World Economy

Czech Premier Proposes Using Surplus to Pay Debt

Czech Premier Proposes Using Surplus to Pay DebtCzech Premier Proposes Using Surplus to Pay Debt

The Czech Republic posted its biggest ever budget surplus last year after the government spent less than planned and economic growth boosted tax receipts, a rare success that ruling party leaders seized on to stake out their positions before fall elections.

The 62 billion-koruna ($2.4 billion) surplus eclipsed the original plan for a 70 billion-koruna deficit. Social Democrat Premier Bohuslav Sobotka, who is struggling to bolster sagging support before the vote, said he wants to use the excess cash to cover the 2017 fiscal shortfall, now planned at 60 billion koruna. Billionaire Finance Minister Andrej Babis, whose ANO party leads in opinion polls, proposed to use it to pay down state debt, Bloomberg reported.

The spending plan has become the key battleground issue for Sobotka and Babis, who have shared a ruling coalition for three years despite embracing opposing fiscal doctrines. The prime minister advocates more spending on public employees and pensions, but Babis is pushing for a conservative approach that has resonated with cost-conscious Czechs and helped propel him to the top of popularity rankings.

“The surplus needs to be used to pay down state debt,” Babis told journalists after presenting the budget outcome in Prague on Tuesday. Sobotka retorted via Twitter: “The priority should be to use the budget surplus to eliminate the deficit in 2017 so that the country has a balanced budget this year as well.”

The fiscal performance places the Czech Republic in a small group of European Union member states to finish 2016 without a deficit. The result has helped boost demand for Czech government bonds, cutting the yield on 10-year notes to 0.49%, or 24 basis points above comparable German bunds, from 2.26% three years ago. Sovereign maturities of up to six years are now trading at negative yields.

Despite bickering over spending, the Social Democrats and ANO have agreed to increase pensions, welfare payments and the minimum wage, helping fuel recovery from a record-long recession. The record surplus in 2016 was also the result of better tax collection and the drawing of more EU funds than originally envisioned.

“It’s hard to believe that even with the planned pre-election increase in current spending, the state will manage to run a deficit of 60 billion koruna this year,” Jan Bures, chief economist at Patria Finance brokerage in Prague, said by e-mail. “That would entail a more significant revival in government investment, which doesn’t look very probable. The actual balance of public finances is likely to be much better than planned again.”

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