Record state investment could drive up construction and housing prices, economist warns

Jiří Weimelka, chief economist at Komerční banka, has warned that the record investment spending built into the Czech government's draft budget for next year risks fueling price growth and pushing some companies to postpone construction and housing projects. According to him, the Czech economy has already emerged from its downturn, and construction and other capacities are already running at full stretch.

The government is counting on the money poured into motorways, energy and hospitals paying off down the road. Under the plans, investment spending next year will rise to nearly 290 billion crowns — 26.4 billion more than this year. The state will chip in more of its own funds, even as EU subsidies shrink. The state budget deficit is expected to grow from this year's planned 310 billion to 389 billion crowns — a jump in debt sharp enough to have already drawn criticism from experts.

Prime Minister Andrej Babiš backs the budget presented on Monday by Finance Minister Alena Schillerová (ANO). He argues critics have failed to clearly explain where the state should be cutting instead. "We need to invest, it will drive growth," Babiš said. Along with Schillerová, he promises the deficit will shrink by 2028.

Where the money will go

The bulk of the new investment will flow into transport: the budget of the State Fund for Transport Infrastructure is set to grow by 10.6 billion to 180 billion crowns, mainly for building motorways and railways.

Competing for workers and materials

According to Weimelka, a record sum of state investment by itself does not mean total investment across the economy will grow by the same amount. "The state and private firms will be competing for the same designers, construction workers, machinery and materials," the economist noted.

His data shows construction firms are currently running at around 93 percent of capacity. If the state offers large, reliable contracts, they may prove more attractive to contractors than private projects — leaving private investors to postpone or scrap their plans altogether as costs rise.

The state is financing its higher spending through debt. "This will increase its demand for savings and capital, which could push interest rates up. Some private-sector projects will stop paying off once financing becomes more expensive," Weimelka explained. Higher state demand could also drive up wages and prices in sectors already short on spare capacity — at which point private investment would be crowded out not by cost alone, but by an outright shortage of people and firms able to carry it out.

Not just risks

At the same time, Weimelka stressed that many state investments can actually support private ones. New roads, railways and energy infrastructure boost the returns on corporate projects that might never have materialized otherwise. Czechia does need public investment, he said, but what matters is picking the right projects at the right time — not just posting a record figure in the budget.

Problems arise once the state, in a small economy like Czechia's, starts competing heavily with the private sector for already limited capacity. The state can certainly build more — but at the cost of higher expenses and less investment from business.

Source: novinky.cz