Andrej Babis sets out his stall

Andrej Babis sets out his stall
Andrej Babis handing out goulash to voters while campaigning. His programme can also appeal to everyone.
By Robert Anderson in Prague January 5, 2018

Andrej Babis will seek support for his minority one-party government in a vote of confidence in the Czech parliament on January 10. After cobbling together a cabinet of ministers from within and outside his party, Babis published a programme on December 18 that is very much a chocolate box assortment of policies that could appeal to parties of either the left or the right, or both, to enable him to govern.

Critics have written it off as just a PR exercise. But it could form the basis of a full term’s legislation, if Babis tries to win support for individual measures on a case-by-case basis. Alternatively, it could be radically changed if Babis succeeds in making a formal coalition with either the left or right. Or it could be forgotten altogether if Babis repeatedly fails to win a vote of confidence or is forced to make way for another candidate because of the Stork's Nest scandal, or is allowed to carry out his threat to hold fresh elections.

Here is bne IntelliNews’ summary of his key proposals on European, defence, budget and industrial policy, plus our comment on what can really be expected:

European policy

Babis has sparked international concern with his criticism of the EU, particularly on migrant quotas and further federalisation, and his opposition to sanctions against Russia. He has also toyed with the idea of introducing a referendum bill, which has aroused fears that it could be used to call for a vote against EU membership – a real danger in what polls say is the most Eurosceptic country in the bloc.

However, the reality is likely to be much more prosaic, as was shown by Babis’ first EU summit on December 14-15, and his choice of Atlanticist Martin Stopnicky as his foreign minister. Babis wants the Czech Republic to play a stronger and more constructive role in Europe, while also opposing developments that he argues are not in the country’s interest. The Czech Republic will continue to support sanctions on Russia, and if the government passes a referendum bill, it will be specially crafted to exclude issues such as EU membership.

As finance minister in the previous Social Democrat-led government, Babis often attended meetings of EU ministers, more often in fact than many of his monolingual colleagues (Babis speaks excellent French and good English and German). Throughout the election campaign, the tycoon repeated that Czechia had to fight harder for its interests in Brussels, by sending better interlocutors, who are well briefed, and who could hammer out deals with their counterparts. His own success at this is, however, mixed, given that he failed to persuade fellow ministers to agree to use a reverse charge system to tighten up VAT collection.

Babis is not interested in picking fights in Brussels for domestic consumption, like Jaroslaw Kaczynski’s Poland, or grandstanding (and then backing down), like Hungary’s Viktor Orban. He is also no romantic on Visegrad Group unity; instead, he is likely to work closely with his countryman Robert Fico of Slovakia and perhaps Sebastian Kurz of Austria to try to reach a compromise on migrant quotas and other troublesome issues in the EU’s east-west divide. In short, he has no interest in making the Czech Republic part of the Central European awkward squad.

“What would Babis gain if he ranks third after Orban and Kaczinski?” Vit Dostal, head of AMO, said at a seminar of the Czech foreign affairs think-tank in November. “His first steps indicate that we will see a continuity with what he have seen so far.”

On the discussions over the future of the EU and other key issues, Babis will look to work with Angela Merkel’s Germany, the Czech Republic’s main economic partner, and France's Emmanuel Macron, with whom Babis has compared himself (even going so far as to claim that Macron has borrowed ideas from him). He may be able to raise the country’s profile in these discussions but analysts don’t expect that he will have the patience or the clout to become closely involved.

He will not be able to play as big a role as he would like so long as the Czech Republic fails to adopt the euro – as it committed to do in its 2004 accession treaty. He has also rejected the country attending Ecofin meetings as an observer, as proposed by his predecessor as prime minister, Bohuslav Sobotka.

Babis opposes euro adoption mainly on the grounds that the Eurozone needs to be reformed first, telling voters that they shouldn’t have to pay to bail out profligate Greeks and Italians. Subsidiary to that, he argues that an independent crown will remain a useful macroeconomic tool until Czechs become as rich as their Western neighbours.

But as a businessman, he backs the euro, and could easily decide to join the ERM II if he felt the economy would benefit. His opposition is tactical, for electoral benefit, rather than ideological. Already Babis has indicated that he will try to pass the Fiscal Compact in parliament, something he did not make a priority of during the last government, despite backing from the Social Democrats.

“The statement by Babis not to adopt the euro is not set in stone,” Vladimir Bartovic, head of the Czech think-tank Europeum told the Amo seminar. “He is a businessman and once he sees the situation when it would endanger the Czech economy or business sector then his decision may change very quickly.”

Jan Hartl, founder of sociological research institute STEM, says he could even do this without much damage to his electoral support. “He can change into a strong supporter of the EU next week and no-one would see it as a substantial change,” he told bne IntelliNews.

Defence

The government wants to increase its defence budget gradually to reach 2% of GDP by 2024-25 (beyond the next scheduled election), as recommended by Nato. No major changes in policy have been suggested, though the new defence minister, Karla Slechtova, wants to re-examine the ongoing tender for military helicopters carried out by her predecessor, Martin Stropnicky, who is now foreign minister.

Fiscal policy

Babis wants to have his cake and eat it in fiscal policy, promising to cut taxes, increase investment spending (with better use of EU funds), and run a balanced budget. Addressing a gathering of Czech chambers of commerce before the election, he said “we are convinced we need to invest as much as possible. We need to invest, invest, invest”. But he also said “we are quite convinced that it is in our power to balance the budget”.

Strong growth in recent years enabled the Czech government (with Babis as finance minister) to run a budget surplus for the first time in 2016 (and again in 2017) but growth is likely to subside over the next few years, limiting Babis’ ability to hit all of his targets.  In all likelihood, the balanced budget goal will be dropped in an attempt to reboot the tax system and supercharge investment in infrastructure. He has already said that a balanced budget “is not a mantra”.

In Ano’s programme Babis pledges to cut the basic income tax rate by 1.1pp to 19%, while keeping the upper tax band at 23.35%. This will be done by  calculating taxable income only from gross wages (i.e., not including employer social and health contributions). Employee social contributions will also be cut by CZK500 per month. VAT will be cut to 10% on some food items. Corporation tax would remain at 19% but employer social contributions would be cut by 2-5pp, the party said in a pledge that has yet to be fleshed out. Ano also hopes for tax efficiency savings from digitilising the system and stepping up the fight against evasion and fraud.

On the spending side the most eyecatching promises are to increase state pensions to 10% of the average wage (from 9%), boost teachers’ wages by 50% by 2021, and launch an infrastructure drive.

In the election campaign Babis continually stressed the need to invest more in the country’s decent but creaking infrastructure. He has also talked about rolling out high-speed internet across the country. The Czech Republic had one of the best infrastructure networks in the region when communism collapsed in 1989 but has done relatively little to improve it since, and has failed to make as much use of EU funds as neighbouring Poland or Hungary. Babis has promised to invest CZK20bn in infrastructure and build or renew 280km of motorways by 2021. He hopes to accelerate construction through a new bill on public procurement, though whether this will include the compulsory purchase of private property – the lack of which is a key obstacle – is unclear at the moment.

Industrial policy

Babis has talked about running the country like a business and it is clear that he wants to take firm control of the government in order to give the country firmer direction. Overall “there is a very big stress on using state power”, argues Sean Hanley, lecturer in East European politics at UCL in London. The state will be the driver in improving infrastructure and extending digitilisation, and Babis has even raised the possibility of renationalising the water companies.

But at the same time Babis has pledged to free private business to build prosperity. In contrast to one of the main planks of the Social Democrat campaign, Babis said businesses should be free to bring in cheaper Ukrainian workers to fill vacancies, while he ruled out sectoral taxes and criticised his former partner’s rhetoric demanding higher wages in the private sector. “Private companies should be free to act,” he told the chambers of commerce before the election. “We live on the taxes they pay, so we should not be interfering with this”.

There is clearly a tension between these two approaches, which will be played out across the sectors of the economy. One particularly contentious area will be the potential construction of new nuclear reactors at Dukovany or Temelin (or both). Babis is in favour of new reactors but has so far insisted that CEZ, the majority state-owned utility, pay for this, rather than the state. CEZ has refused to do so, given that the board could be sued by minority shareholders for undertaking a huge investment with dubious returns. Analysts expect that Babis will eventually compromise on this, once he has installed his own people on the board.

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