Czech government seeks consensus on debt brake mechanism

16-01-2015

The Czech government is preparing to put in place its version of the so-called debt brake, a mechanism for raising the alarm when public debt as a proportion of national wealth starts reaching dangerous levels and calling for emergency remedial action.

Photo: OmirOnia / freeimagesPhoto: OmirOnia / freeimages These brakes have been operational in other countries already for several years with varying models offering different degrees of discipline for the spendthrift. Debt brakes are already part of European Union fiscal compact obliging member countries to curb their spending when overall public debt reaches 60 percent of GDP and Prague is expected to toe the line with its own mecahanism.

The centre-left coalition government is looking to put its debt limit at a lower 55 percent of GDP, but that already looking like giving quite a lot of spending wriggle room given that the ratio in 2013 stood at 46 percent of GDP and last year’s state spending deficit will not have deepened that by much.

But the governing parties need to get at least nine other lower house lawmakers on board to get a two-thirds constitutional majority for this change and there is no apparent agreement. Whereas, the Communist Party of Bohemia and Moravia (KSČM) dislikes the debt brake in principle, the TOP 09 party has called for the debt brake to take effect at a lower level with progressively stricter measures imposed as the ceiling starts to be reached. Last year it proposed that an annual 20 billion crowns a year a year be shorn from overall public debt once the debt limit is hit.

Generally, Czech public debt is not at exceedingly high levels compared with many European states. In 2013, Greece’s public debt to GDP ratio was 174 percent, Belgium was 104 percent and France stood at 92 percent. Neighbouring countries such as euro-using Slovakia and non-euro zone Poland have already put in their debt brake limits at 50% and 60% of GDP respectively.

With Slovak debt cruising at just below the limit it’s clear that the left-leaning central government has been deflected from some measures it would like to have taken and also been pushed along the path of considering public private partnership projects for some expensive infrastructure projects. The problem with such PPP projects is that they don’t deepen public debt at first but often turn out more expensive and more of a burden on public finance in the long run.

The Swiss have introduced a sophisticated debt brake which, while maintaining the overall principle that revenues should cover federal expenditure, leaves room for higher spending in some years being clawed back when the economy picks up. The Swiss system has seen the overall debt burden cut from around half of annual GDP to around a third in less than a decade. That sort of success put the Swiss increasingly out of sync with the debt heavy euro-zone and help precipitate the sudden and dramatic cutting of the Swiss franc’s peg to the euro this week.

16-01-2015