Debt is piling up for the Czech Republic Shutterstock

The national debt of the Czech Republic has risen to over CZK1 trillion (€39 billion), none of which is being paid off. Servicing the debt currently costs around CZK70 billion annually, which is the third-largest outlay from the annual budget.

“Since 1998 we have paid CZK400 billion from the state budget in interest to banks. If we had a balanced budget, we would save the taxpayers that amount,” said Petr Mach, chairman of the Party of Free Democrats (SSD), adding that the national debt is one of the prime causes of the budget deficit.

This debt was incurred by previous governments and is the sum of a series of budget deficits. Put simply, the Czech Republic spends more than it earns and political parties typically prefer to borrow instead of alienating voters by raising taxes.

“In my opinion it’s possible to demonstrate irrefutably that part of the debt arose as a result of the crisis in the banking sector and the rest is structural deficits,” said economist Miroslav Zámeãník, who claims that Ministry of Finance statistics clearly show who is to blame for the debt. It’s enough to look at GDP growth rates and compare them to state budget spending by year he says.

“It’s a predicative statistic from the time when the banking sector was privatized,” Zámeãník said. These statistics show that the state debt grew most under Social Democrat (âSSD) governments when the economy was experiencing robust growth, namely in 2004 when GDP was 4.3 percent, 6.5 percent in 2005, and seven percent in 2006.

Yet, according to analyst Petr Zahradník, debt growth can emerge after a significant delay, therefore it’s not quite so simple to identify a guilty party. “There’s no other area where it’s possible to manipulate figures to the extent possible in the case of public finances. For example, the sum of deferred expenditure can change the final result significantly,” Zahradník points out. “All governments have a share of the responsibility for the high state debt,” he said.

Expensive transformation

Zahradník said the expenses of the first wave of economic transformation at the beginning of the 1990s began the debt problem. The expenses mounted to CZK680 billion, with CZK370 billion alone spent on restructuring the banking sector.

Source: Czech Ministry of Finance

In the opinion of economist Pavel Kohout, there is no doubt as to who is responsible. “[âSSD chairman] Ji½í Paroubek is most definitely guilty, because in 2005, when the economy was paying for the expenses of the transformation and was in the period of its largest growth, as premier he was unable to put forward a balanced budget plan for 2006, let alone a surplus budget plan,” Kohout said, adding that a great opportunity to straighten out public finances was missed. “Instead a trend of more spending began,” he said.

Money from privatizations served to buoy state finances and sometimes cover up the holes in the state coffers, even though the original intention was to spend much of it on expenditures such as settling accounts with the churches, cleaning up ecological damage caused during the communist era and reforming the pension system.

“Part of the revenues was simply eaten up,” Mr Zahradník said.

Today almost everything that could be sold has been, but the former governments have spent all the proceeds. There is no telling where the funds for much needed environmental clean-ups and pension reform will come from.

Libuse Frantová

This is an edited version of an article which originally appeared in Czech Business Weekly