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December 1st, 2008

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Hard sell

Topolánek may look to EC warning to push social spending reforms through Parliament

By Riva Froymovich
Staff Writer, The Prague Post
June 6th, 2007 issue

KURT VINION/THE PRAGUE POST

Prime Minister Mirek Topolánek has said he will resign if the Cabinet's deficit-trimming reforms do not pass Parliament. enlarge

The European Commission has provided the fuel for Prime Minister Mirek Topolánek’s mission.

Ahead of the first reading in the lower house of his finance reform package, approved by the Cabinet May 23, the European Commission (EC) has censured the Czech Republic for its deepening budget deficit. Topolánek’s Civic Democrats will likely wield the EC’s “yellow card” as evidence that the reforms must be passed for the health of the national economy and the country’s entrance into the euro zone.

“The whole package of economic reforms is necessary because of the state of our economy. … We have no other chance,” said Martin Horálek, spokesman for the Christian Democrats (KDU-ČSL), a member of the ruling coalition.

The EC issued the warning to the Czech Republic on May 30 for allowing its deficit to rise to 3.3 percent of the gross domestic product (GDP) — above the nation’s 2008 goal of 3 percent of GDP. Should the country fail to meet its mark come December 2008, the EC may place a freeze on billions of euros of funding that boosts GDP more than 8 percent, according to a study published by the EC May 31.

The European commissioner for economic and monetary affairs, Joaquín Almunia, blamed the rising deficit on increased spending for social services pushed through by the Social Democrats (ČSSD) ahead of last year’s election.

Political observers say Topolánek — who recently expressed regret for not sufficiently scaring the country into acquiescence to the reforms — is likely to use the criticism to boost his argument that a cut in social spending is necessary.

The state’s mandatory expenditures have increased more than 100 billion Kč ($4.7 billion) in the past two years, the government has said. In 2006 alone, 34 billion Kč was spent on social benefits, and that number is expected to increase to 48 billion Kč next year, according to the Czech News Agency.

The Cabinet says the proposed measures will save the government billions of crowns.

The reforms include a higher value-added tax on goods such as food and medicine, a 3 percent annual cut in public-sector employees, and the termination of subsidies and tax relief that workers have come to see as their right. Ministers want to stop the automatic indexation of social benefits, rework unemployment payments to motivate job hunters, and introduce healthcare fees — 30 Kč per doctor’s visit, 60 Kč for each day in the hospital and 90 Kč for each emergency visit, all with an annual out-of-pocket spending cap of 5,000 Kč.

Many in the lower house have voiced their disapproval. The mixed political composition of the Chamber of Deputies suggests a simple blessing to move ahead with the spending cuts is unlikely.

“We are almost 100 percent sure that no ČSSD deputy will raise their hand for this reform package,” said Jiří Paroubek, ČSSD chairman. The reform will bring “some kind of improvement to only 5 percent of the population,” he added, “and I don’t have to tell you that these 5 percent are also the richest people here.”

Moreover, most of the changes to social subsidies face broad public disfavor. The public seems caught between its economic future and a social system steeped in history.

“According to public opinion research, people don’t support such reforms or fear this reform,” said Vladimír Prorok, a political scientist at the University of Economics in Prague.

The Czech Patients’ Association said it would fight the implementation of healthcare fees all the way to the Constitutional Court.

The association also plans to join a protest of the reforms by the Czech-Moravian Confederation of Trade Unions (ČMKOS), planned for June 23 in Prague.

“We are expecting a minimum of 100,000 dissatisfied citizens there,” said Luboš Olejár, the association’s president. “We will see whether our guess that this Cabinet will resign by Christmas will prove to be true.”

Topolánek has said he would resign if the reforms are not passed.

The prime minister was already forced to give up on eliminating subsidized transportation for transit system employees and pensioners. The deputy head of the Association of Autonomous Trade Unions, Jaromír Dušek, charged that even Hitler didn’t attempt to take free travel away from rail workers.

Despite these popular protests, the demise, or at least abatement, of these subsidies is inevitable, according to economists.

The government has warned about high social-service spending for more than five years. Since no reforms have been passed, people think they are not essential, said Markéta Šichtařová, director of Next Finance.

In fact, Šichtařová said, the reforms are probably all bundled into a single package, a “marketing strategy” to sweep them through all at once so that “the media wouldn’t point out unpopular details.

There is no public document readily available to the media detailing the reforms.

However, the European Union won’t be giving the country the boot if the reform is not passed, although such a result could further delay the introduction of the euro here, Šichtařová said.

After all, there are EU member countries with equal or worse deficits, she said, such as Poland, Hungary and Italy.

“We shouldn’t do this reform because of the euro. We should make this reform because of ourselves,” Šichtařová said.

“The fact that we have a public finance deficit is a result of the ineffectiveness of the economy. It’s ineffective because too many public resources are wasted,” she said.

Lowering social subsidies and changes in the tax system “must come together,” Šichtařová said. “This is not necessarily the way to become more European,” but it is the way to become a more effective economy.

And the public will just have to get used to it.

“No one would expect that these benefits would stay free forever,” she said.

— Hela Balínová and Naďa Černá contributed to this report.

Riva Froymovich can be reached at rfroymovich@praguepost.com

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