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Tax hikes, freeze on pensions to save Czech budget

17. 6. 2010 7:48
Finance Minister from caretaker government recommends very austere 2011 budget

Prague - Czech Finance Minister Eduard Janota presented his proposal on the Czech Republic's budget for 2011. Janota suggests that CZK 68 bil (EUR 2.6 bil) are cut next year, with the pensioners and consumers carrying most of the austerity burden.

In addition, state offices' budgets are going to be cut, and some groups such as families with children and the disabled will receive less in benefits.

The finance minister and the rest of the caretaker government is expected to be replaced soon by a coalition of three center-right parties which, after the late-May legislative election, control 118 out of 200 seats in the Chamber of Deputies.

Read more: Roadblocks to watch in Czech government talks

Read more: After election:Czechs to become Europe's reform leaders

Janota's budget „recommendation", as he calls it, is inspired by the election program of the conservative TOP 09, which is the second strongest but - in terms of fiscal austerity - the most radical party of the proposed coalition. The second-in-command of the party is Miroslav Kalousek, Janota's predecessor in the post of finance minister.

Tax hikes: not as promised

However, the „recommendation" goes against some promises made by the Civic Democratic Party (ODS), the dominant member of the coalition, before the elections. Most importantly, the ODS said it will increase pensions and will not to make any tax hikes.

Austerity measures are necessary if the Czech Republic wants to keep its deficit under 4.8 percent of GDP as promised to the EU. However, the obligation is threatened as the state collects less than expected in social insurance payments.

Freeze on pensions and VAT hike

The most surprising aspect of Janota's proposal is the freeze on pensions recommended in spite of a bill that obliges the government to adjust them to inflation. This attitude foreshadows the overall pension reform proposed by the new coalition.

Other important change is that the lower rate of the VAT will be increased from 10 to 12 percent. The treasury is going to receive CZK 14 bil (EUR 560 mil) more thanks to this measure, however it will reflect itself in more expensive food, drugs and new flats. This is going to be the third VAT hike in the last four years.

Czech households are thus going to bear a half of the fiscal austerity hardships.

Other spending cuts

In addition, the cuts will affect state offices' budgets and those who receive social welfare benefits, above all paternal leave and disability benefits. Janota wants to cut CZK 10 bil (EUR 400 mil) from each of the two sectors.

If the coalition accepts Janota's proposals, all the proposed changes will have to be approved by the Chamber of Deputies - not only the budget itself, but also the changes in tax and welfare systems.

autor: Petr Holub | 17. 6. 2010 7:48

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