Government backtracks on pension reform funding plan

The Czech coalition government has backtracked on its plan of how to pay for an overhaul of the country’s pension system. The basic concept of the reform – the addition of private pension funds into the system – remains unchanged. Under pressure from all sides, however, coalition leaders now propose a lower hike in the value added tax than originally planned.

Jaromír Drábek

It took three articles by President Václav Klaus, one pundit said, for the coalition party leaders to change their stance on a crucial part of the government’s reform package. Yielding to mounting pressure by the president, the opposition, a number of interest groups as well as from within the coalition, the coalition parties leaders agreed on Thursday to soften a planned hike in value added tax.

Instead of introducing a single 20-percent VAT rate, as the government originally planned, the lower 10-percent VAT rate will be brought up to 14 percent in 2012. The following year, a single VAT rate of 17.5 percent will be put in place. Labour and Social Affairs Minister Jaromír Drábek explains how the difference in revenues will be covered.

“The good news is that VAT will be unified at 17.5 percent as of January 2013 which will not affect prices as much as the previously considered 20 percent rate. But the original proposal sought to lower social security payments which will not happen under the revised plan. That’s bad news for the Czech economy.”

Pavel Mertlík

To make up for the increase in prices of most foodstuffs and everything else, the government was planning to lower employees’ social security payments which are now set to remain on the same level. But according to the chief economist at the Czech unit of Raiffeisenbank Pavel Mertlík, the government has yet to fill the gap in the budget, estimated at around 30 billion crowns.

“It definitely means that state budget revenues in 2013 and onwards will be lower than foreseen with the planned 20-percent VAT rate. It will increase the deficit of both the pension system and the state budget. The government will therefore have to find new resources – either new expenditure cuts or higher taxation.”

The new plan of how to cover the costs of the pension reform comes some two weeks after Prime Minister Petr Nečas said the government would not open what he called a “Pandora’s box” of changes to the reform plan. Julie Hrstková is a commentator reporter for a leading Czech daily, Hospodářské noviny.

“Given the fact that this is one of the crucial reforms that will affect everybody and that should be put in place for many decades to come, the way our politicians are handling the issue is absolutely dilettante. It’s now quite uncertain whether any reform at all will take place, or what form it will have.”

One of the key reasons behind the government’s change of plan was pressure from the junior coalition party, Public Affairs. Faced with wavering voter support, party leaders showed little willingness to support the ambitious VAT hike. To make sure it does not happen again, the government is planning to link a vote on the pension reform package in the lower house to a vote of confidence.