Government reaffirms commitment to extensive fiscal reforms

The centre-right Czech government weathered the latest in a series of crises on Tuesday, putting aside its differences in the interest of what the prime minister called its sole raison d’être – putting the country’s finances in order. The three parties reaffirmed their commitment to implementing budget savings and tax hikes which should bring the budget deficit below 3 percent of GDP next year and down to 1.9 percent in 2014.

Petr Nečas, photo: CTK

Prime Minister Petr Nečas had good reason to celebrate on Tuesday night as he told the nation that the crisis was over and the government was ready to go back to the drawing board. The prime minister, who last week firmly rejected an ultimatum from the smallest party in government, pressed home his advantage –giving little and getting a renewed pledge from all three parties that they would support far-reaching austerity measures in the years to come.

“The main purpose of this government is to implement its key policy goals i.e. to install fiscal discipline and bring the country’s finances under control. Should this commitment be brought to question at any point in the future it will mean that the government has no reason to continue in office even for a minute longer.”

In order to implement its goals, the government will need to save 56 billion crowns in 2013 which would bring the budget deficit to 2.9 percent of GDP and 95 billion crowns the following year, cutting the gap in public finances to 1.9 percent. Approximately two-thirds of the money that needs to be saved would come from spending cuts, the rest from higher taxes.

The austerity measures include a 1 percent hike in both VAT rates, higher taxes on cigarettes, energy and earnings in tax havens. People earning over a hundred thousand crowns per month –ie. approximately four times the average salary, would pay another 7 percent tax from the exceeding amount in what is being called a solidarity contribution. Pensions will grow at a slower pace, university students will have to pay “entrance fees” of 3,500 crowns for every new semester –to make up for the rejected annual tuition fees, the state will pay lower social benefits and there will be fewer tax reliefs for entrepreneurs. Extensive spending cuts will be affected in the public sphere, including a merging of some government portfolios and scrapping of some ministries.

The ruling parties say they have spread the austerity measures across the board so that all groups of the population will bear the burden. However the opposition Social Democrats, who pushed strongly for early elections in the past week, claim the government’s extended lease on life is the worst possible news for the Czech Republic. They say the savings are not as high as they are made out to be and that the austerity measures proposed will hurt the country’s already flagging growth.

Photo: archive of Czech Radio

However their chances of stopping the reforms are meager. Despite the frequent spats and upheavals, the government’s commitment to budget reform is strong and its comfortable majority in the lower house will allow it to push through whatever reforms it agrees on. Also, the parties’ low public support ratings have made early elections a highly unwelcome prospect for them all, paradoxically making the most unpopular government in modern Czech history the most stable of all.