Senate rejects further tax hikes

The Senate on Thursday rejected one of the most controversial components of the government's fiscal consolidation package - a hike in value-added and income taxes aimed at bringing the debt in public finances under 3 percent of GDP in 2013. The proposed bill has come under fire not just from the opposition parties but also from economists and, not least, the prime minister’s own Civic Democrats who argue that it will drag the country deeper into recession.

Photo: Miroslav Zimmer

The proposed tax bill would raise the value-added tax rates by 1 percentage point to 15 and 21 percent, cancel caps on health insurance paid by employees, and also raise taxes for people earning more than 100,000 crowns per month. The government claims that increasing the tax revenue is essential if the country is to have any chance of taming the deficit in public finances.

Opposition Social Democrats counter that another VAT hike is unacceptable –in particular a hike in the lower VAT which pertains to basic necessities. Social Democrat Senator Jan Hajda:

“The lower VAT bracket pertains to food and medicaments and there is no question that a further hike would hit the lower income groups very hard indeed.”

Jaroslav Kubera

This year’s VAT hike of the lower bracket from 10 to 14 percent has further depressed already weak demand in the recession-hit economy. Consequently budget data from the first half of 2013 show that the hike has failed to deliver the expected growth in revenue. And members of the prime minister’s own Civic Democratic party have become increasingly vocal in their opposition to the planned tax hikes. Civic Democrat senator Jaroslav Kubera

“Raising taxes at a time of recession is nonsensical and counterproductive. If you are going to raise taxes you should do it at a time of economic growth.“

The country’s poor economic performance gives the senator’s words credence. The sharp drop in spending and investments has dragged the country into a drawn-out recession with the economy contracting for three consecutive quarters, while the economies of neighbouring states are growing. There are calls for the government to revise its fiscal strategy –supported among others by the Civic Democratic Party’s founding father, President Vaclav Klaus. However Finance Minister Miroslav Kalousek says there is no reasonable alternative to the present course of action.

“In order to reduce the gap in public spending to below 3 percent of GDP next year we need to take two crucial measures – increase state revenue through tax hikes on the income side and slow pension growth on the expenditures side. Without those two reforms we cannot consolidate our finances and maintain the country’s credibility on capital markets.”

Petr Nečas, Miroslav Kalousek, photo: CTK

Prime Minister Petr Necas is also standing firmly behind the government’s fiscal policy. In an interview for Friday’s Lidove Noviny he said resigning on the government’s efforts to tame the budget deficit in the interest of securing a few tens of percentage points of economic growth was out of the question and if such a decision was taken it would not be made by the present prime minister. He moreover pointed out that in other macro-economic indicators –such as unemployment and the number of people on the poverty line the Czech Republic had an edge over its neighbours.

All now depends on how much support the prime minister can muster in the lower house in order to overturn the Senate’s veto and push through one of the key components of the government’s fiscal consolidation package. If he fails to do so it would most likely mean the end of the centre-right cabinet.