Government to reel-in generous housing subsidy
As part of its proposed public finance reforms the government has decided to lower state subsidies in the area of housing. Until now all Czechs could invest safely in the savings programme, for five years before gaining back their funds and an additional 25 percent in dividends. For a two-parent, two-child family, the investment meant a gain of 90, 000 crowns. Now, the government wants to halve the received amount, and monitor closely just how the subsidy is spent.
Housing savings investments: until now a good deal for most Czechs: safe, profitable, a sure bet - it was even possible to spend the subsidy one earned any which way at all - not necessarily on a new home, or renovations, or house-hold appliances. If the government has its way that is all about to change. Under the new proposal, families will be limited in how much they can invest, no longer able to do so in their children's names, at least not before they turn 15. Families will also have to invest some ten percent more, and will only be able to receive their funds after six years, not five. I spoke to economist Daniel Munich, about what he considered to be the benefits and shortcomings of the earlier plan, and how he saw the proposed reforms. I also asked him to explain what had been the catalyst for the original savings plan in the first place:
"The initial impulse came at the moment when publicly-owned banks were in trouble and were not effective enough to provide mortgage loans and other tools to support housing and investment in housing."
In your opinion has the programme worked?
"Many Czechs started to put money aside to get this public subsidy for future housing expenditures, but only a limited number of them decided to use this money for housing. Most people planned to take the money from their accounts for any kind of other consumption."
Is there not a problem that the programme was too lenient then, in terms of how the money could be used?
"Of course. The programme is structured so that it is still very easy to use the money for many non-housing activities. In fact, the question is, why just housing? There are many other significant other needs which are not supported, so why support just housing?"
Now the government has recommended changes to the programme, cutting the subsidy roughly by half. In your opinion, is the move sufficient within the public finance reforms overall?
"These are smaller steps but these correspond to extremely strong lobbying against these changes and we should expect many new savings contracts to be established this year, because the law will apply only to newly-established contracts after January 1st. So, we can expect those few Czechs who still do not have such savings plans will do so before December 31st."
A sudden surge in people signing up - could that have a detrimental effect?
"Yes. This year the burden on the public budget will even go up."
Do you think that the system has played a positive role for many who were unable to find an apartment, or housing, in the Czech Republic's larger cities, where it is quite difficult?
"I don't think that this programme helps. Almost every Czech has a savings plan, and those who don't have it are those who have little earnings or no earnings and live on welfare... those who get this public subsidy are those average and high income people. So, this is something like regressive taxation. The rich get more from the system, which is just the opposite of what we would expect the state to do."
Daniel Munich is an economist at the Centre for Economic Research and Graduate Education of Charles University (CERGE).
