Czech government announces €4bn austerity package

Czech government announces €4bn austerity package
Finance Minister Zbynek Stanjura had initially rejected all tax rises. / bne IntelliNews
By Albin Sybera May 11, 2023

The centre-right Czech government has announced an austerity package to lower the state budget deficit by CZK94bn (€4bn) in 2024 and by CZK150bn in 2025.

The package includes raising the pension age, hiking corporate and real estate taxes, and most radically, increasing the tax on draught beer.

The package, called “Czechia in shape”,  was introduced at a press conference on Thursday, May 11 at 11:55 to symbolise the urgency of the need to address the ballooning public budget deficit, which has swollen because of an accumulation of measures to help businesses and individuals, first during the pandemic and then during the cost of living crisis.  

Other Central European countries such as Slovakia and Estonia are already contemplating similar packages in the next few months to keep their deficits under control as international monetary conditions continue to tighten.

The cabinet plans to achieve the savings by scaling down non-investment subsidies by CZK54.4bn and the cost of running the state by another CZK20bn over the next two years.

According to Minister of Finance Zbynek Stanjura (ODS), the tax measures will raise the state's income by CZK69.22bn over the next two years. Initially the ODS had been against any tax rises.

In his opening statements, Prime Minister Petr Fiala,  chairman of the neoliberal ODS party,  described his cabinet as “the first government in 10 years which has had the courage” to address pension reform. The comments were clear allusion to previous cabinets in which the populist ANO party of his main political rival, populist billionaire Andrej Babis, took part, and which Fiala described as “populist-socialist”.

The cabinet wants to set the pension age based on the average lifespan, Christian Democratic leader and Minister of Labour Marian Jurecka announced. Czechs will be told the pension age after reaching 50 years of age, and the cabinet expects the average pension to last 21.5 years.

Fiala also said that his cabinet is pursuing neither far-sweeping austerity measures nor reliance on available resources. Our cabinet is pursuing neither one of the radical paths,” Fiala argued. He was followed by statements from the leaders of his five-party ruling coalition.     

Marketa Pekarova, chairman of the free market TOP 09 party, referred to the measures as a “cure package” and warned that “debts are to be paid even with a high-interest rate”.

Vit Rakusan of the centre-right Mayors and Independents said that Czechia “belongs to one of the most successful countries worldwide” when measured by available standards and that to maintain this, Czechia needs to avoid the looming “debt spiral”.   

Chairman of the liberal Pirate Party Ivan Bartos stated the reforms were made so that the impact is justly balanced across the society.

Other measures include the raising of the real estate tax, which the cabinet expects will secure CZK9bn, the raising of corporate tax from 19% to 21%, which should secure CZK22bn for the state, and the raising of the annual motorway pass for personal vehicles from CZK1,500 to CZK2,300.

VAT on food will be lowered from 15% to 12%, while in a radical move, the VAT on draught beer will be raised from 15% to 21% in the country with the biggest beer consumption per capita in the world.

Head of the country’s labour unions, Josef Stredula, criticised the package, referring to it as a “deform”, saying it will take a toll on employees and their families and pensioners. “We have not heard a word about how the cabinet will lower inflation,” Stredula said at the labour union’s press conference. He also criticised the cabinet for not consulting the reform with labour unions.   

Czech state debt increased to a record high of CZK2.997 trillion in the first quarter of 2023, increasing by CZK102.2bn this year alone. The state debt for 2022 increased to 44.6% of GDP, up from 42% in 2021, making it the highest public debt ratio since the establishment of Czechia in 1993.