Czechia's 2027 budget reaches 2% on defence by borrowing more

Nine months after Andrej Babiš returned as prime minister, his government has produced the budget that defines it. The draft for 2027, presented by Finance Minister Alena Schillerová at the end of August, raises spending on almost everything the coalition promised voters, and it lifts defence to 2 per cent of GDP for the first time. It does both by borrowing. The result is a document that satisfies NATO's older commitment on paper while leaving the defence line exposed to the coalition's internal bargaining, to the bond market and to a nuclear project whose cost is climbing.

What the draft contains

According to the finance ministry's figures, as reported by Radio Prague International, the draft plans revenue of CZK 2.189tn against spending of CZK 2.578tn, leaving a state budget deficit of CZK 389bn. That would be the second-largest deficit in the country's history. The plan for 2026 was CZK 310bn, so the gap would widen again. Investment is set at a record CZK 289.6bn. Healthcare gains about CZK 50bn, state employees' pay about CZK 36bn, with rises of 5 to 9 per cent and 3,285 new posts, and defence about CZK 36bn.

Ms Schillerová argued that there was no alternative to a larger deficit, saying that without it the country would risk stagnation and higher costs later. She said reductions would follow after 2027. The government's own programme, as summarised by OSW in December 2025, pledged to keep the deficit below 3 per cent of GDP while cutting corporate income tax from 21 to 19 per cent and moving the renewable-energy surcharge from electricity bills to the state budget. Those commitments pull in opposite directions, and the 2027 draft shows which one gives way.

How the deficit is measured

Two numbers circulate for the size of the gap, and both are correct on their own terms. Economists at ING put the general government deficit at 3.5 per cent of GDP in 2027. The ministry reports 2.8 per cent because it invokes the EU's national escape clause for defence spending, which allows part of the military increase to be set aside when assessing compliance with the fiscal rules. The difference is not an error; it is flexibility the EU introduced to encourage rearmament, now being used by a government that is sceptical of NATO's higher targets.

The market consequences are more concrete. ING estimates gross borrowing needs at CZK 881.9bn, up 19 per cent on the CZK 738.2bn expected this year, with a record CZK 278bn of government bonds maturing. Its analysts wrote that the draft raises the likelihood of an interest-rate increase by the Czech National Bank in November or later, since the central bank's August forecast assumed a smaller deficit and slower wage growth. A higher policy rate would raise the cost of every koruna borrowed, including for defence and for Dukovany.

Why 2 per cent is a floor, not a target

The defence line is the headline the government wants. In the draft it comes to CZK 191bn, CZK 36.2bn more than this year, or growth of roughly 23 per cent. Seen from the previous baseline, that is a real increase. In March, when the 2026 budget passed by 104 votes to 87, the defence ministry received almost CZK 155bn, or about 1.7 per cent of GDP; Euronews reported that the total would inch above 2 per cent only if defence-related projects at other ministries were counted. President Petr Pavel, a retired general, said at the time that there was not a single justifiable reason for defence spending to stagnate.

The benchmark has since moved. At the Hague summit in 2025, allies agreed to spend 5 per cent of GDP by 2035, of which 3.5 per cent on core defence. Mr Babiš has argued that the state inherited strained finances and that health is the priority; his government treats 2 per cent as the achievable level. For allies the question is not whether Prague reaches 2 per cent in 2027, but whether there is any credible route from there to 3.5 per cent within eight years. The draft does not offer one.

The coalition is the first test

The budget still has to clear the cabinet and then the Chamber of Deputies, where ANO holds 80 seats and its partners, the SPD with 15 and the Motorists with 13, give the coalition 108 of 200. Both partners have put conditions on their votes. Petr Macinka, the Motorists' leader and foreign minister, said his party would propose cuts and could withhold approval if its demands were ignored. On 17 September the SPD, led by Tomio Okamura, proposed moving CZK 7.5bn out of defence procurement, arguing that weapons purchases would simply shift in time and the money could go to people instead. The ministry has already moved CZK 16.4bn of projects from this year into next. Jana Černochová, a former defence minister now in opposition, said the SPD was using that postponement to remove several billion more.

The opposition's objections run the other way. Martin Kupka of the Civic Democrats called the plan a deliberate decision to indebt the country at the expense of those who cannot yet vote; Zdeněk Hřib of the Pirates said a deficit of this size during growth made no sense. The cabinet planned to approve the draft on 21 September and send it to parliament by the end of the month. The defence figure is therefore the most negotiable large item in a budget whose other increases, in wages and pensions, are politically harder to reverse.

Ukraine and the ammunition initiative

The budget also frames Czechia's role in supplying Ukraine. The ammunition initiative, announced by President Pavel in February 2024, pools donor money so that Czech firms can buy large-calibre shells on the world market. During the 2025 campaign ANO and its partners questioned it. In office, Mr Babiš said it could continue on condition that it was financed by other countries and remained transparent, with Czechia providing coordination. The defence ministry has said about four million rounds worth roughly CZK 90bn have been delivered, with the Czech budget contributing about CZK 1.8bn.

Participation has since narrowed. In May President Pavel said only about nine countries were still contributing financially, down from 18, while the scheme was still delivering up to half of the large-calibre ammunition Ukraine receives. Kyiv Independent reported deliveries of 1.5 million shells in 2024 and 1.8 million in 2025, with about one million more contracted for 2026. The gap between these figures and the four-million total has not been explained in public; the two sources may count different periods or types of round. The 2027 draft does not restore a Czech contribution, so the initiative's future depends on donors' confidence in Prague as coordinator.

Dukovany is the larger long-term bill

The biggest fiscal commitment sits partly outside the annual budget. The contract with Korea Hydro & Nuclear Power for two units at Dukovany was valued at CZK 407bn in 2025, with construction due to start in 2029 and the state owning 80 per cent of the project company. On 14 August Deputy Prime Minister Karel Havlíček said that, once the cost of money was included, the total would be CZK 600bn to 700bn. That is not necessarily a cost overrun, since the earlier figure excluded financing, but it shows how sensitive the project is to interest rates. A budget that pushes the central bank towards tightening raises that cost too.

What to watch

Three things will show whether the draft holds. First, whether the defence line survives the SPD and Motorists amendments at CZK 191bn, or whether postponed procurement becomes a quiet cut. Second, the central bank's November meeting, which will reveal how the monetary authority reads the fiscal stance. Third, the European Commission's assessment of the escape-clause claim, which determines whether the reported 2.8 per cent is accepted. For allies and investors the pattern is clear enough: Czech defence spending is rising, but it rests on borrowing and on coalition consent rather than on a settled political choice.

Sources

• Radio Prague International — Outcry over 2027 draft budget, posting second-highest deficit in history
• ING THINK — Czech draft 2027 budget: higher deficit pressures bonds and raises rate hike risk
• Around Prague — SPD proposes cutting Czech defence spending by CZK 7.5 billion
• Euronews — Czech 2026 budget passes but defence outlays fall short of NATO pledge
• OSW Centre for Eastern Studies — Babiš's new government: Czechia first
• Radio Prague International — Czech ammunition initiative to go on: government shifts stance after taking office
• Kyiv Independent — Half of countries withdraw from Czech ammunition initiative for Ukraine
• Britské listy — Czechia's Dukovany nuclear expansion cost could nearly double