CEE nations waste chance to slash budgets

By Alan Crosby

VIENNA (Reuters) - Central European governments are missing a chance during the current strong economic cycle to slash budget deficits and restructure public spending for the longer term.

Governments and parliaments in the Czech Republic, Poland, Slovakia and Hungary are putting the final touches on state budgets, all with the aim of trimming shortfalls as they eye joining the euro zone in the coming years.

But analysts and bankers at the Reuters Central European Investment Summit said the steps were too timid and more cosmetic than true fiscal adjustments.

"I think it's a wasted opportunity. This would have been an excellent opportunity to fundamentally change public finances and put them on a very clear downward trending debt path," said Standard and Poor's credit analyst Kai Stukenbrock.

With economic growth in the region's EU members well outpacing that of their western counterparts, revenues have exceeded expectations this year.

The Czech parliament began debate on the 2008 budget draft that targets a shortfall of 70.8 billion crowns ($3.64 billion), or 1.9 percent of expected 2008 GDP, down from a 91.3 billion crown plan for 2007.

But that is due mainly to changes on the revenue side, while the government has yet to tackle the most difficult public spending reforms in the healthcare and pension sectors.

PRO-CYCLICAL POLICY

Hungary sees a drop in the budget deficit target to 4.1 percent of GDP in 2008, from an expected 6.4 percent this year.

Christoph Rosenberg, the IMF senior representative for central Europe and the Baltics, told the Reuters Summit the steps were a positive sign.

But he also noted far deeper reforms are needed for a sustainable cut in the deficits and to help ease external economic imbalances seen in many countries across the region.

"One thing is very clear: Fiscal policy should be much less pro-cyclical, and that's particularly the case for the countries with fixed exchange rates and don't have any other real policy instruments at their disposal," he said.

Poland's government is looking to cut the general government deficit to 3 percent of gross domestic product in 2007 and keep it there in 2008.

Higher-than-expected revenue on the back of a booming economy and lower spending have allowed Poland's federal budget to show a surplus in recent months.

By keeping the deficit below the 3 percent level, Poland would meet a key criteria ahead of euro adoption, seen early next decade.  Continued...