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CEE MONEY-Czech PM switches message from 'save' to 'spend a bit'
November 12, 2012 / 5:15 PM / 5 years ago

CEE MONEY-Czech PM switches message from 'save' to 'spend a bit'

* PM says no need to cut further, must stop scaring people with savings

* Change comes after battle for tax hikes

* Economists welcome change, Czechs have room to ease

By Jan Lopatka

PRAGUE, Nov 12 (Reuters) - Czech Prime Minister Petr Necas has retreated from a two-year-old campaign of spending cuts and tax rises with a call to ease budget restraint and boost household spending.

His policy reversal could give relief to an economy suffering the longest recession in the European Union outside of the euro zone.

And bond markets, long described by Necas and Finance Minister Miroslav Kalousek as ready to punish Prague if it strayed even slightly from its deficit goals, did not budge on the news.

Unlike most other European governments struggling with debt, the Czechs have the luxury of low borrowing and firm control over spending that have boosted the government’s credibility and pushed their bond yields to all-time lows.

But Necas has been criticised as over-zealous by investors and the central bank, which now expects the economy to shrink by about 1 percent this year.

In March, Necas declared “public debt is public enemy number one,” and stuck to that message through two more quarters of contraction.

But he shifted course on Saturday. And although the change may not immediately show up in the country’s budget figures, he made clear he wants to send an alternative signal to Czechs whom he had urged to save.

“We have to stop all the scaring of people and show them a light at the end of the tunnel,” Saturday’s daily Mlada Fronta Dnes quoted Necas as saying.

The government had planned to cut the budget gap to just below the European Union’s deficit ceiling of 3 percent of gross domestic product (GDP) next year. It planned to then cut deeper to 2.5 percent in 2014 and 1.6 percent in 2015.

But from now on, keeping the gap under the EU’s 3 percent limit will suffice until economic growth recovers to 2 percent, he said.

“This is good news, as in the Czech case it is difficult to see anything other than the state being able to provide an impulse to the economy in the short term,” said ING economist Simon Quijano-Evans.

“Given the solid Czech fiscal and monetary track record, markets should not be too upset with this.”

A Prague trader said the market would be happy as long as the 3 percent EU ceiling is observed.

SAVINGS GROW

Necas’s comments were a 180-degree turn from a stance he took as recently as last month, when he told daily newspaper Lidove Noviny: “Of course we can’t tell people to stop saving and start spending”.

Paired with budget cuts and tax hikes, the push for Czechs to prepare for worse times ahead and put cash aside for retirement has had a deep impact on the traditionally thrifty population.

Household deposits have grown by 70 billion crowns ($3.5 billion), or nearly 2 percent of GDP over the past year. Household spending dropped by a real 3.3 percent year-on-year in the second quarter, while government spending fell 0.9 percent.

Daniel Hewitt, emerging Europe economist at Barclays Capital, said the government’s message appeared to have pushed an otherwise responsible fiscal policy too far.

“What is important is ... the psychological impact. Czech consumers have been so discouraged,” Hewitt said. “I though what they did on the fiscal (side) was really good, and it has obviously done wonders for external confidence for the Czechs. But it seems the consumers are just completely depressed.”

The only growth component that has remained in positive territory so far has been foreign trade.

But car production, the principal industry in a country heavily dependent on manufacturing and exports, has begun to fall, while forward-looking figures in purchasing managers’ surveys indicate more contraction.

A revival in consumer spending may therefore be the last tool at the government’s disposal.

ENOUGH TAX HIKES

Necas said in his newspaper interview only that consultations with economic experts had changed his mind.

That followed repeated messages from the central bank, whose governor, Miroslav Singer, has called on Czechs to spend more to lift consumer confidence stuck near a 13-year low.

Central bank board member Pavel Rezabek said in a Reuters interview in October the government had squeezed households and partly nullified the impact of record low interest rates.

Since then, the bank has cut its main rate to 0.05 percent, running out of standard methods to support the economy, and has said it may consider interventions to weaken the currency if more is needed.

There are also political factors to be taken into account.

Necas’s centre-right coalition almost collapsed this month over the government’s plan to hike value-added tax rates by 1 percentage point, introduce a 7 percent new tax on salaries over 4,000 euros, and raise property transfer tax.

In the end, the tax hikes went through. But Necas said the second half of his term, which ends in mid-2014, would be more focused on investment in infrastructure and research.

“Apart from stabilising public budgets, we now need to focus a lot on renewing economic growth,” Necas said in the interview.

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