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Bigger tax cuts thanks to crisis

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In response to the financial crisis, Prime Minister Mirek Topolánek has come up with an extensive reduction of taxes and mandatory insurance payments, which, in some points, goes further than the load of reforms introduced last year.

The new set of measures includes cuts in taxes and insurance for businesses, an increase in pensions and wages for public servants, and a surprising new element in the financing of pensions: People can send 1% of their social insurance payments directly to their parents’ pension account. Labour and Social Affairs Minister Petr Nečas said such a change would lead to higher pensions for people with more children. By contrast, childless tax payers would pay 1% more.

Apart from completely new items, Topolánek incorporated some measures he has been fighting for for a long time – including a 1.5% cut in social insurance for employees, a proposal he failed to push through the lower house last week owing to an insufficient number of votes.

The government coalition faced the same problem at the Tuesday extraordinary meeting where Topolánek presented these measures. In the end, however, the expelled member of the opposition Social Democrats (ČSSD), Evžen Snítilý, supported the cabinet. If he does not change his stance, his vote could be decisive for the government during the vote on these measures.

But it is not clear yet when the government will use all of the crisis tools because ministers do not want to use them until the worst comes. The cabinet would introduce the complete block of measures only in the instant that forecasts predict an economic growth below 2%. “We have to be very careful because there is nobody to pay the debts for us,” Finance Minister Miroslav Kalousek said, adding that a risky implementation of the measures could only result in superfluous expenditures.

This is a reason why ministers on Tuesday did not want to disclose how much the block of measures would cost. “I am not entitled to say that,” said Nečas. However, if all of the proposed steps were put in place, expenditures would increase by dozens of billions of crowns. Topolánek promised that savings would cover part of the spending, but the crisis scenario also counts on a higher-than-planned budget deficit.

Some economists do not like the plan to continue implementing reforms and wait to see what would be the impacts of the crisis. “The beginning of the year will be the most difficult period, so the best would be to put the crisis measures in place as of January 1,” said David Marek of Patria Finance. But other economists rather support the government’s idea.

The opposition criticises Topolánek. “The government’s reaction is wrong and comes too late. Unfortunately, this will have concrete impacts on people’s lives next year,” said Bohumil Sobotka, shadow finance minister for the ČSSD.

“The block of measures is a mix of methods linked to the long-term reform attempts. It includes recommendations that the IMF and the World Bank give as well. It is good that the material suggests confidence in the financial sector,” said Daniel Münich, an economist with the CERGE-EI institute.

The crisis tools should also boost demand. Labour and Social Affairs Minister Petr Nečas said it should be achieved by a combination of higher wages for public servants and lower social insurance payments.

“There will be CZK 18 billion more left for households thanks to that,” Nečas added. However, it will deprive the budget of at least CZK 2.5 billion, a sum that the government wants to spend on wages to cover inflation.

The state budget, compiled based on previous forecasts for a 4% economic growth, should then open right in January and February and change as the situation will develop.

“It will be necessary to search for such careful solutions, steps and tools that would combine the above-mentioned methods and tools and that would reflect the extent of threat to our economy,” Topolánek said. He summarised the government’s strategy: to recover confidence in the financial sector, stabilize the economic environment and make it more flexible, and to provide impulses for economic growth.

Translated with permission by the Prague Daily Monitor.

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