Czech Left Would Raise Taxes To Control Deficit

by Ulrika Lomas, Tax-News.com, Brussels

26 August 2009

The main political parties in the Czech Republic have responded to the proposals recently unveiled by the Czech Republic's Finance Minister, Eduard Janota, which he says would allow the country to avoid being dragged by a huge budget deficit into the same fiscal trap as some of its other Eastern European peers.

Ahead of an election set to take place on October 9-10, Mr Janota has suggested that taxes should be raised in order to control a widening budget gap.

Janota proposed that the basic rate of value-added tax should increase from 19% to 20%, and the lower rate from 9% to 11%, in an effort to raise additional revenues of CZK20bn (USD1.1bn). He also proposed that a planned reduction of corporation tax from 20% to 19% should be delayed, and that social insurance caps should be raised.

In addition, he put forward plans to cut spending by CZK40bn, including on pensions and welfare.

The Finance Minister believes that, without such changes, the Czech Republic will see an estimated CZK230bn deficit – equal to 7% of GDP – in 2010.

The Social Democrat (CSSD) Party has reportedly claimed that Janota's deficit estimates are overstated, and has pledged, amongst other measures, to increase the corporate tax rate to 21%, and to replace the flat tax system for individuals with a progressive system. The CSSD would also introduce an inheritance tax to rein in the deficit, reports in the national media have revealed.

However, the party is said to have rejected proposals put forward by the Finance Minister for cuts in mandatory spending (legally required expenditure on certain programs)of CZK40bn, including on pensions and welfare.

"We assume we can get to a gap of some 170-180 billion crowns. The key would be growth in revenues, cutting mandatory spending is 'science fiction', and will be impossible to push through," CSSD leader, Jiri Paroubek was quoted by Reuters as explaining.

Another of the potential front-runners in the election, the Civic Democrat Party (ODS) has reportedly declined to provide a great deal of detail with regard to its plans for rescuing the economy, preferring to wait until after the October election.

The Czech Communist Party (KCSM), meanwhile, is said to favor the reintroduction of a progressive tax regime for individuals, and the replacement of the current corporate income tax system with a turnover tax. However, KCSM remains firmly opposed to any increase in VAT, and would seek the lowering of the 9% reduced rate to 5%, amongst other changes in this area.

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