* PM says no need to cut further, must stop scaring people
* Change comes after battle for tax hikes
* Economists welcome change, Czechs have room to ease
By Jan Lopatka
PRAGUE, Nov 12 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
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
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
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,
"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
"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.
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
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.