By Jason Hovet
PRAGUE (Reuters) -Czech billionaire Andrej Babis’s ANO party, the favourite in an October 3-4 election, is banking on populist pledges that will cost billions of euros, end austerity and test the country’s frugal mindset.
The incumbent centre-right government of Prime Minister Petr Fiala has cut the deficit and reformed pensions in the past four years, making it a fiscal standout.
Last year, the Czech Republic was the first among central European neighbours to return its fiscal gap below the EU’s intended ceiling of 3% of gross domestic product.
It forecasts a smaller gap of 1.9% this year.
In Babis’ previous term from 2017 to 2021, budgets went from surpluses to record deficits of over 5% of GDP as the coronavirus pandemic hit, higher pensions came in, and income tax was cut.
With fiscal room again and voters frustrated by slow wage growth, ANO has sought to reclaim power with promises that economists expect will widen deficits and raise debt costs.
It wants to raise public sector salaries, reduce corporate income tax, lower some taxes in restaurants, boost pensions and provide mortgage support to young families and various professions like nurses.
It could saddle future governments by capping the retirement age at 65, after Fiala’s government moved to gradually lift the age in coming decades.
Oxford Economics estimated on average budget deficits could be 150 billion crowns – or 1.9% of GDP – higher each year during a four-year term led by ANO in downside scenarios.
“There is a good sort of fiscal spending and there is fiscal spending that does not bring much in the long term,” said Tomas Dvorak, a senior economist with Oxford Economics.
“100% … we are talking about wasteful spending,” he said of ANO’s plans, using mortgage subsidies as an example.
PRUDENCE STILL POSSIBLE
Ratings agencies are not yet sounding alarms and forecast still prudent policy, but will be watching for any reversal.
“If we see that looser fiscal policy leads to a sharper increase in debt, then that would be a key negative sensitivity,” Fitch analyst Malgorzata Krzywicka said.
If ANO kept to rules limiting deficits to 3% of GDP, it still has room to work.
Societe Generale said potential consumption-oriented loosening shifted risks to a more bearish outlook on government bonds and the crown currency.
The extent of loosening will depend on coalition partners as ANO is unlikely to win an outright majority.
Pairing with a party from the existing ruling coalition – something officials on both sides have so far ruled out – could temper any loosening by ANO, whose programme implies easing of around 1.2% of GDP, Dvorak said.
But in a scenario where ANO may team with fringe parties on the far-right or far-left, deficits would widen by almost 2 percentage points annually, according to Oxford Economics.
The 10-year bond yield could rise to 5.20% from 4.53%, debt will increase, inflation will be higher, and debt servicing costs could jump to 180 billion crowns from 100 billion, Oxford Economics said.
Other economists also see high costs.
Daniel Munich of the economic institute CERGE-EI estimated tax cuts could leave an up to 82 billion crown hole in the budget, about 1% of GDP.
ANO’s pension and welfare promises would initially cost up to 35 billion crowns but longer-term that could soar to 239 billion crowns with changes like re-capping retirement at age 65, he said.
Moody’s ratings agency said in a July review that a reversal of reforms like in pensions “would be highly credit-negative.”
LAGGING WAGES
ANO’s ambitions may be pre-election posturing and might still be tempered by legislation on budget responsibility or EU rules. At the same time, a fiscal prudence message is harder now than before.
Real household gross disposable income in the Czech Republic has grown by less than 1% since end-2019, according to Oxford Economics and Haver Analytics data. In neighbours Slovakia, Hungary and Poland, the rise is 8-12%.
ANO calls the budget a “tool, not a goal”. Babis rejects claims his promises are too expensive, arguing they will come over time and money can be found in the informal economy and better state functioning.
“It is realistic,” Babis said in a September 23 Facebook post to voters. “We are not promising you anything we wouldn’t fulfil.”
** Click here for an interactive graphic:
($1 = 20.7220 Czech crowns)
(Reporting by Jason Hovet; Editing by Andrew Cawthorne)
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