The Czech Government responded to the economic crisis by massive cuts at the expenditure side of the State budget, in particular by cuts in social systems, not increasing the minimum wage (the last increase was made in 2007), reduction of both salaries and numbers of employees in public services and public administration. Entirely absent are measures aimed at supporting economic growth and/or maintaining the purchasing power of the population. The Czech trade unions feel that such policies are harmful and that the measures adopted cannot lead to any success in dealing with the crisis: rather the crisis will become deeper still. Therefore, we prepared our own set of proposals the aim of which is to prevent a further increase of sovereign debt and to embark on a path of economic growth.
In the area of employment the Government has systematically reduced expenditure on the State employment policy. No projects exist that would promote the creation of new jobs. Instead, measures are aimed at reducing the existing poor level of the unemployed persons' protection. Further across-the-board cuts have been prepared in the area of the State administration and it can be expected that this would lead to a further increase in the number of unemployed. The overall situation in the labour market will inevitable become worse.
Starting from January 2012 the system of support provided to the handicapped persons was curtailed, including the financial support for their integration in the society. Employers are no longer entitled to tax reliefs related to employment of handicapped persons. The level of social protection of families has also been reduced, including more stringent conditions for supporting households with a very low income. Due to restrictive social measures families with children lost a substantial part of their former social income, in particular due to the reduction of family benefits. These measures will invariably lead to growing numbers of persons threatened by poverty and/or social exclusion.
The impact of these policies has been further enhanced by attempts to privatise public services and run them on a commercial basis, which includes the areas of labour offices, education, and health.
In these circumstances employers have put increased pressure on restriction of workers´ rights, misusing the prevailing fears of loss of jobs. Repercussions can be felt in the areas of both remuneration and working conditions.
The need to promote social dialogue and the role of basic (social) rights was accentuated by the inclusion of the EU Charter of Fundamental Rights into the primary European law. This is very significant in the Czech context; however, the Czech Government negotiated an opt-out, despite strong protests voiced by trade unions. The opt-out is expected to be confirmed at the next ratification of the Treaties (e.g. at the next EU enlargement) and Czech trade unions hope to receive full support for their stance from their European colleagues with a view of preventing this to happen.
The current state and future outlook of our country under the current conditions (fiscal pact, austerity, etc.)
The pretext for cutting off the rests of the social model (its overall level was relatively low already in the past – see international comparisons concerning expenditure on health, pensions, education, etc.) is now the Government attempt to achieve the so-called fiscal consolidation. Paradoxically, the last elections in 2010 strengthened the right-wing parties, which in turn imposed on the majority of the population the idea that the crisis was not caused by the real culprit (speculative trading implemented by banks and financial capital which was entirely separated from needs of the real economy) but, allegedly, by the profligacy of the social system – the Welfare State. Thus, saving measures within the budget are now one-sidedly directed against the poor and the (lower) middle class. At present, the middle class has not yet been pauperised to such an extent to consider organised resistance. As a consequence, low-income households have experienced more and more limited access to public resources.
The Czech economy has suffered from a long-term slump; the 2012 GDP will not exceed the level already achieved in 2008. At the same time, the existing system of public finances continues to generate a deficit of around 6 billion euro each year in spite of the fact that the consolidated tax quota is by six percentage points lower compared with EU average (33 per cent vs. 39 per cent). Given the long-term reduced economic performance (one cannot expect higher budgetary income, more realistically one can expect that the level of income will decrease further still) the Government will hardly be able to implement its ambitions of reducing the deficit of the State budget. In addition to this, there will be a significant adverse impact of the so-called pension reform. Thus the Government will be forced to adopt further drastic measures.
For these reasons the first proposals concerning the draft State budget for 2013 and 2014, which are now under consideration by the Government coalition, include a/o. an increase plus consolidation of VAT at the level of 20% (or rather 21%), introduction of other excise taxes on all types of energy consumption, change of the valuation system that was originally conceived for maintaining the purchasing power of old-age pensions, cancellation of certain social benefits for the poorest citizens (contribution towards the payment of rents, one-off benefit at childbirth). Last but not least, the measures include a planned dismissal of 24 thousands of public employees, primarily teachers (cancellation of 17 thousands of jobs in the regional school system) and policemen (abolition of 3, 5 thousands of jobs). It appears that the above measures plus possible minor accompanying measures on the income side of the budget would not create sufficient budgetary resources to cover the impact of the pension reform introduction, not considering the impending risk of the need to replace the funds, that are still available from EU programmes, by domestic resources.
The Government has landed in this desperate situation because it has not conceived reasonable economic and fiscal policies. One could expect that the above proposed measures would be accompanied by proposals seeking possible action intended to improve the present situation. In our view, the Government can choose between two possible alternatives:
- Either to halt increases of the budgetary debt and to maintain it at the level around CZK 110-120 billions. At present, it is not advisable to plan a reduction of the deficit. Maintaining a reasonable level of budgetary deficits can be achieved by strengthening of budgetary income (see below).
- The second path consists in planning further cuts of budgetary expenditure. This would be implemented in a situation of stagnant economy with no real prospect of economic growth. Certain considerations voiced by some Czech analysts on possible economic recovery are not supported by valid data on the situation of companies.
It has become more and more evident that the Government has chosen the second of the above alternatives and prefers to continue the policy of further cuts of budgetary expenditure falling for the illusion that economic growth can still be achieved in such circumstances. Such policy – as has become evident in other parts of the world – is deemed to failure. Due to problems in the real economy the developments in public finances will be sooner or later run into great problems. Introduction of ensuing changes in the budgetary policies would inevitably mean a further worsening of the social situation.
We believe that such undesirable developments should be prevented and that it is still possible to find a way out of the current difficult situation – provided that the main economic players and politicians would be prepared to co-operate in the search of feasible measures and would also be prepared to listen to the citizens' and social partners' views.
Certain proposals submitted by ČMKOS
In the present situation, we propose to consider the following reasonable steps:
1. To put off the introduction of the pension reform to a later date ensuring in this way the current level of pensions and maintenance of living standards of old people.
2. To take measures during the next two years leading to maintaining the level of the budgetary deficit at CZK 110-120 billion for the time being not trying to reduce the deficit.
No one has exerted any pressure on the Czech Government to reduce the budgetary deficit - with the exception of some Czech political representatives. The Czech economy can live with such deficit levels for a short period of 2-3 years – even if the economic situation in the EU as a whole would not improve. Maintaining a deficit around CZK 115 billions would mean that the deficit would not exceed the level of 3 per cent of the GDP. Considering the relatively low level of debt and the Maastricht criteria, this appears to be acceptable.
3. Government efforts should be concentrated towards achieving some economic growth – this being the best means how to improve the position of public finances. Part of this effort must be directed at strengthening or maintaining the level of domestic demand.
The Government should further concentrate on improvement in tax collection. More specifically:
- According to our calculation CZK 10 - 15 billion are lost each year in the collection of VAT from the sector of small businesses and craftsmen due to failure to report proceeds. We demand to introduce effective registration of proceeds - for example by cash registers. This measure would also create equal conditions for economic activities in this sector – those who are honest in trading would no longer be disadvantaged.
- Increasing the level of corporate income tax by 1 per cent, together with a substantial reduction of all exemptions leading to reduction of the tax base. In this way it would be possible to increase the effective rate of this tax by 2 or possibly 3 per cent. This would correspond to additional budgetary income of CZK 15 billion.
- Introducing a property tax: considering the situation in developed European countries it is hardly comprehensible why there are no inheritance taxes for a broad circle of relatives.
In accordance with ČMKOS calculations introduction of these measures would increase the budgetary revenue by a minimum CZK 50 billion, without any adverse impact on people's living standards or an increase of costs of living.