Do big election promises make economic sense?

Perhaps more than ever before, the economy is the talk of this year's elections. Right now confidence in the Czech market is the highest it has been in eight years, but during their campaigns both the opposition Civic Democrats and the Social Democrats - who've ruled for the past eight years - have promised big changes.

A year without taxes for Czech entrepreneurs, for example. Thousands of dollars paid to parents for having children. Up to 4 percentage points cut from the VAT tax rate, and a one-time payment to sixth graders so they can buy their own computers. These are just some of promises that have been handed out by the Civic and Social Democrats in the past few months.

David Marek is the chief economist of Patria Online, the web service of a major Czech investment bank. He says he's never heard such unrealistic campaign promises from the major parties and thinks they are probably just pre-election happy talk.

The Civic Democrats' are the ones pledging the one-year tax holiday for small and medium-sized businesses, but perhaps the most radical of their promises is a proposal for a flat 15 percent tax on corporate, income and value-added or VAT tax.

David Marek says the proposal would simplify the Czech Republic's convoluted taxation system, but also says the party's current figures are unrealistic. A 15 percent VAT, for example, would be a four-point drop from current rates and Mr. Marek says.

"It's not reasonable, but I would see such a promise as a good point for our next coalition. So if ODS should look at the other promises of their coalition partners, they could moderate their promise of a flat tax from 15 percent to possibly 19 or 20 percent. But 15 percent is not viable for the Czech state budget."

Photo: archive of Radio Prague

The Social Democrats are also calling for tax reform, though with less-specific proposals. They're committed to the current progressive tax system on individual incomes, and also are in favour of keeping a low VAT tax on "socially important" products such as diapers.

Similarly the Social Democrats promise to put more money in parents' pockets, raising the childbirth incentive to 60,000 crowns - just shy of 3,000 dollars. The ruling party also rejects opposition plans to charge tuition at Czech universities and is committed to state funded health care. They haven't said how to pay for all of this in the long run, and David Marek isn't sure these benefits will be affordable in the future.

"It could be sustainable, but the better way would be to change the system of social benefits because it's one of the main reasons for our current state budget deficits."

David Marek did add that the principal concern of most investors here and abroad is that the communists not return to power. With the Communist Party polling at about 12 percent, that doesn't seem likely. But both the Civic Democrats and the Social Democrats can expect to win only about 30 percent of the total vote - which means whoever wins will have to build a coalition with another party. And that makes every promise subject to change.