MNI INTERVIEW: Czech Defence Boost Means Cuts Elsewhere- Holub
MNI (LONDON) - Strong revenue growth and spillovers from a boost to German government spending have increased the chances that the Czech Republic will meet its 2025 fiscal deficit target though proposed increases in defence spending will mean further cost-cutting elsewhere, Deputy Finance Minister Tomas Holub told MNI.
Increases in the price of carbon emission permits may not be good for the economy as a whole but should carry revenues from that category closer to target, despite criticism from the Czech Fiscal Council that the forecasts were unrealistic, Holub said in an interview.
Revenues from taxes on household consumption and personal income have also increased strongly, he added, with GDP seen increasing in line with the budget assumption of 4.5%-5.0% in nominal terms, or around 2% in real terms, this year. (See MNI EM INTERVIEW: Czech National Bank Seen Holding This Month)
There will also be carryover effects from fiscal consolidation in 2024 as measures including higher corporate tax rates become effective. “We will definitely see higher nominal revenues than last year,” Holub said.
The 2025 budget included spending cuts of CZK41 billion crowns to target a deficit of CZK241 billion.
GERMAN BOOST
Germany’s proposed EUR500 billion investment plan could bring direct and indirect benefits to the Czech economy worth around 0.5-1.0 % of GDP, “which is about the same order of magnitude as estimates of the potential adverse impacts of any trade war,” Holub said.
Holub, appointed at the start of this year after leaving the Czech National Bank in November, noted that the while the government thinks it is realistic to raise military spending from 2% of GDP to 3% within five years, whoever is in power after autumn’s parliamentary elections may not share that belief, with little room for fiscal manoeuvre.
“Definitely there will be pressure,” he said. “One criticism from the Fiscal Council that I think is fair is that the budget is so tight that there is not too much margin for adverse developments. In principle, we should have a further decrease in the structural deficit, but at the same time it is extremely hard to reconcile with higher debt service and military spending.
“It might become even more visible in the budget for 2026, because the windfall tax will expire by the end of this year, and this exceptional source of revenue will be gone, and at the same time the debt service and military spending will increase further.”
Trade-offs will have to be made, with the military, infrastructure, education and research given priority over other areas receiving state funds, he said.
GREEN DOWNGRADE
“Everything else beyond those four priority areas should be reconsidered. The Finance Minister Mr Stanjura also talks about de-prioritizing the green transition, not just here in the Czech Republic, but also more broadly in Europe. I think that’s inevitable, although it doesn't mean that the targets of green transition should be fully abandoned.”
Czech debt service costs were around 1% of GDP in 2024 and are expected to be higher this year. Yet the rising cost of debt should not prevent policymakers from issuing more bonds to fund higher defence spending, Holub said, especially given the alternatives.
“For more indebted countries [than the Czech Republic], the option to use common EU debt is clearly more attractive. I would caution against over-using this instrument, because it seems to me that one of the reasons it is so attractive for European politicians is because it doesn't count as anyone's debt,” Holub said.
“To do so temporarily, because our security is a priority, is fine. But over-reliance on this on a permanent basis should probably not be the case. If we agree that 3% of spending relative to GDP will be the new norm for EU countries in the long term, it needs to be taxed-financed eventually, as with any other type of public expenditure.”