Jan Cienski (The Financial Times 12.10.2007)
The Czech Republic must reform its pension and healthcare systems to maintain the country's strong rate of growth and to prepare for eventual entry into the eurozone, said Zdenek Tuma, the Czech central bank governor.
'If there is a slowdown at this time we would be in deep trouble," said Mr Tuma. 'The government would have no manoeuvring room."
Parliament passed a first economic reform package in August by a single-vote margin. That legislation introduced a flat income tax of 15 per cent compared with the current progressive tax rate of up to 32 per cent, as well as lowering corporate taxes and trimming some welfare benefits.
With a deficit expected to be 3.9 per cent of gross domestic product this year, the government of Mirek Topolanek, the conservative prime minister, is now planning further reforms to cut government spending.
'Even with the strong performance of the Czech economy we have a deficit, which is inappropriate," said Mr Tuma. 'We should aim at a balanced budget."
While acknowledging the need to trim public spending, Mr Tuma was sanguine about the economy, which grew at a 6.4 per cent rate in 2006 and is expected to expand by 6.1 per cent this year.
The strong economy is causing labour-market tightness, with unemployment at 6.4 per cent. Some employers in Prague such as Anthony Denny, CEO of AAA Auto Group, the country's largest used car seller, are having to import and house workers from outside the capital and have seen their labour costs rise steeply in the past year. 'The pressures in the labour market are mounting," said Mr Tuma. 'Everybody I speak to in business mentions shortages of qualified people."
For now, productivity gains are keeping pace with wage growth of 8.4 per cent, but inflation is rising, climbing 2.8 per cent year-on-year in September. Mr Tuma said inflation was expected to pass the bank's target of 3 per cent, setting the ground for a continuation of the central bank's tightening cycle. The bank will change its target rate to 2 per cent by 2010.
Even with three rises this year, the bank's benchmark rate is 3.5 per cent, 75 basis points below the rate set by the European Central Bank. With Europe's lowest interest rate and a strongly growing economy, the attractions of joining the euro were more political than economic, said Mr Tuma.
The coalition government has scrapped a pledge to join the euro by 2010, and there is currently no target, despite the finance ministry's failed effort to set 2012 for euro adoption. 'Like the Swedish economy, it seems that we can function relatively well at the periphery of Europe," said Mr Tuma.