The economics of austerity under Fiala: what drives it and what’s next?
The Czech government's austerity policies under Prime Minister Petr Fiala are shaped by both economic necessity and political ideology. Rising inflation, stagnating wages, and a housing crisis have fueled public dissatisfaction, while the deficit continues to grow without significant investments in long-term economic growth. I spoke with Klára Votavová, research fellow at the Europeum Institute of Foreign Policy, to understand the impact of these austerity measures and what to expect from the upcoming budget debate, which is currently taking place in the Chamber of Deputies.
To begin, can you explain the rationale behind the Czech austerity policies under Petr Fiala's government? And, in your view, have they been successful and the goals they set out?
“It is true that the deficit of the Czech Republic has been growing among the fastest in the European Union since 2020. But at the same time, the debt is still among the lowest, to give you some context.
“The reason why the deficit has been growing so much is, firstly, that there are some mandatory expenses, such as pensions, which have been growing because of inflation. These needed to be valorized because of the high inflation of recent years, straining the budget.
“But another one – and I think it's more politically charged – is this cut in personal income tax made by the previous government led by Andrej Babiš's ANO in late 2020 but was also supported by the current main governing party, [Civic Democratic Party] ODS.
“They cut this personal income tax and lost 140 billion crowns annually to the state budget. This is highly criticized because it was not warranted; it did not help the most vulnerable people. It helped the wealthier people more actually.
“So, this is the main reason why the debt has been growing so fast since 2020. And it should be highlighted that even though [the debt] is growing we can't see many productive investments so it's not really moving the economy anywhere.
“At the same time, to speak more on politics. I think that there is a very established discourse in Czechia – especially since the financial crisis of 2010 – that we are going to go the Greek way and that we are going to go bankrupt.
“At the time of the financial crisis, the current government party, ODS, was also in government and they also designed these austerity policies then. But back then at least it was in line with the European mainstream – which now I would say is not.
“I would also say that when it comes to the main government party, the neoliberal ideology runs quite deep. So, this idea that the state should be very lean; it should be small; that we need to privatize things and deregulate is very widespread.
“So, I think one reason is this economic one but the second one is about political ideology and discourse because if you have a look at Poland they don't really care so much about the deficit like they do in Czechia.
“And about whether they have been successful, the budget [for 2025] was proposed and still the proposed deficit is very high or it's higher than it was before 2020 – when the crisis years started. [Note from interviewee: The proposed deficit is 10 times higher: 241 billion CZK for 2025 vs. 28,5 in 2019.] So, based on that metric they are probably not that successful.”
So, you're saying that the neoliberal ideology has permeated Czech thinking on this and perhaps that has a lot to do with the 90s, Vaclav Klaus's influence, as well but you're saying that it's a post-2010 phenomenon. And I know that David Cameron with the Tories in the UK had a similar line of reasoning that occupied their mind for austerity. And it didn't really turn out well, to simplify for the sake of brevity.
But I'm curious, Why doesn't Czechia tax the wealthiest class more, in your view? Would a progressive tax be a type of solution toward the strictness of austerity here?
“I think so. If you have a look at some international statistics and recommendations that Czechia is getting from the European Commission or OECD, you can see that property taxes are extremely low. They have recently risen a bit but they are still extremely low. Most importantly, there is no progression in them.
“You know you can also see that the inequality of wealth distribution in Czechia is extremely high. I think some numbers suggest that they are higher than in all of the European states (except Russia and Turkey), but as I said the property and capital taxes do not reflect this at all. So indeed, I think that we would need an overhaul of the tax system in the Czech Republic – but that's not happening.
“That has a lot to do with the fact that there is no left-wing opposition or no left-wing representation in the parliament. You either have this right-wing government or you have the populist – I don't really like the word populist – but we have this ANO party in the opposition which only tells people what they want to hear and does not offer any alternative to the neoliberal narrative. ANO was founded by this rich billionaire, Andrej Babiš. And he also doesn't have an interest in raising any taxes for himself as well.
“But I would also say that we can see recently that the power of billionaires in Czechia has increased during the energy crisis; they own the media; and I think they are becoming more and more politically important. So, I also think the government doesn’t really dare to go against them. This is what I believe is the reason.”
It's interesting that there isn't a mobilization of the left against what austerity typically is quite reasonably unpopular because people are being paid less and they're seeing less investment in the welfare state and public services. So why do you think that this isn't the narrative? Is it really just because there's no political opposition?
“I mean for me this is really disappointing because I remember when this government came into power in 2021. I was expecting that we were going to relive the period in 2010 which was a time when there were huge demonstrations in Prague. It was organized by the trade unions; Slavoj Žižek was invited; there were talks about alternative economic systems; and so forth. And that never happened this time around.
“So, I think one of the reasons is that the actors who would be able to organize have become very weak over the past 10 years. The trade unions are weak and even archaic; people are not joining them. It's mostly older people there.
“But also you know the traditional left-wing parties like social democracy are out of the Parliament currently. So, there are no powerful actors who would be able to vocalize this.
“And then, as I said, as the opposition you have Andrej Babiš. They do criticize some parts of the austerity policy. They would say, for example, that the government should not lower money going to the pensioners, but they are not proposing I would say an alternative economic policy; they are not they are not proposing the overhaul of taxes for instance which I say a thing would be necessary.
“Now that the Pirate Party is out of the government, and that the Social Democrats have a new leader, maybe we will see some more vocal criticism of austerity in the one last year before the election. But I'm also not sure that it's going to be that powerful.
“And indeed this criticism was taken over by other far-right parties or the conservative left. There is a new conservative left formation that is quite successful, it's called “Stačilo.” And at times they also do criticize some very pertinent issues like the capital outflows from the Czech Republic or that the wages are very low in the Czech Republic, etc. but they do it from, I would say, a nationalist perspective. So, they don't often criticize the billionaires, but they criticize Ukrainian refugees.”
They're finding that scapegoat. But everyone seems to be protesting right now against Fiala's government and the low wages in the public sector. Some of that is owed to inflation, the ramifications of Czechia's reliance on Russian energy exports, the housing crisis, and so forth obviously. But I'm curious, are they, would you say, responding to austerity?
Or is that not in the Czech public consciousness at the moment? Are they really thinking about those other things that the housing crisis is a result of not a low investment in housing and low building but rather too much immigration?
“I don't think specifically about housing that the narrative would be connected to migration. I think that there are two alternative narratives. Either it's because it's not that we are not building fast enough which is a right-wing narrative or the left-wing narrative would be that we have Airbnb rentals, and so on. It's probably a combination of both construction and the financialization of housing.
[Note from interviewee: The right-wing narrative is dominant, also maintained by ANO, so there is no real powerful alternative to the government in the housing question as well. And you can see that in the 2025 budget proposal, the allocation for building accessible housing was again slashed.]
“I believe that the opposition party, ANO, would again criticize it but they don't really like to propose many alternative solutions to what Fiala is doing. There is no investment in accessible housing, for example.
“But generally, I think that when it comes to austerity politics, people know that their life has become more difficult and everything is more expensive. But then they have ANO, the main opposition party, that says ‘Yeah you are right and it used to be better under Babiš and we are going to return this standard of living to you after we come back to power.’ But as I said they are not really proposing any structurally different economic policy in terms of taxes.
So, there's no noticeable difference between Babiš's tax policy and Fiala's?
“Yeah in terms of taxes, no. Because, as I said, they also designed the cut in personal income tax in 2020 together they passed, so there is no reason for Babiš to really criticize that and he's a very popular – and populist – politician so he's not going to propose higher taxes to anybody.”
You were briefly contrasting with the European community but how is this received would you say in the EU? Are they looking at Czechia as a kind of a place where the wealthier are having a better time than in France or a country with a more progressive tax rate?
“Although Czechia surely likes to paint itself as a liberal, pro-business country in the EU I don't know how much the Commission, for example, or other states think about Czechia in these terms. But looking at the EU context, there is geopolitical competition increasing in green and digital technologies, the race with China, the race with Russia, and the US.
“I think that on the European Union level in general there are these calls for more public investments and private investments into the economy. You recently had a [Mario] Draghi report for instance that suggests that the EU really needs to invest approximately 800 billion euros more into its economy per year – which is a huge number. This is so you can compete and you can develop your cutting-edge technologies, and so on. But the austerity policies of the Czech Republic goes against this, with their austerity policies, completely.
“At the same time, in the EU there are still these divisions between the more austere countries of the north, including Germany and, for instance, France. So it's also not that easy. I'm not saying that the Czech Republic is completely alone in still liking austerity policies. But I do think that in 2010 it was even more widespread in the EU, and now it's less.
“And I think one of the biggest problems of the Czech austerity policies is that it's not considering the global context.”
And then that question is, according to Draghi's report, if you don't have innovation and if you don't want to compete with China and the U.S. and renewables and EVs and so forth, how do you balance that tradeoff of having investment but not increasing the deficit and not increasing taxes? So it really is a question of how would you say, how would Czechia want to be competitive?
“I don't think that there are that many thoughts about these industrial, economic, structural changes and dilemmas. I think that the narrative here is a lot that the Green Deal is really endangering the Czech economy, also because of our reliance on cars and that we would, for instance, like to reverse the ban of combustion engines and so on. So I think that's a big question. So I would say that the discourse is quite backward; we want to return somewhere or we want to keep how it is now.
“The problem also is that the problem of the Czech Republic is that we are in this middle-income trap that we are still lagging behind Western states in terms of wages. And we are also very dependent on their industry. So the headquarters of companies are not based in the Czech Republic. So we are also not really deciding about anything. All the decisions are being made in Germany.
“And if you want to escape the middle-income trap, there are examples from, I don't know, Southeast Asia that you really do need to invest, that you need to identify your niches and invest there.
“And this debate here is not really happening. Also, one problem of the Czech budget is that over 90% of its current composition is for mandatory expenses. So, forcing that you need to pay every year the social benefits and pensions, and so on. And you don’t have any space in the budget to actually invest in things that are important for the development of your industry.
“I think that this is the big problem of the Czech Republic that we are not looking forward and instead maintain things as they are.”
