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Losers

Spend-happy government's state subsidies further strain cash-strapped coffers

By František Bouc
Staff Writer, The Prague Post
January 31st, 2007 issue

ČTK
Hyundai's lead attorney Kim Do-Tomas talks about the carmaker's deal with the government in Ostrava Dec. 7.
The Czech government caught factory fever last winter when it became embroiled in a bidding war with Poland and Turkey to secure a new 28 billion Kč ($1.3 billion) automobile manufacturing plant that South Korean carmaker Hyundai planned to build in Europe.
Despite the mounting public finance deficit, the government took unprecedented steps to get the plant, which Hyundai agreed to build in Nošovice, north Moravia. It now will have to pay a hefty price for those promises.
On top of the nearly 5 billion Kč in tax breaks and incentives Hyundai will get through 2013, it will also be able to use Czech subsidies to hire staff in other European Union countries thanks to provisions buried in the agreement. This effectively means that the state will dole out paychecks for foreigners working in the Czech Republic.
“The original rules for subsidies should have been aimed exclusively at Czech citizens,” said Alžběta Honsová, a spokeswoman with the state investment agency CzechInvest. “But we have considered the fact that we are an EU member state and the subsidy can also concern staff from all EU countries.”
The finding was just the latest in a litany of state subsidies on offer from a government that will have to make drastic cuts to spending in order to lower the deficit.
The only conditions set by CzechInvest required Hyundai to employ the foreign workers on indefinite work contracts and not use employment agencies.
Hyundai has had nearly 600 job applicants coming from the north Moravian region, but also from neighboring Slovakia and Poland. The company plans to employ about 3,500 people by 2013. It remains unclear how many foreigners Hyundai will hire, but the number will likely be in the hundreds.
The announcement was met with anger by the public, and surprised many economists and industry analysts who were not even aware of the subsidy.
“It’s absurd that many small Czech enterprises are teetering on the verge of bankruptcy without receiving any support, and that not only foreign companies but also foreign workers are receiving subsidies from the funds created by Czech taxpayers,” said Miroslav Ševčík, director of the Liberal Institute, an economic think tank.
NextFinance’s chief economist Vladimír Pikora admitted the extension of subsidies to foreigners would only be justifiable if they were also permanently living in this country.
“Otherwise,” Pikora said, “such support looks rather controversial with respect to the government’s usual effort to fight domestic unemployment.”
While Hyundai is set to become the biggest incentive recipient in the near future, there are many more projects that the government has promised to subsidize from public funds.
Industry and Trade Minister Martin Říman said last spring that he would do away with selective incentives for foreign companies. However, the current government, headed by the right-of-center Civic Democratic Party, is still obliged to honor the commitments made by the previous left-leaning Social Democratic (ČSSD) governments.
“The state promised to pay 7.5 billion Kč for training, retraining and job creation last year, and the tax holidays granted to 144 companies in 2006 will cost the state another 44.6 billion Kč,” Říman said. “This is not good for taxpayers.”
Free-for-all
The government is far from selfish toward its citizens. There are a surprising number of domestic subsidies out there, many the result of last-minute pre-election amendments aimed at currying favor with voters from key demographics.
Recent freebies include 200 Kč toward mobile phone payments for disabled people, and a 1,000 Kč “crayon subsidy” for parents to buy school supplies for their first-graders.
The ČSSD pushed for a failed 7,000 Kč computer subsidy — a one-time payment to households with school-age children. The Freedom Union, which fell out of the government last spring, even tried to lobby the state to pay for people’s Internet access, saying it's a basic right.
Partly as a result, the state budget’s mandatory expenditures ballooned 70 billion Kč last year and expenditures on various welfare benefits totaled 355.1 billion Kč, accounting for nearly 9 percent of overall government spending. The state budget deficit skyrocketed from 56.4 billion Kč in 2005 to 97.3 billion Kč at the end of last year.
Prime Minister Mirek Topolánek said after forming his new Cabinet in mid-January that slashing the public finance deficit was a priority. The first subsidies that should be cut will be the crayon subsidy and also the 5,000 Kč allowance that helps pay for funerals.
Power of promises
Despite the efforts, the new Cabinet will have a difficult time cutting many social subsidies, economists predicted.
“Hardly any politician would have the courage to cut subsidies to voters, especially given the fragile political situation,” Pikora said.
“Voters have already got used to the high number of subsidies,” Ševčík added.
Indeed, a survey by the CVVM agency showed that, although people’s perception of the government’s social polices has improved, there is still a high rate of those who considered the benefits insufficient.
The poll showed that 45 percent of people believe state care is lacking. Meanwhile, 42 percent of Czechs find social policies satisfactory. Only 7 percent said they consider them excessive.
While politicians admit there is a need to restrict government spending, many continue to come up with more subsidies.
A group of deputies recently pitched a bill that would give retired medal-winning Olympic athletes 20,000 Kč per month on top of their regular pensions for the rest of their lives. The bill has yet to be discussed in Parliament.
ČSSD deputies also proposed in mid-January that the state pay alimony to low-income families where fathers fail to make the payments themselves.

František Bouc can be reached at fbouc@praguepost.com


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