Cabinet unveils package of tax, spending reform

The Czech coalition government on Tuesday unveiled a package of ambitious tax reforms and spending cuts, aiming to reduce the country's fiscal deficit and prepare it for the adoption of the Euro. Among other measures, the plan introduces a flat 15-percent personal income tax and raises the lower VAT rate from 5 to 9 percent. The reform package will be presented to parliament in June. However, the centre-right government of Prime Minister Mirek Topolanek has no guaranteed majority in the lower house.

Mirek Topolanek, Miroslav Kalousek, Petr Necas, photo: CTK

The government says their reform comes at the eleventh hour. It claims that under current legislation, in 2009 state budget revenues would be lower than mandatory expenditures. The new reform package is expected to benefit the highest earners as well as those with the lowest incomes while targeting "free-riders" - as Prime Minister Topolanek called them - that is people preferring to rely on state welfare rather than actively seeking employment. The plan has been criticised from the left as being too strict on the lower and middle income classes as well as from the right as not going far enough. Jiri Dolejs is an MP for the opposition Communist Party.

"The fundamental problem of the proposed reform is that it underestimates the effect of the increase of indirect taxes on the one hand and social spending cuts on the other. That in my opinion is going to affect a substantial part of the population."

But the fiscal reform package is facing tough criticism from the Civic Democrat's own ranks. Former finance minister Vlastimil Tlusty says the result is a watered-down version of an original Civic Democrat reform proposal and he is not even sure if he will vote for it in parliament.

"At the moment I am definitely not happy with the reform. It looks like a Civic Democrat reform but it is no such thing. One single figure has been left in it and that is the 15-percent tax and everything else is different. On top of that it won't work. I would call it a mock-up, not a reform."

Economists in general agree that the reform is a step in the right direction but doesn't go far enough. Economist Tomas Sedlacek of CSOB bank lists what in his view are the shortcomings of the proposed package.

"The disadvantages are that it will not bring a serious reduction in the budget deficit. Another disadvantage is that it will be carried extensively by the middle-income workers. And unfortunately, one of the strongest disadvantages is the decrease of expenditure side of the government budget."

The current coalition government of the Civic Democrats, the Christian Democrats and the Greens would like to see the changes in place as of January 2008. The package should be presented to parliament in June where the government does not have a guaranteed majority. The opposition Social Democrats have already said they were willing to approve only individual parts of the reform, such as cuts in corporate tax, but would refuse the package if it were presented as a whole. With no secure majority in the lower house and one coalition MP already threatening to vote against the fiscal reform proposal, it seems the cabinet will be in for some tough negotiations ahead of the vote.