Major political parties in the Lower House of Parliament came to an agreement to cut the budget deficit to CZK 163bn next year. Otherwise, the deficit would reach CZK 230bn without changes proposed by the Finance Ministry. The consensus is still very fragile and one can not rule out further political turmoil. The headline figure only tells how big the central government budget should be. The general government budget is likely to be close to CZK 180bn (5.0% GDP).
Positive implication is that the caretaker government will go on and lead the country until the general election in May/June 2010. Now, there is no better alternative for the country.
Fiscal policy remains in the abyss and without a deep reform steps the deficit would not fall below 3% GDP. Thus, the Czech Republic would not qualify for the euro adoption in years to come. The general government debt is set to increase from 29% GDP in 2008 to 39% GDP in 2010. There is no immediate threat of rating’s downgrade, however, if the next government does not take necessary steps shortly after elections, it can not be ruled out.