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Czech Republic, Hungary the only EU states with gaps over 3% of GDP in 2008

The Czech Republic and Hungary will be the only EU members whose budget gaps will at the end of 2008 be higher than 3% of GDP, that is, the limit needed for the euro adoption, a European Commission report said today.

The Czech Republic is one of the six members of the EU with the most risky public finance outlook, the Commission said. Czech Finance Minister Miroslav Kalousek said the criticism was justified. The current situation has been caused by unreasonable fiscal expansion at the time of positive economic development. „There is only one reason for these trends: political irresponsibility,” he stressed.

The reform package approved by the government is focused on fundamental spots which the EU has criticized and if the Chamber of Deputies approves it, drawing up a state budget with a deficit at 3% of GDP is possible, he said. In the report on the state of public finance in the EU, the Commission said the budget situation has improved substantially and that the average deficit has fallen from 2.4% in 2005 to last year's 1.7%, with seven economies showing excessive deficit, namely Italy, Portugal, Britain, Czech Republic, Hungary, Poland and Slovakia. The average deficit in the euro zone fell to 1.6% from 2.5% in 2005.

Based on the most recent convergence programs for introducing the single currency, only the Czech Republic and Hungary will show budget deficits higher than 3% of GDP at end-2008, the former's gap projected at 3.6% and the latter's at 4.9% of GDP. Still, however, Czech public finance gap will be lower than this year's projection of 3.9% of GDP. The Commission called on all member states to make use of good economic times and work to achieve sound and sustainable budgets. High tax revenues, which can only be temporary, have sometimes been used to partly raise government spending, the report said, adding that there is a risk that the mistakes of the past will be repeated. Unless the member states change their policy, only ten of them will meet the mid-term budgetary goals set in the Stability Pact, said the Commission. In the mid term, that is, in three-to-four years, the countries should make efforts to set budgets showing surplus or slight deficit.

Like last autumn, the Commission ranked the Czech Republic among the six countries with a high degree of risk for their public finance outlook. The other countries are Greece, Cyprus, Hungary, Portugal, and Slovenia. Slovakia ranks among the ten countries with an average risk. Population aging and related spending which will grow markedly in the long term pose a threat for the high-risk countries, and so it is more pressing for them to consolidate budgets, the report said. (