Draft budget for 2015 criticized as unambitious

24-09-2014

The draft budget for next year, approved this week by the Czech government, projects a deficit of some 2.3 percent of the country’s GDP. Government officials say the budget will allow for higher public investments and hikes in public sector salaries and pensions. But critics argue the budget is unambitious, and a missed opportunity to narrow the Czech public finance deficit at a time of an economic recovery.

Photo: Barbora KmentováPhoto: Barbora Kmentová The draft budget for 2015 is the first major tool for the centre-left Czech government appointed in January, to shape the country’s economy. The cabinet is projecting a deficit of around 100 billion crowns, which represents 2.3 percent of the country’s gross domestic product.

The budget includes plans for a 3.5 percent increase in the salaries of public employees and a 5-percent hike in the salaries of security forces such as the police and army. The government has also promised to slightly raise pensions, introduce a lower VAT rate on drugs, books and baby food, and cancel fees for visiting a doctor.

Public investment, mainly in transport infrastructure projects, should also grow. While this year, some 71 billion crowns is to be spent on road, railway and other infrastructure projects, the figure for 2015 has been set at 94.4 billion.

To pay for that, the government hopes to collect more taxes and social and health care insurance which should grow by 3.2 percent in 2015 compared to this year. The cabinet’s mandatory expenditures, which is ongoing spending it is obliged to cover, is meanwhile only set to grow by 1.6 percent next year.

Prime Minister Bohuslav Sobotka, Finance Minister Andrej Babiš and other officials said the budget would help the ongoing recovery of the Czech economy by boosting household consumption. For his part, President Miloš Zeman also praised the document and said he would sign it into law when it reaches his office.

Miroslav Kalousek, photo: Filip JandourekMiroslav Kalousek, photo: Filip Jandourek But critics, such as deputy chair of the opposition TOP 09 party Miroslav Kalousek, argue the government is missing an opportunity to narrow the gap in public finances even more.

“They increased expenses by tens of billions. But these will not go on investments, which would be understandable, but on social welfare and operational costs.

“This is a short-sighted and irresponsible policy which to a great extent thwarts past efforts to heal Czech public finances. Our party will certainly not back such a budget.”

I discussed the draft budget and the government’s economic strategy with Jan Bureš, the chief economist of the ERA Poštovní spořitelna bank.

“At first glance, the draft budget is not surprising. The government expects the deficit to be around 2.3 percent of GDP, or some 100 billion crowns. That looks optimistic at first sight but I would say that given the rather fast growth projections for this and next year, the budget’s targets don’t seem to me really ambitious.”

The government does not seem to have any major concerns about the deficit as they have also raised the salaries of public employees earlier than planned. But in absolute numbers, the projected deficit is the same as this year, 100 billion, when it’s expected to reach some 3 percent of GDP. How is the government planning to fill the gap?

Jan Bureš, photo: Tomáš AdamecJan Bureš, photo: Tomáš Adamec “The government is quite optimistic about tax collection. Also, they are betting on an ongoing economic recovery of around 2.5 or 3 percent next year. So they are not that conservative in their assumptions.

“I also believe they could be more ambitious on the deficit target at a time when growth projections are high, which means they could address some of the structural problems of public finances such as the rise in spending linked to the ageing population, a high taxation of the labour force, or a low share of investment in the overall public budget.

“What the government doing now is more about boosting consumption through higher wages in the public sector, and supporting household consumption through various subsidies and higher pensions.”

What government investment levels does the budget foresee?

“I believe that now when the economy is in a recovery phase we don’t really need pro-expansionary policies to enhance growth. But I also think that the investment levels have been significantly reduced over the past couple of years, and now, I think there is room for normalization of public investment.

Photo: Jan RosenauerPhoto: Jan Rosenauer “I think the government could increase its investments even more which I think would be a better option than boosting consumption through pensions and public sector salaries.”

The government says the budget will allow for a third, 10-percent VAT rate. Critics say this will make the system too complicated, and instead suggest the existing rates should be lowered, or just one single rate should be introduced. What do you think?

“I agree that one rate would be a good solution. Having three rates will make the system more complicated, potentially creating conditions making fraud and tax avoidance easier. We must also take into account that especially smaller companies must always spend money on adapting their accounting software when such changes occur.

“When we look as the households on the other hand, I don’t believe they can save any considerable amounts because of a lower VAT on certain goods. The average household could save around 10 or 20 crowns a month so this is only a minor change which I don’t believe it worth it.”

You mentioned some of the issues linked to the draft budget, one of them being the untackled pension system. The government has scrapped a reform of the system attempted by the previous centre-right cabinet, leaving it as it is. Could this backfire in the coming years?

“Yes, I think this is a real problem. The ageing Czech population is a problem not only for the pension system but also for health care, and ignoring it is not very good, particularly since we are going through a positive economic period.

Photo: Filip JandourekPhoto: Filip Jandourek “This would be an excellent time for significant reforms, and I think we are wasting time here. I’d also like to note that the last government increased value added tax to fund its pension reform. But we have now cancelled the reform but have more or less kept the increased VAT rates unchanged, and the public budget now gets much more money from this tax than some three or four years ago.”

24-09-2014