Janota's Efforts
Finance minister presents sensible economic solution and takes fire from both sides for it
Next year's public sector deficit may grow to CZK 230 billion, according to the latest Finance Ministry estimate. Such a gap, worth 6.5% of GDP, would cause a major delay in plans to adopt the euro, and the Czech Republic would be walking straight into deep economic trouble. No wonder technocrat Finance Minister Eduard Janota has proposed measures he believes would reduce the deficit to a still-high, but somewhat more acceptable, CZK 160 billion (4.5% of GDP).
Instead of praise, Janota has come under attack from both the left and right. Still, it was a good thing to describe the problem so bluntly. No politician can now afford to take lightly the minister's warning that, unless we substantially increase budget revenue and cut spending, public finance will plunge into major trouble – and with it, to some extent, so will the whole Czech economy.
Janota's package would first reduce spending through measures ranging from a freeze on growth in pensions to reducing state contributions to lavish and unneeded building-society savings accounts. The plan does not shrink away from increasing taxes (as Respekt has been suggesting for a while). It would increase VAT and the excise tax on petrol, double property tax, and tax the rich more by increasing ceilings for mandatory insurance contributions. Janota would also like to postpone a previously agreed reduction of corporate taxes.
From the menu of steps that could cure public finance, the minister has chosen those that are easier and somehow more politically correct. Many would only affect wealthy people (higher property taxes and contributions ceilings), which should appeal to the political left. Others would do what most economists suggest, namely exploit easily accessible sources (VAT and the petrol tax). Hence Janota has come up with a mix that makes economic sense while also being politically viable.
That is also why many measures are missing from the package. There is no doubt that the state now cannot afford to give away carbon credits worth tens of billions of crowns, which MPs granted mainly to the wealthy (and powerful) energy giant ČEZ. A strange mammoth order for a series of environmental cleanups is not the best cure for struggling state coffers. Overall, budgeting and public orders need more oversight from the population and the Finance Ministry.
A move towards more progressive taxation would not appeal to the Civic Democrats (ODS), but would be more transparent than a slimy game involving contributions ceilings. There is no good argument against increasing other excise taxes (alcohol and cigarettes). Lastly, the package shrinks away from proposing ecological taxes on cars, which many countries adopted long ago.
It is politically understandable that the minister is avoiding such themes as university or healthcare fees. But the country needs a clear declaration that abolishing today's medical fees is now out of the question, while tuition fees could reduce public spending on the growing number of universities.
Reaction from left and right
While Janota's proposal received criticism from all sides of the political spectrum, the attitude of nonleft parties gives more hopes that we may ultimately avoid the Hungarian or even Latvian scenario. While the proposals do not suit them (partly due to the upcoming elections), it seems the centre-right parties may take the risk and back the package. The attitudes of the Social Democrats (ČSSD) and the Communists (KSČM) offer no such hope.
To adopt the rescue measures, the ODS would have to admit that there will be no more tax cuts and that many taxes will grow – and that the party has really gone too far with its "blue chance" promises. Top 09 should be open to compromise: That party and the ODS could excuse increased taxes by stating the need to save citizens from enormous growth in public debt. Some help can even be expected from the Christian Democrats (KDU-ČSL), who before the elections will not want to be seen burdening our children with debt.
The situation is worse with the ČSSD, which previously showed plenty of tolerance toward deficits, especially temporary ones. The party's main election strategy – to tax high earners more and spare others – will not fill the coffers unless we expand the category of "the rich" to a larger proportion of the population. While some of the party's economists understand this, it remains completely uncertain if the ČSSD is open to a viable compromise. The situation in the KSČM is worse yet.
Unfortunately there is little doubt that the race against time, which will decide how much we all will pay for previous years' lack of fiscal discipline, has already started. Even if an eventual economic recovery helps the coffers a bit, the slowly increasing tax revenue will be swallowed by the growing costs of paying back carelessly accumulated debt.
Hence the time has come for politicians to face the emerging threat quickly and assertively. Given the circumstances, Top 09 strategist Miroslav Kalousek's proposal to approve Janota's package in its entirety before the elections would be not only a smart political manoeuvre, but also the best of all bad solutions.
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