Right-wing parties willing to introduce some form of progressive taxation

Although on Wednesday the cabinet approved a draft budget for 2012 envisaging a deficit of 105 billion crowns, the right wing parties have not given up pushing for an alternative proposal which would enable a more drastic reduction of the public finance deficit to 95 billion crowns. In order to give the latter proposal, envisaging a unified 19 percent VAT rate, a new lease on life TOP 09 and the Civic Democratic Party have said they are willing to consider the junior party Public Affairs’ demand for progressive taxation – albeit indirectly and for a limited period of time. Radio Prague asked Raiffeisen bank’s chief economist and former finance minister Pavel Mertlík what he thinks is behind the unexpected U-turn.

Miroslav Kalousek, photo: CTK

“I think the key problem is the state of Czech public finances: the revenue side of the budget has been developing much worse than expected this year. The projection reckoned with unrealistic economic growth of 2.8 percent and expected consumption to grow by 2.3 percent but in the first quarter there was a negative development in private consumption and the projection today is around 2 percent, way below the government’s expectations. So they are missing money in the state budget and it is highly probable that the situation will be difficult on the revenue side next year as well. So as I see it, the willingness to discuss changes in the structure of taxation is that Mr. Kalousek (finance minister from TOP 09) and his party want to increase the VAT to a unified single rate of 19 percent –from the current 20 and 10 – already next year which would definitely help the revenue chapter and he is ready to make some small compensation to the junior coalition party in the form of agreeing to some temporary increase in the degree of progression of personal income tax.”

If they should agree on a unified 19 percent VAT next year what impact would it have on the economy?

“I am quite skeptical about the outcome. Definitely as regards revenues this will make a significant contribution to state coffers – adding an extra 10 billion crowns at least, maybe more- on the other hand, it will also mean increased public expenditures because the price of foodstuffs and other basic necessities will be elevated and many people will cross various thresholds which will make them eligible for various forms of welfare benefits. So, in consequence, on the expenditures side there will be a remarkable increase and according to some estimates that we have it can swallow up roughly half of the extra revenue. So it would not be easy and it would significantly worsen the situation of many families in the Czech Republic, who are now not far from the poverty threshold. In the Czech Republic the number of people living below the poverty line is the lowest in Europe –something like ten percent of the population - but there is a large number of people who are very close to the poverty threshold on the upper side and who would very likely fall through that line and become eligible for state support. And at the end of the day the tax burden will fall on the lower income earners anyway.“

And what would a 19 percent VAT and progressive taxation do to the country’s economic growth?

“Definitely it would not support economic growth in 2012. From the longer term perspective the impact would probably be neutral, but for the first year or two it would be quite negative.”

Pavel Mertlík

So you would not advise this alternative – you would prefer the more moderate VAT hike which was approved on Wednesday –is that correct?

“ That is correct and I think there are generally good opportunities for the government to cut expenditures which are ineffective. The general level of taxation in the Czech Republic is currently something like 33-34 percent of GDP and I am pretty sure that for the time being it is appropriate, it is not necessary to have it higher. The problem is on the expenditures side where things like appropriate public procurement, reduction of corruption and a review of various expenditure programmes can help a lot. The government is simply wasting money in many areas.“