Czech government approves inflation-fighting budget to cut record deficits

PRAGUE (Reuters) - The Czech Republic's centre-right government approved a revamped 2022 budget on Wednesday, cutting the proposed deficit to 280 billion crowns ($13.2 billion) as it seeks to rein in record fiscal gaps and take pressure off surging inflation.

The country has seen a debt explosion in recent years caused by the coronavirus pandemic and fast-rising spending commitments on state wages and pensions.

After taking power in December, the new five-party ruling coalition rejected the budget draft it inherited and aimed to rewrite plans to cut spending by 80 billion crowns and tame a debt rise that is among the fastest in the European Union.

Finance Minister Zbynek Stanjura, announcing that the government had approved the budget, said the deficit had been reduced without tax rises. The deficit is below a previously planned target of 377 billion crowns.

The new 2022 plan, which parliament still needs to approve, sees 76.6 billion crowns in savings versus the previous draft, along with higher budget revenue amid forecast economic growth of 3.1%.

The state budget makes up the bulk of the overall public finance balance, which hit a deficit of 6.1% of gross domestic product in 2021 - double EU limits - when the budget gap reached a record 419.7 billion crowns.

Under previous plans, the gap was seen falling to 4.4% of GDP in 2022. That drop will be even bigger with the new draft.

Prime Minister Petr Fiala has called his government's plans anti-inflationary as the central European country of 10.7 million battles surging energy costs hitting households and companies.

Inflation is heading toward 10%, and the central bank has raised interest rates by 425 basis points since June to a 20-year high of 4.5%, hitting state borrowing costs.

Extra budget revenue, seen at 62 billion crowns, is expected to go toward cutting the deficit and an already planned extraordinary pension hike and to help households cover rising energy bills.

The government plans savings in operational costs, among other cuts, including lower-than-planned payments into the healthcare system, drawing criticism from unions and former prime minister Andrej Babis.

Investments should rise to 203 billion crowns.

The Finance Ministry's latest outlook, which did not include 2022 fiscal forecasts, showed state debt rose to 42.0% of GDP last year, up from 30% in 2019 before the pandemic hit.

Czech debt is low relative to EU averages but has been on course that could see it hitting a 55% debt brake in the coming years, triggering automatic budget cuts, which has raised nerves among economists and some ratings agencies.

(Reporting by Robert Muller and Jason Hovet; Editing by Alison Williams and Edmund Blair)