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Czech 2019 budget gap beats plan as slowdown looms

PRAGUE (Reuters) – The Czech Republic’s central state budget ended 2019 with a narrower deficit than expected, albeit the largest gap in four years as spending increased and the economic growth slowed.

The country has been one of the European Union’s best budget performers in recent years, keeping overall public finances, including the budget, in a surplus since 2016 while also using a strong economic period to raise spending for pensions, wages and investment.

However, it is also starting to contend with slowing growth.

The government reported a 28.5 billion crown ($1.25 billion) 2019 budget gap, below its approved 40 billion crown deficit. Savings and better than expected EU fund flows, among other items, helped make up for a slight tax shortfall.

“The reality remains that tax collection is not fulfilling expectations and the entire budget balance was significantly influenced by extraordinary non-tax income,” Raiffeisenbank analyst Vit Hradil said.

“We expect (in 2020) that the problem with fulfilling government ambitions will again arise, and that is mainly in the area of tax income.”

Tax income was nearly 11 billion crowns below target in 2019 although overall income was above plans. Spending was also more than planned, with pensions rising almost 9%.

The state’s independent budget council office said while the tax shortfall was not large in relation to overall income, it was a clear sign of a slowing economy that the state will have to face in 2020.

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The central state budget makes up the bulk of the country’s overall public finances, which also include regional governments and the health insurance system.

The finance ministry expects to maintain surpluses overall before a return to a slight deficit in 2021. It likely ended 2019 at around 0.3-0.4% of gross domestic product, Finance Minister Alena Schillerova told reporters.

The 2020 central budget is also aiming for a 40 billion crown deficit while raising spending.

Economists and opposition have said above-average pension and wage bumps and other handouts in recent years have left little room to manoeuvre in the budget in times of economic weakness. Similarly they say investment in roads and infrastructure has fallen below historical levels despite annual economic growth of between 2.5-5.3% since 2014.

The Czech economy, like others in central Europe, has maintained growth in the past year thanks to falling unemployment, rising wages and firm domestic consumption compensating for slowing trade with a weaker euro zone.

The ministry forecasts 2020 growth to slow to 2.0% from 2.5% seen in 2019.

Schillerova echoed Prime Minister Andrej Babis on Friday in that the state would not cut investments in case of a worsening slowdown.

“We have approved a 40 billion (crown deficit) and of course it will depend on the how the economy develops,” Schillerova said.

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(Reporting by Robert Muller, writing by Jason Hovet, editing by Nick Macfie and Louise Heavens)