’t want to paint any bleak scenario, we may overcome it,” she said.

She also said she was confident a 2019 budget deficit goal of 40 billion crowns ($1.7 billion) would be met.

To maintain the budget deficit target next year, Schillerova said she would rather find savings from administrative and personnel costs, similar to a round of cuts carried out for 2019, than let the deficit widen.

“I have savings in my DNA, so I would seek savings, but not at the expense of lower investment,” she told Reuters.

(GRAPHIC - Czech public finances: here)

NEW EUROBOND

The central budget is the largest component of the country’s public finances, which also include regional government spending and healthcare. The country has posted a surplus since 2016 but forecasts a deficit of 0.2% of gross domestic product in 2020.

Babis’ government, in power since 2018, has raised capital spending, although at 2.5% of GDP in 2020’s planned budget, it is still lower than in the boom years before the global financial crisis, and even immediately after the crisis.

(GRAPHIC - Czech state investments: here)

Babis has avoided raising corporate and income taxes and rejects a proposal by junior government party the Social Democrats to introduce a new banking sector tax to boost budget revenue.

One exception has been a new 7% digital tax on global internet giants that Schillerova said should be in place sometime around the middle of 2020, raising 2 billion crowns. Excise tax on tobacco and alcohol has also increased.

“We have those giants in mind, like Facebook, Youtube, Airbnb, they pay nothing here,” she said.

Moody’s agency last week raised the country’s credit rating to Aa3, putting it on a par with nations such as Belgium.

Schillerova said the country could issue its first Eurobond since 2012 next year after a long absence from foreign markets. Another option would be to continue issuing euro-denominated bonds on the domestic market, which the ministry began this year to help meet its euro-denominated obligations.

“The situation is very good, the (European Central Bank) cut rates, it creates excellent conditions for an issue of euro-denominated bonds, so we are rather optimistic,” she said.

Borrowing costs for the country are still quite low, boosted by demand from foreign investors.

Reporting by Robert Muller; Editing by Kirsten Donovan and Mark Potter

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