Economic crisis - CMKOS view[1]

CMKOS Study Analysing the Present Economic Crisis

(Translation into English supported by the FES)

Summary

The study analyses the risks stemming from strengthening of economic restriction connected with reduction of taxes and social security contributions and points out the non-existence of budgetary reserves for alleviating economic and especially social repercussions of the economic crisis in the Czech Republic.

The study analyses the risks that direct taxes and social security contributions (i.e. a guaranteed budgetary source) will be reduced and the budgetary loss connected with this reduction will be substituted by higher taxation rates for consumption (VAT and excise tax). Already in 2008 this assumption did not materialise and given the expected slowdown or a downright halt of economic growth, this “compensation effect” will be non-existent. At the same time, there will be a considerable shortfall at the income side of the budget as the tax revenue will not come up.

The process of “decapitalisation” of State assets, which is already under way, will accelerate and so will gradual reduction of public activities both in the social sphere (social transfers - pensions, sickness benefits, family benefits, unemployment benefits, etc.), and in public services (such as health and education, etc). This process tends to open the way for “private initiatives” undertaken by companies and actual privatisation of these areas. The current economic crisis will thus become a useful opportunity and a pretext for implementation of privatisation plans conceived long ago. Further reduction of direct taxes and social security contributions, which the present Government plans to enforce as quickly as possible (calling it a tool to challenge the crisis) is an immediate threat to the viability of public budgets and narrows the room of manoeuvre for implementing genuine active policy measures of the Government designed to eliminate or alleviate social impacts of the crisis and for active measures to support economic growth. In a situation of economic growth slowing down there will not be enough money for either of these measures. The growing budgetary deficit and the insistence on the current policy intentions would leave the Government only with one option, as already was already signalized to the IMF mission, namely “to reduce the rates of taxation for businesses and those for social security contributions still further and try to offset the shortfall in revenue by making more stringent policies related to the volume of wages and social transfers”.

Two different processes can be distinguished in the Czech economy: the proper economic crisis imported from abroad by means of the export and banking channels and the impact of measures undertaken within the public finance reform. These two processes are of the same direction and are mutually supportive, and tend to cause a slowdown of domestic demand. For this reason, no measure designed to continue and even to accelerate the current reform and thus leading to a further slowdown of demand will be able to combat the crisis. On the contrary, it will enhance the outside adverse impact.

The study makes an analysis of the major key areas hit by the crisis: the financial sector (growing indebtedness of businesses and households, incl. ensuing risks); reduced performance of manufacturing (which lost the capacity to supply complete industrial plants and equipment); the construction sector (including the situation of developers hit by the crisis). Also analysed are implications of the privatisation of Czech banks, which are now owned by foreign parent companies. The study analyses the risk that the Czech economy is on the verge of a crisis, which cannot be compared with any previous downturns, including the slump of 1997-1998. The latter was caused by mismanagement of economic transformation at the beginning of the nineties and by faulty economic policies pursued by the Government (as well as by a wrong response made by the central bank), an additional factor being an internal political crisis. Thus the fundamental causes emanated “from within” and to start economic recovery it was sufficient to revise the Government's economic policy. In contrast to this, the present crisis is of global nature, crisis of overproduction affecting the whole world. It is a crisis caused by excess demand, which was based on speculative transactions on financial markets. This resulted in undermining the confidence in the whole financial sector, which led to a rapid collapse of financial markets and, as a consequence, to subsequent slump of demand and production.

Given the fundamental causes of the present crisis and the existing structure of the Czech industry, patterns of exports and high dependence on external demand, the possibilities to challenge the impact of the crisis by domestic measures are considerably limited. Any short-term effect can only be expected from measures designed to promote domestic demand, for example by promoting the household consumption, or infrastuctural investment from public budgets.

Long-term remedies to assist the Czech industry should be directed, in particular, towards the development of sophisticated products, support to research and development in the sector of industry as well as towards close co-operation of the capacities of higher education with industrial companies. This would bring about a more direct and rapid transfer of research results into practical implementation. For the same reason it would be sensible to provide greater support to higher education in selected technical branches and to the development of natural sciences at university level with a view of increasing the number of graduates. High priority has to be given to the development of the entire educational system, including vocational training.

At the same time, it is necessary to strengthen the diversification of Czech exports in order to reduce the present high concentration on specific territories (and thus their vulnerability). To this effect supported should be diplomatic efforts with a special attention to the export of Czech technologies.

The Government should direct its economic policies, in particular:

-          to direct all measures towards strengthening economic growth and, to the maximum possible extent, towards moderating the social impact of the crisis;

-          to strengthen measures assisting growth and not to resort to economic restriction;

-          to prevent wasting of public resources and stop with the non-sense across the board reduction of taxes and social security contributions;

-          to create strong budgetary reserves to deal with the solution of both economic and social repercussions of the crisis;

-          to get rid of sentimentality and immediately reassess all the so-called “reform measures”, which have nothing in common with the primary objective of alleviating the economic and social impact of the present crisis. Rather, the measures planned under the “reform” are bound to aggravate the crisis (the planned pension reform based on the “opt-out” system, the tax reform involving a great risk of great reduction of tax and social security contributions revenue, health reform involving the risk of reducing the present health care standards);

-          to co-ordinate more closely the budgetary and monetary policies with the Czech National Bank;

-          to immediately stop the process of privatisation of public property (in the first place in the energy, transport infrastructure and health sectors) as well as privatisation plans in the area of social transfers and public services (pensions, health and social systems);

-          to closely co-operate with social partners when developing recovery packages.

According to the study the precondition for effectiveness of any measures is a close involvement and co-operation of major stakeholders - the Government, employers and workers, both at home and at EU level.

It is necessary “to unfold a social safety net”. In this area, key measures include the following:

-          Increasing social benefits and extending the period of their payment. This applies mainly to unemployment benefits, sickness and family benefits (social assistance benefits) and allowances providing relief in acute distress situations. Equal attention should be paid to living conditions of pensioners, considering possible extraordinary valorisation of pensions.

-          Resolutely rejected should be the policy of reducing public expenditure in the area of social transfers, which is the basis of the public finance reform implemented by the Government. Large groups of the population are likely to be affected by the expected increase of unemployment, including long-term unemployment. These workers cannot be treated as individuals who refuse to work and opt for being supported by social benefits and allowances. It is not possible to tolerate that these workers, hit by the crises for which they are not responsible, would become impoverished, together with their families. One should also consider the ensuing possible increase of crime.

-          Fieldwork in the social area has to be considerably strengthened. It should be aimed at a systematic identification of persons who are in need of assistance (individuals with specific handicaps, older persons, etc.). In major cities, which are threatened by emergence of slums, social support centres should be established to counter emergence of ghettos of low-income people with all accompanying adverse phenomena observed already in some places. This would require a change of principle in the existing social systems. The policy followed by the Government was designed for a period of prosperity and has been aimed mainly at reducing public expenditure across the board.

-          Needed is also a change in the framework of housing regulations including regulation of rents. It is necessary to promote the systems of social housing and to redefine the concept of usury. A new system of refinancing of mortgages should be developed with a view of dealing with situations where, due to the crisis, people are unable to repay their debt.

-          In addition to regulation of rents the Government should consider the introduction of regulation of prices for items of basic needs, in particular the prices of fuel and energy.

-          Additional allocation of resources should also be directed at active labour market policies and employment policy as a whole.

However, a precondition for feasibility of the measures and policies referred to above is to immediately stop the present wasting of money on across the board reduction of taxes and social security benefits. Further reduction of taxes and of the consolidated tax quota, as proposed by the Government, must not be continued. It would be sensible to stabilise the tax system at 2007-2008 levels, i.e. to abolish all already approved but not yet implemented tax and social security contributions cuts and reject any further proposals in this direction.

The study invites the Czech Government to adopt the objectives formulated by the European economic recovery plan submitted by the European Commission. This is a plan developed jointly at international level, which has to be followed, sooner or later, by all Member States, unless the Governments concerned intend to digress from the main stream of social and economic developments in the European Union.

This is also the reason why CMKOS supports the requirements formulated by the European Trade Union Confederation, the heart of which is a plan in the volume of 2% GDP designed to stimulate investment in people, innovation and sustainable development. 

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