Government Releases Austerity Budget Package Aimed At Saving CZK 150 Billion In Two Years

The government hopes its consolidation package will reduce the state budget deficit by CZK 94.1 billion next year, and by a further CZK 53.4 billion in 2025. Photo credit: CG / Brno Daily. 

Prague, May 12 (CTK) – The Czech cabinet yesterday presented an austerity budget aimed at saving CZK 150 billion in two years, which the government says is necessary to consolidate the public finances. Among the measures announced were an increase in the corporate tax rate from 19% to 21% as of 2025, a rise in property tax, and tax hikes on tobacco, alcohol and gambling.

Social insurance contributions will be increased for self-employed people, and the state will reintroduce sickness insurance for employees.

The two lower VAT rates of 10% and 15% will be replaced with a single rate of 12%. As a result, VAT on medicine, food and housing will drop by three percentage points, said Finance Minister Zbynek Stanjura (ODS).

The only exception to these rates will be the zero VAT rate on books, Stanjura said, adding that the VAT changes will leave an extra CZK 6.3 billion in people’s pockets..

Gluten-free products, water and sewerage charges, heating, passenger transport, accommodation and catering services except draught beer, tickets for cultural and sporting events, magazines, medicines, construction work for housing, foodstuffs, child car seats and funeral services will remain at the reduced VAT rate, Stanjura said.

Other items that were previously in one of the reduced rates will be moved to the basic rate of 21%.

The corporate tax increase will bring CZK 22 billion extra to the state after it is increased in 2025. According to Stanjura, the rate adjustment will bring the Czech Republic close to the EU average. The increase of two percentage points will go to the state budget under the new tax budgeting arrangement.

Property tax will be doubled, with part of the revenue going to the state, expected to bring in around CZK 9 billion next year and CZK 300 billion in 2025.

Stanjura stressed that even after the increase, the contribution of property tax to the state budget will remain well below the average for Organisation for Economic Cooperation and Development (OECD) countries.

Taxes on tobacco, alcohol and gambling will bring in an extra CZK 10.9 billion over two years, most of it next year.

Taxes on cigarettes, smoking tobacco and cigars will rise by 10% next year, and by 5% each of the following three years. Tax on heated tobacco will rise by 15% a year, and nicotine sachets and e-cigarette refills will now also be taxed.

The lower tax rate on gambling will increase to 30% from the current 23%. Tax on alcohol will increase by 10% next year and by 5% each of the subsequent three years,

The package will increase levies on sole traders, who will pay an extra CZK 3 billion to the state next year and another CZK 4.5 billion in 2025.

The reintroduction of sickness insurance at a rate of 0.6% will bring the state an additional CZK 11.9 billion next year and another CZK 1.1 billion the following year.

The government hopes its consolidation package will reduce the state budget deficit by CZK 94.1 billion next year, and by a further CZK 53.4 billion in 2025, with expenditure falling by CZK 78.3 billion and revenues rising by CZK 69.2 billion in the next two years, said Stanjura.

“I would like 11 May 2023 to be a turning point, and now we will be heading to lower deficits of both the state budget and public finances,” Stanjura (ODS) said.

He said the government was sticking to the principle that there must be more savings than new revenues. The forecast deficit decrease of CZK 94 billion in 2024 comes two-thirds from savings and one-third from new revenues. Cumulatively for both years, the ratio is 53% to 47%, Stanjura added.

The main part of the savings on the expenditure side is CZK 54.4 billion of cuts to government subsidies, of which CZK 45.6 billion will come in the next year. The state’s operational expenditure is expected to be reduced by CZK 11.2 billion. The cost of public sector salaries will be reduced by CZK 9.7 billion, Stanjura said.

In industry and trade, subsidy payments will be reduced by CZK 20 billion over two years, and in agriculture by CZK 10.2 billion. Subsidies in transport will fall by CZK 6 billion, in local development by CZK 2.8 billion, and in education by CZK 2 billion.

The government has also decided to abolish 22 tax exemptions, including limiting the tax rebate for a spouse caring for a child up to the age of three, and abolishing the nursery tax rebate for placing a child in a pre-school.

The government has stressed that the current range of subsidies is unsystematic. According to the cabinet, the original intention of the subsidies, to reduce regional and other disparities, has disappeared. The number of separate subsidy programs had grown disproportionately, and the costs of administration had risen along with them. According to the government, subsidies also often keep projects alive that provide no real economic benefits.

Stanjura said he would like the proposals to pass the first reading in the lower house of parliament before the parliamentary recess, and believed that the basic parameters of the agreed budget measures would not be changed there.

“However, I cannot rule out that some minor amendment will pass if the ruling coalition agrees on it,” he noted, adding that he expects these to be mostly minor changes of a technical nature.

Regarding the much-discussed pension reforms, Labour and Social Affairs Minister Marian Jurecka (KDU-CSL) said some measures were already in the legislative process, such as tightening the conditions for early retirement and adjusting the indexation mechanism for the future. He expects this part to be approved in the autumn.

Adjustments to the minimum payment for self-employed workers and limits on the payment for contract workers will be part of the overall tax package. The remaining part of the reform should be discussed by the government in the second half of this year and by the parliament in the first half of 2024, Jurecka said. The timetable for the reform, he said, envisaged a full implementation after 1 January 2025.

“We want a state that redistributes less; a total of 70% of the savings are made by abolishing subsidies, especially to the business sector,” he noted.

Budget revenues will increase by CZK 69.2 billion over the next two years, including CZK 31.7 billion next year. The main contributor to revenue growth will be an increase in corporation tax to 21% from the current 19%, which will generate CZK 22 billion for the state, though this will not be visible until 2025.

This year, the state is forecasting total revenues of CZK 1,930 billion and expenditures of CZK 2,220 billion. The deficit is expected to be CZK 295 billion. Last year, the budget ended with a deficit of CZK 360.4 billion.

The state budget ended in a deficit of CZK 200 billion in April, the deepest April deficit since the Czech Republic was founded in 1993.

The austerity package was rejected by the opposition and trade unions.

Karel Havlicek, first deputy chairman of the opposition ANO, described the measures presented yesterday as an execution of tradesmen, and said the cabinet would also “rip off” pensioners. However, ANO will support higher taxation of gambling and tobacco and measures to support demanding professions.

Havlicek, formerly minister of transport and industry and trade, said that the budget would make businesses less competitive. “Higher income taxes will lead to greater optimisation, and the reduction in compensation for the emissions nonsense that this government has supported in the EU is also hard to believe,” he noted.

“VAT could have been worse, but I don’t understand the operation at all. Goods will not get cheaper, the state will lose lots of billions,” he said.

Josef Stredula, chairman of the Czech-Moravian Confederation of Trade Unions (CMKOS), said changes in the government’s consolidation package were aimed against employees and their families as well as pensioners.

He criticised the fact that unions had not been given details of the reform, and said he expects the government to discuss the proposals with the unions at Monday’s tripartite meeting. He said government officials were not communicating fairly with citizens.

“We have not heard a word about how the government will reduce inflation; the proposals that are being brought will increase inflation,” Stredula said.

He also argued that the reclassification of some items to a lower value-added tax rate would not result in reduced prices for the final consumer.

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