Finance minister calls for measures to counter looming budget deficit

Bad news travels fast and Czechs found it splashed all over the front pages of Monday’s papers. The country’s finances are in a worse state than previously thought with next year’s budget deficit threatening to reach 230 billion crowns (12.7 billion dollars). Among the emergency measures being considered are higher VAT rates, which means higher prices at a time when many people are already skimping and saving.

Tentative forecasts that Czechs could have seen the worst of the crisis were mercilessly quashed by the country’s finance minister, Eduard Janota, over the weekend. With tax revenues down as a result of the recession, Mr Janota said the gap in next year’s budget was threatening to reach an astronomical 230 billion crowns – a figure which he said could lead the Czech Republic into a plight similar to that of Hungary.

“Given the existing legislation, which I must respect, I am not able to draw up a budget with a gap smaller than 230 billion crowns – not to mention that I have ignored calls for billions more from individual ministries above the limits we had set.”

The finance minister is calling for action and has proposed a two percent increase in VAT rates and higher consumer taxes, as well as slashing expenditures in the public sector. However the decision is not his to make. As a caretaker minister he has a restricted mandate and it will be up to the winner of October’s general election to decide how to bring down the deficit to an acceptable 200 billion crowns. With elections just six weeks away curbing expenditures and raising taxes is the last thing politicians want to talk about – but they have tentatively outlined what measures they would favour. The Civic Democrats say they would up the lower VAT of 9 percent to 12, and bring the higher VAT rate from 19 to 18, among other things which they are not yet clear about. The Social Democrats have revived their higher-taxes-for-the-rich plan, saying they would introduce progressive income taxation.

None of the proposals have won great praise from economic analysts. Aleš Michl, analyst for Raiffeisen Bank, says that the right way to handle the crisis is to focus on expenditures because trying to increase revenues at a time of recession would only prolong the economic crisis.

Aleš Michl

“I think it is not fair to increase taxes right now because of the recession. Unemployment is on the rise and people are saving for bad times, so if there were to be a tax hike I would expect another recession next year. It is very tricky to deal with the revenue part of the budget. I would suggest focusing on expenditures and save as much as possible. We only need political willingness to cut spending – for each minister to cut spending by 3 or 5 percent, that’s the only way.”

News of the country’s ailing finances has thrown a damper on upbeat election campaigning. The Civic Democrats promises of keeping down taxes and the Social Democrats pledge to give more money to pensioners if they win the elections now appear in a completely new light. It is clear that no matter who wins they will have to introduce more painful reforms to prevent the country’s debt from spiraling out of control. Shadow ministers are now working around the clock to revise their state budget proposals for next year and campaign managers are looking for ways to sweeten the pill. Political commentators say that were it not for the fact that there is a non-affiliated, caretaker cabinet in office news of the country’s economic problems would have been kept under wraps until after the elections.