Prague - New Czech government, sworn in less than a month ago, could very well introduce its economic reform by paraphrasing Winston Churchill's famous "Blood, toil, tears and sweat" speech from 1940.

Even though, fortunately, no blood is expected to be spilled in the country where violent rallies are as rare as mild winters, the economic reform prepared by the government is really going to deliver some hardships to Czech citizens - regardless if they are employed, unemployed, students, pensioners, or mothers with children.

Read more: New Czech government: radical reforms, no rush for euro

The reform is likely to pass through the 200-seat Lower Chamber easily, because the coalition has a comfortable majority of 118. PM Nečas argues that it is necessary for the Czech Republic to implement the measures in order to avoid slipping into the group of "countries known for not being able to solve their own problems and threatened with painful correction measures not fully under their control."

So far, all European countries have deepened their economic problems this way.

Read more: New Czech and Slovak governments: How do they match up?

In a bad company

Eurostat's data show that in 2008 and 2009, EU member states suffered from a significant reduction in budget revenues due to the global economic downturn, however the expenses remained the same or increased in order to ease the effects of the same global depression. In this way, countries such as Ireland, Lithuania, Latvia or Greece have uncontrollable budget deficits, with Spain and Portugal suffering from similar problems. 

Another seven EU countries reported decrease in revenues and increase in expenses. From these seven states, three have no fiscal problems: Denmark, Finland and Sweden. Following traditional Keynesian principles, these Scandinavian states have produced financial surpluses in the times of prosperity, and now they use them to cover their budget deficits.

Read more: Czech Republic doubles down on austerity measures

The other four countries are three strong G8 economies - France, Italy, Great Britain - and the Czech Republic. And only the Britons are in a worse situation than the Czech Republic.

Although in 2007 the Czech Republic had a balanced budget, however a budget reform was implemented in 2008 and 2009. The reform and the crisis had a cumulative effect of decreasing budget revenues, with the expenses continuing to increase on the same 5 percent pace as in the previous years. This means that the Czech public finances started to sink one year before the crisis.

Now, the Czech Republic's neighbors Slovakia and Poland have their budgets in a much better shape. 

Saving can be costly

The examples of Ireland, Italy, Lithuania, Latvia, Portugal, Greece and Spain all show one thing: saving can be quite costly.

The measures implemented by these countries in order to cut their budget deficits will also cut their economic growth - by one per cent. Some of the economies are even expected to shrink this year.

As US economist and Nobel Prize laureate Joseph Stiglitz said: "What is true for a family is not true for a country."

"A household that owes more money than it can easily repay needs to cut back on spending. But when a government does that, output and incomes decline, unemployment increases, and the ability to repay may actually decrease," Stiglitz wrote in Financial Times, commenting the cases of Greece and Spain that lost more of investors' confidence after announcing their austerity measures.

However, the same family/state analogy Stiglitz rules out as flawed is being used by the Czech government to explain the necessity of austerity measures.

"The crisis has showed clearly that living on credit in a long term is not possible neither in a family, nor on a state-level," the government says.

Foreign experts estimate that this year, the Czech economy will grow by 1.5 percent. This is a slower pace than in Slovakia or Poland, but is not different from Western Europe. The Czech Republic will follow the Estonian way of tax hikes which would enable it to keep its revenues and expenses on the same level as in 2009. In this way, Estonia managed to avoid revenue drops that affected its neighbors.

After increasing VAT, consumer and real property taxes, the caretaker government of PM Jan Fisher that ruled the country from May 2009 to July 2010 promised that this year the state revenues will be 6 percent higher than last year. In other words, the state was expected to earn CZK 70 bil (EUR 2.8 bil) more this year.

However, by July, the state revenues are on the same level as in 2009, and the Finance Ministry admitted in June that the state will receive CZK 20 bil less in social insurance payments this year. In addition, the budget is going to lose another CZK 20 bil in revenues from corporate taxes which will be cut this year. 

The government has promised to curb the deficit already this year, so the first cuts are expected to come in the following months.

In 2011, the tax revenues are not going to increase. In 2012, the state is expected to earn CZK 17 bil more. This means that the deficit will have to be saved by budget cuts.

Jobless growth scare

The Czech Republic is an export-driven country - and now it feels the downside to it. The Czech economy grows mainly thanks to exports of industrial products which have already reached the pre-crisis level.

However, the positive effects of this are not seen yet - companies do not pay taxes, nor create new jobs. The revenues grow, but most of it turns into corporate income, as the Czech Republic has reported no wage growth in the last 12 months.

The Czech Statistical Office confirms this trend. For the last six months, the number of unemployed is not growing. There are 50 thousand new entrepreneurs, but 80 thousand less employees. In addition, there are 20 thousand new pensioners. These are bad news for the budget, because entrepreneurs pay half in social security payments, and pensioners are paid their rents by the state.

High unemployment and stagnating salaries means the demand is weaker - 5 percent less than in 2007. The retail sale and construction are the sectors that suffer the most from this trend. House prices remain the same as in the pre-crisis period, and in result there are 1/3 less flats being constructed than last year.

And, in addition, the retail sale and construction is going to be further harmed by the budget cuts. The state investments are going to decrease by CZK 10 billions in 2011, Finance Minister Miroslav Kalousek plans to increase VAT and abandon mortgage subventions.

In result, the unemployment is going to grow. "In the months to come we expect it to grow moderately," Labor and Social Affairs Minister Jaromír Drábek said.

"The unemployment will decrease only with more robust economic growth, which we will see in the second half of the next year, at best," said Oldřich Körner, an analyst from the Industry Union.