June 3, 2016 / 4:50 PM / 2 years ago

Czech PM says public workers, defense take priority to faster cut in deficit

PRAGUE (Reuters) - The Czech government prefers to use strong budget revenue to improve healthcare, education and defense rather than cut the budget deficit faster as the economy strengthens more than expected, Prime Minister Bohuslav Sobotka said on Friday.

Gross domestic product grew by 3 percent year-on-year in the first quarter, supported mainly by household consumption, while state investments eased, data showed earlier on Friday.

Sobotka’s center-left government targets a central government budget deficit of 70 billion crowns ($2.9 billion) this year. Analysts say it could beat that significantly and cut the gap further next year.

“The first-quarter (GDP) results are a bit better than our full-year estimate for the economy that the state budget is based on,” Sobotka said at the Reuters Eastern Europe Investment Summit.

But he stopped short of aiming for better-than-planned full-year budget numbers.

“The numbers certainly show that we will be able to keep the (planned) deficit,” Sobotka said.

The coalition has started preliminary talks on the budget for 2017, an election year, with Finance Minister Andrej Babis proposing slimming the deficit to around 48 billion crowns, but Sobotka resisted calls for faster reduction.

“We will use the space to raise defense and security spending and to stabilize healthcare and education,” he said, adding doctors, nurses and teachers’ salaries were a priority.

“It is necessary to consider other priorities as well (as) ...the pace of deficit reduction.”

Effective debt management has enabled the central European country to borrow at negative yields in short to medium-term maturities.

The overall public sector gap - including the central budget, regions, and the healthcare system - was just 0.4 percent of GDP last year, and the finance ministry sees this year’s gap at 0.6 percent.

Growth also slashed the public debt load to 41.1 percent of GDP at the end of 2015 from a peak of 45.1 in 2013.

Czech doctors and nurses have been asking for significant wage growth for years, and have stepped up the pressure in recent months as many leave for much higher pay in Germany and elsewhere in western Europe, which has led to staff shortages.

Teachers, among the worst-paid public workers, have also demanded pay hikes.

Defense spending represents just over 1 percent of Czech GDP, half the amount it is committed to spend as a member of NATO. Prague has promised to raise that proportion to 1.4 percent by 2020.

One weak point in growth data, which has however helped the budget so far this year, is a drop in investments in the first quarter.

The government has attributed the fall to a switch to a new funding period of European subsidies, but also to administrative delays that have crippled some large road projects, rather than a lack of funding.

Sobotka said the government aimed to solve problems with the largest highway construction projects to get them back on line.

Follow Reuters Summits on Twitter @Reuters_Summits

Reporting by Jan Lopatka and Robert Muller; Editing by Ruth Pitchford

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