Business analyst: government’s austerity plans should not undercut growth

The government on Wednesday approved far-reaching austerity plans to gradually lower the gap in public finances to well below 3 percent of the GDP. The strategy combines savings and tax hikes that are expected to impact all strata of society. Radio Prague asked business analyst David Marek whether such extensive austerity measures were called for and who would bear the brunt of the fiscal reform.

David Marek
“In the last two years the Czech government succeeded in significantly reducing the budget deficit. Two years ago the gap in public finances was almost 6 percent of the GDP, last year it was marginally above 3 percent of GDP. However this deficit is still too high for the long-term development of the Czech economy –it is unsustainable in the long-term and the government has to continue with fiscal consolidation. In my view the proposed measures are unavoidable.”

Will the proposed measures not undercut growth? Growth is now at just above 0.

“The Czech economy has one significant feature – it is a small, open economy and fiscal policy has a relatively small impact on GDP –respectively the impact of the fiscal policy is offset by net exports, so I would say that the impact on GDP growth from the proposed measures would be very limited.”

The government says it has distributed the measures fairly evenly across the board – so that the burden is evenly shared –but who do you think will bear the brunt?

Illustrative photo: Archive of Czech Radio - Radio Prague
“There are lots of measures and almost everyone will be affected by the process of fiscal consolidation. However there is one group that could be severely affected and that is old people. Pensions are likely to increase significantly less in the coming years –much less than envisaged earlier - and there is a danger that the increase in pensions could be even smaller than the rise in inflation so the real value of pensions could diminish in the years to come.”

Now obviously the gap in public finances needs to be reduced to under 3 percent of GDP, but the government is aiming for 1.9 percent in 2014. Are we not holier than the Pope here?

“I would say this is a reasonable goal because even 1.9 percent of GDP is still too much for the Czech economy and its long-term sustainability. We are not in a situation like Spain, Portugal or Italy -we do not need to hurry with fiscal consolidation, but we should show some progress because financial markets cannot tolerate deficits as big as 3 percent forever.”

But is raising taxes the best way to go about it? Some analysts say a lot of money is still being squandered in the public sector. Do you feel that this was a wise decision?

Photo: Barbora Kmentová
“I would say that the scope of necessary fiscal consolidation is so big that we cannot rely solely on expenditure cuts or tax hikes. We need to combine both of them. On the other hand higher taxes can diminish incentives for the government to look for additional savings, for additional expenditure cuts and I would say that the administration costs of the public sector are still too high and there is still significant scope for savings.”