Finance ministry considers crisis measures after economic growth projected at just one percent

Gloomy growth predictions across Europe have led the Czech Finance Ministry to revise its growth forecast for 2012 downward to at best 1 percent – a dip that will leave the government at least 18 billion crowns in the hole. Already a number of crisis scenarios are being drawn up to counter the drop in revenues. For many Czechs, already forced to tighten their belts under government reforms, it will mean even tougher times ahead.

Photo: Barbora Kmentová

Already paying higher VAT on foodstuffs or suffering lower unemployment benefits, Czechs face further belt-tightening ahead, as the government scrambles to deal with lower-than-projected economic growth. Predictions back in July set growth for next year at 2.5 percent but that seems a world away now after downward revisions for the eurozone, by the OECD and the Czech Finance Ministry respectively: the eurozone is expected to see only three-tenths of a percent growth next year, while the closely-tied, export-heavy Czech economy will at best grow by one percent next year

That’s if things go well. Under the worst-case scenario being considered by the Finance Ministry, the country could slip into recession, meaning crisis measures will be needed, especially if the government aims to meet its proposed 105 billion crown deficit. That could mean a further slashing or curbing of social benefits, further cuts in the public sphere – from ministries to public bureaux – and a quicker-than-planned unification of the VAT rate at 19 percent. On Monday the country’s finance minister, Miroslav Kalousek, outlined possible ways ahead:

Miroslav Kalousek, photo: CTK

“The options available mean that we have to look at the scope of social services and ask if anything essential will happen if some of them are cut.”

But some, including members of the government’s economic advisory board, NERV, are not recommending unifying the VAT at a higher 19 percent rate just yet. Former finance minister and member of NERV Jiří Rusnok said that raising the tax would not help jump-start or boost the economy, in other words would only stifle consumer spending. On the political level, the finance minister, supported by his party and the Civic Democrats, has an additional problem: the junior member of government, Public Affairs, warns by no means will it support measures that would leave ordinary Czechs struggling. The party’s Vít Bárta had this to say:

“For us this is an absolutely essential issue: we are trying to defend middle class and lower income earners. And we are going to be as bull-headed about this as we were about the issue of food vouchers.”

Vít Bárta, photo: CTK

The government has said it will not revise the 2012 state budget now but only in January, after it has been passed in its current form by Parliament. The stated reason? That any changes need to be based on a more accurate growth forecast. Measures approved, including cuts, could then be introduced midway through the year. One thing the government, specifically the finance minister, says he won’t do is change income tax for high-level earners or companies – a solution traditionally sought by the opposition Social Democrats.