State budget points to further widening of deficit, debt may exceed CZK 2.5 trillion this year

by   CIJ News iDesk III
2021-04-01   10:01

Today's results of the state budget for March confirm that the Czech Republic is on its way to the deepest public finance deficit in history - up to CZK 500 billion. On the one hand, the Czech Republic is facing significant income shortfalls, which are both the result of a pandemic, but also tax changes - the abolition of super-gross wages and an increase in the taxpayer's rebate lead to a decrease in personal income tax collection by almost 30%. On the other hand, of course, spending is also rising rapidly, mainly due to anti-pandemic measures such as compensatory bonuses or COVID-gastro programs.

As a result of the pandemic, public debt continues to grow rapidly - the state debt last year exceeded CZK 2 trillion and this year it will probably overcome CZK 2.5 trillion. This means that compared to 2019, it will increase from about 29% of GDP to more than 43% of GDP. The state will thus have to issue a large number of bonds - this year the issuance activity can reach up to CZK 700 billion - and this can be seen in the relatively inadequately liquid Czech bond market. Yields on Czech bonds shot up at the beginning of the year and are close to two-year highs.

However, the speed of public debt may not be a problem in itself - during a pandemic, a loose fiscal policy is desirable and is the standard in both Western Europe and the United States. The problem is rather how well we use deficit budgets in the medium term. The stumbling block is tax changes. The stimulation of the economy through tax breaks aimed at the highest income groups is on the one hand inefficient and creates "permanent" structural shortfalls in Czech public finances of around 80-90 billion crowns per year. That is why the state debt can grow rapidly in the coming years and by 2023 it may exceed 50% of GDP.

Source: Jan Bureš & Petr Dufek , Patria Finance and ČSOB