Czechs Improve Budget Outlook as Fiscal Hawks Prepare for Power

(Bloomberg) -- The outgoing Czech government said the country’s pandemic-induced deficits will narrow faster than previously expected because tax revenue will improve despite snags in the economic recovery.

The Finance Ministry on Tuesday cut its forecast for the general government deficit, a broad measure of fiscal health, to 7.2% of gross domestic product this year and 4.4% next year, from 7.7% and 5% respectively. The quarterly report also curbed projections for economic growth as a chip shortage is paralyzing the key car industry.

The improved budget outlook bodes well for the coalition of five parties that won a combined majority in elections and is preparing a to replace the administration of Prime Minister Andrej Babis. The group has pledged to return to a tradition of fiscal restraint and cut the deficit to 3% of economic output “as soon as possible.”  

With a dire shortage of workers driving rapid salary increases and boosting consumption, the cabinet expects fast growth in tax collection and limited spending on unemployment benefits. 

Read more: Czech Parties Seal Coalition Pact to End Billionaire’s Rule

The new coalition has said it will aim to cut the 2022 central state budget gap below 300 billion koruna ($14 billion), compared with Babis’s last proposal for a 377 billion koruna shortfall.

“In 2022, the public-finance balance will probably no longer be affected by anti-pandemic measures, and fiscal consolidation should begin,” the ministry wrote in the document. “On the other hand, the negative effects of rising input prices and supply-chain disruptions are likely to last for the rest of this year and at the beginning of next year.”

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