Economic Analysis - Election To Bring Even More Conservative Fiscal Path - 18 SEPT 2017

BMI View: Andrej Babis , leader of the anti-establishment party Action of Dissatisfied Citizens (ANO), will likely win the most seats in the parliamentary elections in October, and his government will focus on debt re duction and balancing the books . In the context of low debt levels and negative short-term interest rates, a focus on fiscal consolidation over public investment may come at the expense of longer term growth potential .

Following Czech Republic's record budget surplus of 0.6% of GDP in 2016, we forecast the surplus to narrow slightly to 0.2% in 2017 and stay roughly balanced over the next few years. Although the 2016 surplus was partly due to a one-off effect, Czech Republic's favourable fiscal outlook is due to the country's strong macroeconomic backdrop, which will boost tax revenues. At the same time, expenditure growth will be tied to the outcome of the parliamentary elections set for October, and our core view is that fiscally conservative Andrej Babis, head of the anti-establishment party Action of Dissatisfied Citizens (ANO), will win the elections, resulting in spending cuts and consolidation efforts over the coming years. We forecast the public debt ratio, which is already low by regional standards, to fall to 35.2% of GDP in 2017 and 33.3% in 2018, from 37.2% in 2016, on the back of a combination of next government's consolidation efforts and rapid real GDP growth of 4.3% in 2017 and 3.3% in 2018.

Economic Strength Filling Tax Coffers

Balanced Budget Outlook Supported By Strong Macro Backdrop
Czech Republic - Budget Balance, CZKbn
Source: Eurostat, BMI

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