Czech government approves austere budget and tax hikes

Petr Kučera
23. 9. 2010 17:18
Lower Chamber to vote on package in October. Government has 118 out of 200 seats
PM Nečas has a reason to smile. His coalition government controls 118 out of 200 seats in the Lower Chamber
PM Nečas has a reason to smile. His coalition government controls 118 out of 200 seats in the Lower Chamber | Foto: Jan Langer

Prague - A night full of cuts. This could be the simplest description of the Czech government's meeting that started yesterday at 6 PM and was concluded after the midnight.

In addition to cutting tax exemptions and other benefits, the ministers approved a proposal of the 2011 budget, which calculates a deficit of CZK 135 bil (EUR 5.4 bil). "The deficit of the public finances in 2011 is not expected to surpass 4.6 percent of GDP. In 2012, we want to reach the 3.5 percent, and in 2013 we aim at 2.9 percent," said PM Petr Nečas.

The Lower Chamber is expected to vote on the cuts and budget in October 2010, with the government controlling a comfortable majority of 118 out of 200 seats. In addition, it has a majority in the Senate.

However, the municipal elections in October might make things more complicated.

Read more: Economic recovery: Czech Rep lags behind Germany

Read more: Czech Republic doubles down on austerity measures

Tax exemptions under attack

As of January 2011, taxpayers will be permitted to reduce the income tax they pay by CZK 24,600 a year (roughly EUR 1,000), which means a reduction by CZK 200 - currently, the tax discount equals 24,800.

State subsidies for building savings will be decreased as well. The subsidy for the year 2010 which will be paid in 2011 will be subjected to a 50 percent tax. From 2011, this special tax will be replaced by a decrease in subvention based on a new law. However the decrease will not be 50 percent, but only one third, from the maximum of CZK 3000 to 2000.

In addition, the interests from building savings will be taxed by 15 percent. Currently, they are exempted from tax.

Birth grant only for poorer families

Another important cut is the abolition of birth grants as a universal social benefit paid to any family with a newborn baby, regardless of its social status. So far, every mother that gave birth received CZK 13,000, regardless of the number of her children.

As of 2011, the benefit will be paid only to families with net income lower than 2.4 times of the living minimum. In addition, the benefit will be paid only for the first child.

Two-year and three-year parental benefit will remain unchanged, while the four-year variant will be reduced so that the total sum paid will be equivalent to the two-year variant.

Since January 2011, unemployment benefits will be harder to get. Employees that quit will receive smaller benefit, unless he or she quits for "serious reasons". Also, those who receive compensation from their former employee will not be eligible for the benefit. However, when they no longer receive the compensation and are still unemployed, they will be eligible for the unemployment benefits of standard duration and value. In other words, their benefits will be only delayed for a few months.

Seniors who work and their income is over CZK 70,000, or three times the average salary, will have to pay taxes from their rent. This means that rents will be no longer tax-free for seniors with income over CZK 840,000 a year.

The government agreed on ending the tax exemption for photo-voltaic plants and other green energy sources. Some other tax exemptions will be abolished as well. For example, the Czech president's salary, ex-presidents' rents and MP's compensations will be all subjected to taxation.

Those who employ handicapped persons will be no longer eligible for 50 percent tax reduction.

However, the main wave of exemption-abolishing will come in 2012, whith a whole new law on income tax.

There will be also cuts in sick leaves - after two months of sickness, people will receive only 60 percent of the base, not 72 percent as before.

Employers will pay sick leave for the first three weeks, only after that the benefit will be paid by the state. Currently, employers pay only the first two weeks of sick leave.

This also means that the self-employed will be without sick leave for the first three weeks instead of two, even though they will have to pay the same social insurance as now.

The government has not decided yet on the cuts in state employees' salaries, because it wants to discuss the issue first with unions. The decision will probably be made in 14 days.

However, the government says that in 2011 it will pay 10 percent less on salaries of the state employees. And it will be up to the individual departments what measures they choose.

Labor and Social Affairs Minister Jaromír Drábek has already agreed with the proposal of unions to create a joint work group that would discuss the systemic changes to be incorporated in 2012.

The ministers also agreed to an amendment to the VAT law that would enable entrepreneurs not to pay VAT for products and services delivered to companies that have declared insolvency and have not paid for the products.  


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