As finance minister, long-time state official Eduard Janota has more work and many more problems than his predecessors. He is now drafting a state budget with the highest deficit in the country’s history. At the same time he is preparing a package of austerity measures aimed to reduce the public deficit.
The package includes an increase in VAT, higher social insurance contribution from high-income groups, a wage-freeze in the public sector, and cuts to social benefits. ČSSD leader Jiří Paroubek and ODS chief Mirek Topolánek rejected the rescue package for the state coffers on Thursday, thereby supporting the CZK 230 billion budget gap before the elections. But Janota continues working on the savings package. “Rejecting savings may hurt the country’s rating and raise the cost of government debts,” he said in an interview with HN.
You have discussed reducing the state budget deficit for next year with Mirek Topolánek and Jiří Paroubek. Did you convince them to introduce unpopular cuts, tax hikes and avert a catastrophic deficit?
Probably not. We discussed the budget in detail as well as how to lower the deficit. I tried to prove that I am not hysterical. The state budget is getting worse month by month. That is why I am increasing my forecasts for next year’s deficit.
How dramatically is the condition of the state budget worsening?
Collection of corporate tax is very poor and it’s getting worse month by month. We are now much worse off than we were three months ago when we approved the government’s policy statement and when we were convinced that we could keep the budget deficit at around CZK 160 billion without any major cuts. At that time, we cut current expenditures and reduced investments, but it was not yet necessary to introduce laws restricting mandatory expenditures. Since then, we have lost a further CZK 30 billion in corporate income tax. Wages are falling, so social insurance collection is declining as well. Just the decline in social insurance between April and June forces us to reduce revenues by CZK 40 billion.
That sounds warningly. What did Paroubek and Topolánek say? Are they willing to approve any savings before elections?
Both suggested that, in their opinions, it is impossible just now to discuss the proposed austerity measures aimed at reducing the state budget deficit. I will have to present a draft budget with a deficit of CZK 230 billion. Ministries want an additional CZK 80 billion on top of that. I cannot accept that by any means. It will be hard negotiation. I cannot give anybody a single crown unless I take it from somebody else. I am going to present the budget in a single block together with the savings package. It will contain completely specific proposals for austerity laws.
Paroubek and Topolánek know you negotiate with foreign investors who buy government bonds. By refusing to lower the deficit, they are contributing to the country’s poor rating and high debt. Are we on our way to bankruptcy?
I am not going to assess how big a step we have made towards it today. I just say that the deficit of next year’s state budget will be at 7.1% of GDP. Just the interest on that will cost CZK 80 billion. Three years ago, we paid CZK 40 billion, and this year it was CZK 55 billion. We are borrowing more and we are paying higher and higher interest rates on the loans because the growing deficits make us a more risky debtor.
What is at stake?
There is a threat the country’s rating will be downgraded. If our public finance deficit rises from 1.6% of GDP to 7.1% in a single year, then can result in a rating revision.
Have rating agencies already warned you that they might do that?
I have not talked to anybody yet. I believe that we come to terms and approve the savings package. But that is not realistic at the moment.
Politicians always say in autumn that it is impossible to complete a better budget in time. You had been preparing budgets for decades. If they really wanted to, could the ministry draft a completely new budget?
Administratively, it is possible to do that in time. If there is political will, it is possible to draft a budget in two months and a half.
Have you been successful in selling bonds?
Not so far. All countries are having problems with government debt. But we do have an A rating, not AAA, and there are so many government bonds on the market right, so naturally that works against us.
Bankruptcy can sneak up on a country. How can we know if it’s coming?
A combination of high public finance deficit and a deficit in the balance of payments is deadly. It is one way to recognise candidates for national bankruptcy.
That was the case of both Latvia and Hungary. But we have no problem with the balance of payments deficit. It has hovered around 2%-3% of GDP in the long run. So isn’t it an exaggeration that we’re following in Hungary’s footsteps?
That is true, but it does not guarantee that we cannot face our problems. Our public finance deficit is really high, and the government debt is rising very fast. Unlike Hungary, we do not have loans in foreign currencies. When the crown falls, it does not raise our debts. And we do not have a big balance of payments deficit either. But we should not be complacent. You never know what investors will perceive as a risk. What also raises borrowing costs is political instability and an outlook that a country is failing to put its public finances in order.
I can find a temporary ČSA head immediately
You also have to deal with Czech Airlines, which some economists say is on the verge of bankruptcy. What is the government going to do now?
Today (the interview was conducted at noon on Thursday – editors note), pilots are supposed to say whether or not they accept the management’s proposal to step down if pilots reduced their wages by 30%. If they agree, ČSA President Radomír Lašák would step down quickly, in line with his proposal. Of course the whole management cannot leave overnight; nobody is expecting that.
Who would be a new ČSA president? Would you call for a new head before the end of privatisation?
I would empower somebody from the current management to head the company temporarily. The temporary head would manage the firm until the end of privatisation. If we choose a new owner (the consortium of Travel Service and Unimex is the only remaining bidder in the tender – editors note), we would leave the selection of a new head up to them.