Austerity Is Still an Election Winner, Czech Ruling Party Bets

(Bloomberg) -- The Czech Republic’s main ruling party is taking a political gamble a year before a parliamentary election by pressing ahead with austerity measures that so far have served to bolster support for the populist opposition.

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The conservative Civic Democrats and their coalition partners must wean the country off a pandemic-era borrowing binge, said Jan Skopecek, a deputy speaker of parliament who oversees the party’s economic policy. The ultimate goal is is a balanced budget, he added.

“The only healthy deficit is zero deficit,” Skopecek said in an interview in Prague.

The party under Prime Minister Petr Fiala leads a five-member coalition that was elected in 2021 in part on a pledge to return the nation of 11 million to fiscal rectitude after the previous government under billionaire Andrej Babis oversaw a surge in public debt.

The Civic Democratic leaders assess that the path to reassuring a restive public is to follow through on promises to scale back the deficit. In a bid to stabilize the pension system, the government is proposing an increase in the retirement age, after slashing subsidies to businesses and slowing the growth in pensions.

And while those steps have been a salve to investors and credit-rating agencies, they’ve taken a toll on a broad swathe of the population, including retirees, public-sector workers, families and business owners.

The result has registered at the ballot box. Babis’s populist ANO party came in first place in this month’s European Parliament election, putting the billionaire in position to return to office next year. Far-right and pro-Russian groups also made gains.

But for Skopecek, 43, the political game lies in holding steady and relying on voters to see the benefit of deficit cuts, in the end rewarding the coalition. An economist by training, he’s a standard-bearer of a brand of fiscal discipline in Czech politics that’s dominated since the fall of communism.

“I can’t see a different way forward,” Skopecek said. “I don’t think it would be a better electoral strategy if we now started watering down our efforts.”

The Czech government is projected to reduce its deficit to 1.9% of gross domestic product next year from 3.7% in 2023, among the most ambitious savings projects in the European Union. Regional peers Poland, Hungary and Slovakia will remain above 4%, as well as France, Italy and Belgium.

Skopecek said his preference would be for “faster and more ambitious” cuts. He lamented that Czechs risk acclimating to a Western economic model based on “entitlements and exuberant social welfare,” which sap the productivity and pave the way for long-term fiscal shortfalls.

“As a small country in central Europe, we can’t afford to run anywhere near the type of debt-to-GDP ratios that investors tolerate in large and politically strong countries like France,” he said. “Investors wouldn’t forgive us.”

Despite the austerity measures, the government has pledged to ramp up investment in roads and other infrastructure.

It’s a political lesson learned by the Civic Democrats during the last decade, when deep spending cuts after 2010 contributed to economic stagnation and saw the party lose two general elections.

‘Unpopular Measures’

Instead of funding the development with excessive debt spending, Skopecek recommended curbing business regulation and red tape as a way to boost economic growth and generate enough tax revenue.

He acknowledged that even voters who support fiscal restraint are much less enthusiastic about measures that affect them personally. Still, that should not deter the government’s austerity aims, he said.

“People voted for us because they wanted fiscal consolidation,” Skopecek said. “They are smart enough to understand they too might be affected by it, but they can see around the corner and accept unpopular measures.”

--With assistance from Harumi Ichikura and Mark Sweetman.

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