Czechs Approve $6.4 Billion Package of Tax Hikes and Spending Cuts

Peter Laca
·2 min read
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(Bloomberg) -- Czech lawmakers approved a plan to raise taxes and cut spending as the government seeks to slash the budget deficit even as households struggle to recover from the worst cost-of-living crisis in three decades.

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Prime Minister Petr Fiala’s two-year-old administration is returning to a key pledge of restraint after boosting spending on energy subsidies, defense and aid to Ukrainian refugees. The plan triggered criticism from unions when it was unveiled earlier this year and has contributed to the decline in government’s popularity in opinion polls.

Governments across central Europe are struggling to rein in spending, with investors increasingly focusing on sustainability of budget policies. Hungary, Poland and Romania are all dealing with wider shortfalls than the Czech Republic, which has traditionally been one of the region’s most fiscally prudent nations.

The lower house of parliament in Prague passed on Friday a legislative package totaling 150 billion koruna ($6.4 billion) over the next two years that should bring the overall fiscal deficit to 2.2% of economic output next year from an expected 3.6% in 2023. The shortfall will decline to 1.7% of gross domestic product in 2025, according to Finance Ministry estimates.

“My government, the entire ruling coalition, is taking action so that we don’t have to needlessly borrow more and more money, that we don’t increase indebtedness of our children and grandchildren,” Fiala told reporters after the vote in Prague.

On the spending side, the state will cut subsidies to various industries, slow pension growth, scrap many tax breaks and cut administrative costs. Revenue measures include lifting the corporate tax by two percentage points to 21%, raising VAT and excise taxes on some products and slightly increasing effective income-tax levels for high earners.

The fiscal-consolidation push and easing inflation have supported demand for Czech sovereign debt, slashing the yield premium on 10-year koruna bonds over German bunds to 188 basis points from a peak of 422 basis points last June.

The government has already imposed a windfall tax on energy industry and banks to cover part of the subsidies for households and companies during Europe’s energy crisis, although it plans to decide next year whether to scrap the special levies before 2025.

While the Czech Republic’s outstanding debt — at 44% of gross domestic product — ranks it at the lower end of European Union nations, record borrowing has outpaced most of its peers in the last three years.

“We are reversing the trend. After many years, state spending is declining,” Finance Minister Zbynek Stanjura said. “It’s high time we shift to a lower gear and start stepping on the brake.”

--With assistance from Krystof Chamonikolas and Zoltan Simon.

(Updates with prime minister’s quote in fifth paragraph.)

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