New laws to impact household budgets

With gloomy economic outlooks and continuing uncertainty on the job market Czechs are bracing for another tough year. In its determination to bring the deficit in public finances to below 3 percent of GDP in 2013 the centre-right Czech government recently pushed through a number of crucial reforms that will impact each and every citizen.

Photo: archive of ČRo 7 - Radio Prague

2013 will be another year of belt-tightening for Czechs. Taxes on goods and services have risen by one percentage point, to 15 and 21 percent. Estimates of how much this will cost an average Czech household range between 1,000 crowns more per year and around 300 crowns per month.

Here is how Helena Langšádlová, vice-chairwoman of TOP 09 and the budget committee in the lower house of parliament, defended the new law in December:

“The choice is between taxing consumption or production. And since it is a righ-wing government, it chose to make this slight increase in consumption tax. It is of course unpleasant. No government likes to raise taxes. But this fiscal reform package was a necessary move at this point in order to consolidate public finances. The stabilization of public finances is essential for our future prosperity.”

There are other new laws, though, that will impact more than the cost of the weekly shopping. Electricity prices will grow on average by more than 2% and those using gas will be paying 4% more than last year. The cost of living will also increase for those who have been paying regulated rent. The five-year de-regulation process ended in 2012, bumping rent in some 700 thousand flats around the country, in some cases, by four times what it was before 1 January.

Petr Nečas, photo: Filip Jandourek

Self-employed individuals who claim flat tax deductions will no longer be able to get tax breaks for children or low-earning spouses.

While, people with a monthly income that is more than 4.8 times the average salary, or approximately 100 thousand crowns, will be paying an extra seven percent tax on earnings above the average salary.

Another long-debated change that is not linked to taxes is a new part of the pension system – the so-called second pillar – which will allow Czechs to place part of their government pension into private, and potentially high-yielding, accounts. Here is how Prime Minister Petr Nečas explained the need for this new measure:

“Currently there are 1.8 economically active persons for every pensioner, while in 2050 there will be 1.2 economically active persons for every pensioner. These simple numbers show that there is a need for dramatic change to the pension system; cosmetic changes are simply not enough.”

Many financial institutions said they will not offer the private pension plans as products in the new year. Some see it as useless given that the second pillar may be annulled completely in two years time, when the Social Democrats are expected to win back power.

Photo: Sebastian Schaeffer, Stock.xchng

The new savings system has not been explained very well to those who may profit from it either, so many people are skeptical about placing their money in completely private savings accounts, and will opt to keep their extra pension savings in the current government-subsidized plans.

The pension reform will by and large only impact the middle-aged and younger generations. But today’s pensioners are also facing a few unwelcome changes this year. Those who chose to work while receiving their pension will no longer be able to use generous tax breaks that have been in effect since 2008. Along with the rising energy costs and higher taxes on basic goods, this serves as another blow to the budgets of one of the most vulnerable groups in society.