Milena Horčicová, Director of the Financial Policy Department in the Ministry of Finance, briefly discusses the main areas of impact from the crisis and the difficulties the Ministry faces when trying to forecast and tackle current fiscal concerns.
12/8/09
Introducing thoughts:
[This section of the Ministry of Finance publishes quarterly forecast for the public, and has just released their Macroeconomic Forecast paper in October 2009.] Right now we are focusing on consolidation plans scheduled to release in January, 2010. (In fact for all European countries, this date has been pushed back from December, which is helpful because we can then use data from 2009.) But for the Czech Republic, we have the specific problem of an interim government, making it difficult to prepare a convergence program with some clear declaration of a path for fiscal consolidation. This is of course one problem.
The second problem is volatility concerning the development of the financial economic crisis. Of course we are a bit optimistic concerning next year, but are still very conservative with our predictions; for next year we speculate some 0% GDP growth. But of course it is possible now that it will be double. In our situation it is just very difficult to prepare these mid-term materials.
How would you like to combat the volatility of the financial crisis?
According to our forecasts, we expect small growth for next year, and a bit more for 2011 and 2012. The Ministry conducts macroeconomic colloquia twice a year; our last one was in November, and some of the results of this colloquium were published. If you compare different forecasts of different institutions (e.g. ČNB, Česka Spořitelna), the Ministry of Finance is a bit more pessimistic and conservative. For example, the last OECD outlook for the Czech Republic for 2010 estimated 2% GDP growth. But, you never know. These are only forecasts, and of course reflect different approaches of different groups. We just have to wait and see. Forecasts are not easy to produce during normal times, and during this very unusual time (with many factors to take into consideration), these forecasts are difficult to produce. It must be noted that our development and GDP growth are closely related to Germany, our main partner in foreign trade; we are critically dependent on the development of the EU, but especially on Germany.
Is this 2% forecasted GDP growth for 2011 unrealistic, should Germany introduce austerity packages?
It may be. We had a fresh example of this relationship concerning foreign trade and these good observed results. Germany had some strong support programs for cars, and Skoda benefited from this support. But of course next year will be different. Whether developments within the German and EU economies will be beneficial for us – of course there will be some development increase and recovery in Germany and other EU countries, but we don’t know which part of this recovery is because of massive fiscal support or from government support of the economy. We don’t know if these developments are healthy, temporary, because of this fiscal pulse, or not. This is the question, and especially for next year. Maybe this is the reason for our conservative forecasts, because we don’t know.
What brought the change from more optimistic readings of the economy (for mid-year forecasts over the course of 2009 gradually worsened) to a pessimistic outlook?
Last year maybe we were too optimistic. There is a very long-term preparation procedure of state budget proposal. For the state budget proposal preparation we use the July forecast. The developments of a few months reflect that of the whole year. In the middle of last year (before Lehman brothers fell, and so on) – some forecasts were according to previous developments, devoid of expected developments with a very deep impact of the crisis. (The same can be said for the OECD forecast.) The state budget proposal was prepared according to this past July forecast, and it was very difficult to change it. At the end of last year and beginning of this year, almost all countries changed their forecasts from small amount of positive GDP growth to a large negative GDP growth percent. It was a very unusual situation, and it is very difficult to predict. (Same goes for the IMF, OECD)
What concerned you and your colleagues most with regards to the crisis?
The main problem of these negative developments and GDP decline is unemployment. Even with some recovery, we expect an aggregate increase in unemployment because of some postponed effects, and so on. This is the main problem. Of course there will be some big impact on the fiscal side, of the state budget. The decrease of social and tax revenues on one hand, and on the other hand big expenditures concerning unemployment support and so on.
Are you optimistic about the excessive deficit procedure and deficit developments?
I can only say that in the case of the same development, it will not be possible to reach mid-term objectives of 3% in 2013. We will have a meeting with the Minister and some responsible deputies concerning the convergence program, reacting on some recommendations of the European Council’s excessive debt procedure. We are preparing some list of revenue and expenditure possibilities – how to solve this problem and decrease the deficit by 1% per year. Of course it is possible to do; you can increase taxes, and there is some possibility to change expenditures, but it of course depends on the decision of the new cabinet after elections. We only prepare the state budget for next year for this cabinet, some austerity package.
You know the discussions in Parliament are horrible – this is a nice way to spend taxpayers’ money. It’s very difficult to find some sources for additional expenditures. In our convergence program we tried to include a list of possibilities; it depends on the new government’s decisions. Some changes, and especially increase in taxes, will be necessary, but the proposals are subject to differing standpoints. There are possibilities to change expenditures, but you know, I remember a decision passed which proposed to decrease the number of state employees by 3% per year. The first measures were passed two years before the revolution based on perestroika messages. This was 22 years ago, and if you compare the Federal Ministry of Finance and the Czech Ministry, the numbers are quite similar; of course it’s not correct to compare these numbers, but you see some interesting results. Really it is possible to make these changes; you would save some money from wages cuts, but you also make state employees more effective. But these changes are very difficult to make in the Czech Republic, and you know it’s very difficult to make a comparison of state positions with Western countries (UK, US). This is one big reason for skepticism concerning expenditures. And these expenditure cuts do not only concern only wages; of course there are other things concerning public procurement, so it’s possible to save a lot of money.
