Social Democrats promise economic growth, more government spending, and higher taxes

The Social Democrats top all election surveys ahead of the upcoming early general election. The party, which has spent the last seven years in opposition, promises voters economic growth; they want to icrease government spending and invest more into health care, education and other fields. All this is to be paid for by, among other things, higher taxes. In this edition of Marketplace, I discuss the Social Democrat’s economic policies with the party’s economic expert and shadow finance minister Jan Mládek.

Jan Mládek, photo: Filip Jandourek

“Our aim is to undo the damage incurred by the previous right-wing government over the last seven years. They have caused the economy to fall and the GDP to decline. That was home-grown because neighbouring countries are growing, so it was not imported.

“Our economic policy aims for a higher growth which is also the answer to the question about how we want to fund our priorities. We have three sources: we believe that to bring about economic growth of 2 percent of GDP is not impossible, and 2-percent growth would bring some 25 billion crowns in revenues.

“Another source is improved tax collection. Tax evasion and avoidance is a big problem here; a British study suggests that the Czech Republic is losing 230 billion crowns on foregone taxes. We are realistic and believe that improving tax collection by 20 billion each year is not unrealistic.

“The rest should be paid for by higher taxes. We have declared that we want to re-introduce progressive taxation for individuals. We will slightly increase corporate income tax by one or two percentage point. And we would also like to introduce another corporate income tax rates for firms in the energy, finance and telecommunications sectors. The reason is that these companies operate in an oligopolistic environment with large profits, and the Czech state should participate in this more than it does now. This rate should be between 25 and 30 percent.”

You expect GDP to grow by 2 percent in 2015 – but how do you want to make sure it does? Some analysts warn of a flat recovery that could come instead of growth.

“We reject this fatalistic approach to these issues, and we have good reasons for that. When the Social Democrats formed the government in 1998, it was during the time of the Latin American and Southeast Asian crisis, and Czech GDP was also falling. But we have changed our approach to foreign direct investments. We would like to attract investment from all over, not just the EU, from Japan, Korea, China, and Russia. There are neglected opportunities: trading with China was hampered by political reasons by the previous government, and these ideological reasons were detrimental for the Czech economy.”

You personally have come under heavy criticism following your remarks at the Social Democrat congress in Ostrava earlier this year. You said self-employed people were freeloading on the system because they were paying relatively smaller contributions to the health care and pensions systems than employees. Are you planning to change this?

“From the matter-of-fact perspective, my statement was absolutely correct. It was maybe not so correct politically because I used emotional language but the problem is here, and it’s not only my opinion. The existing arrangement has been criticized by the European Commission which said we had a big unbalance between the tax burden – including social and heath insurance – of employees and other forms of employment.

“It’s necessary to do something about it, and we are suggesting introducing fiscal cash registers to monitor economic activity. There is suspicion that many companies don’t declare their turnovers and profits and hence there are big gaps in individual and corporate income tax, in VAT, and maybe even in some consumer taxes.

“We are not doing it only for the revenues but there is a mounting problem with for the self-employed themselves, in the case of social insurance. These payments go towards your future pensions, and if you contribute very little, you will get very little. So there will be tens of thousands of self-employed people who will retire with very small pensions.”

Speaking of the pension system – the previous cabinet attempted to reform it although its efforts seemed to have run ashore. On your website, you say that support for families with children is the best pension reform. Does that mean you will not try to reform the deficient system?

“Well, we believe a reform of the system is needed. But we didn’t agree with the creation of the so-called second pillar which means taking money from the public system and putting it in private pension funds.

“On the other hand, we are working on the reform of the pay-as-you-go system. Right now, we as a country have not cap for the retirement age which increases every year by two months for men and three months by women.”

So what is your plan? Will you make economically active people pay more into the system to balance it?

“We have never said that we will stop increasing the retirement age. We think there should be a limit – 67 years – and we have also reached agreement with the government on the so-called third pillar. If you want to contribute extra, you can do so in private funds, and you will get state support via subsidies and tax breaks. Here we might make some minor adjustments but the system will go on.

“We think we need a permanent debate about the pension system, and we are ready to seek wider consensus because any changes should not be pushed through by a narrow majority. These changes are done for one or two generations, not for one parliamentary term.”