Ministry of Finance puts onus on cuts to curb budget deficit
The Czech Republic has been praised by the European Commission for the steps taken so far to curb its burgeoning budget deficit. Now a new wave of tough austerity measures are being drawn up by the Finance Ministry to help push the deficit below the magical 3.0 percent mark. We look at the praise so far and the pain in store.
The Czech Republic was picked out as a bad pupil in the school of European budgetary discipline last December when the European Commission launched procedures against it for running an excessive budget deficit. Blamed and shamed, it was allowed to rejoin the class after promising to mend its ways by 2013 by pushing the deficit to below 3.0 percent of Gross Domestic Product.
The praise is welcome, but the Czech Ministry of Finance is already drawing up the steps that will allow it to progressively cut the deficit by around one percentage point in each of the next three years to get below 3.0 percent of GDP in 2013.
The business daily, Hospodářské noviny, outlined how the ministry is intending to reach that target next year through a package of tax increases and savings amounting to 68 billion crowns, around 3.3 billion US dollars.
That higher target has been set because ministry officials have already had to put a more pessimistic gloss on expectations of government earnings and spending to take account of the evolution so far this year.
Just under two-thirds of the 68 billion crown target would be made up by savings on state spending with the remainder from tax increases.
Some of the main savings would come from halting work on new motorways and rail links and cutting the costs of their ongoing upkeep, an across the board 5.0 percent cut in spending by ministries, freezing pension payments at current levels and some cuts in social benefits and family allowance.
On the revenues side, the lower level of Value Added Tax would rise to 12.0 percent from 10.0 percent; tax rates for the rich – those earning more than 140,000 crowns a month – would more than double to 31 percent; and tax perks across the board would be cut or abolished.
The newspaper reckons increased taxes on high earners and the cuts in family allowance could run into problems with the three-way coalition looking to form the next government. But, the other measures should sail through.
Pavel Mertlík is a former Social Democrat Minister of Finance and currently chief economist with Raiffeisen Bank’s Czech operations. He says spending cuts or tax rises are necessary given the growing reliance of the government on borrowed money to cover its costs.
