2010 budget makes tough cuts

The Chamber of Deputies approved the government's anti-crisis austerity budget Sept. 25, cutting the 2010 forecasted state deficit from 230 billion Kč ($13.5 billion) to 162.8 billion Kč, or 5.2 percent of the gross domestic product (GDP).

The measures now face the Senate, which will debate the package either Oct. 5 or 6, Senate Chairman Přemysl Sobotka said Sept. 25. Sobotka also told the Czech News Agency (ČTK) he believes a majority of senators will approve the measures.

"I expect reason to prevail even if there will certainly be criticism," he told ČTK. "However, if something like a cuckoo in the nest appears, we will protest."

A combination of tax hikes and spending cuts were the final key elements of the much-debated package, and even skeptical analysts admit an approved budget is better than no budget at all. Finance Minister Eduard Janota admitted tax hikes are the biggest component of the package after the political parties had submitted their respective changes to it. The tax hikes will lower GDP next year about 0.7 percent to 0.6 percent, a necessary cost in order to cut the deficit, he added.

Jan Veselý, president of the Czech Beer and Malt Association, says the 42 percent tax rise is "devastating for small breweries."

Halka Jaklová is manager for the Single Mothers program.
"Single-parent families get only minimum support from social security and the alimony they receive from the other parent, if there is any," she said. "Cutting down the parenting allowance will therefore affect this group much more than complete families."

Václav Stárek, secretary general of the Czech Association of Hotels and Restaurants, says, "Raising the tax to 20 percent - along with the current economic problems restaurants face - will bring many restaurants to the point where they will have to close down."

Raiffeisenbank analyst Aleš Michl, says, "The only way to generate funds during a recession is to cut costs."

But many of those whom the tax hikes and funding cuts will affect most - single parents, breweries, hotels and restaurants - have voiced opposition to the government's choice of economic tools and their unintended consequences.

Breweries

The austerity budget's 42 percent rise of DPH tax on beer and spirits will raise a considerable amount of capital, considering the levels of alcohol consumption in the Czech Republic. But Czech breweries, especially small independent breweries that don't have the capital backing of large international corporations, may be unable to shoulder the 15 million-18 million Kč in yearly expenses the tax increase will bring on, said Jan Veselý, president of the Czech Beer and Malt Association.

"The 42 percent tax rise is devastating for small breweries," he said. "In Slovakia, they raised the consumption tax 60 percent, and that destroyed seven out of 13 breweries."

Because grocery stores are less willing to increase prices than pubs and restaurants, the tap price of beer is likely to increase, putting many pubs at risk for less business, or at least grumpy customers, Veselý said. The only other option for breweries is to shoulder the debt themselves, which could hurt already-struggling beer producers.

Single parents

The most significant chunk of saved capital in the austerity budget comes from cutting or declining to increase social benefits to parents. New mothers and especially single mothers, 40 percent of whom live at or below the poverty level, will be unduly affected by these cuts, said Halka Jaklová, project manager for the Single Mothers program, which offers support to single Czech mothers.

"Single-parent families get only minimum support from social security and the alimony they receive from the other parent, if there is any," she said. "Cutting down the parenting allowance will therefore affect this group much more than complete families."

The one in four children in the Czech Republic who live with a single parent will likely suffer because of the cuts in support, which previously covered less than half of their upbringing, according to Jaklová. Most single mothers are usually more economically active than mothers in complete families, but, for a segment of the population where 13.6 percent are unemployed, the cut in state support will be a tough blow.

Restaurant owners

Restaurant owners in particular have been watching VAT developments closely since April, when the government first read a proposal to lower the tax from 19 percent to 9 percent. Since the caretaker government took office, however, the proposal has collected dust. The austerity budget will increase VAT to 20 percent, which will have a disastrous effect on restaurants, unless the reduced VAT takes effect soon, said Václav Stárek, secretary general of the Czech Association of Hotels and Restaurants.

"Lowering the VAT to 9 percent or 10 percent would save at least 9,000 work places in restaurants," he said. "Raising the tax to 20 percent - along with the current economic problems restaurants face - will bring many restaurants to the point where they will have to close down."

Many restaurants are already balanced on the brink of closure, with tourism down 20 percent in Prague this year, and even local patrons less likely to frequent fine-dining establishments. Because restaurants raise prices only as a last resort, and especially because price hikes during a recession are likely to result in little more than empty tables, even a 1 percent VAT increase may force many restaurants into bankruptcy.  

Analysts

Most analysts agree the best thing about the government's austerity budget is the fact that it is passed, sending a tangible sign to Czechs and foreign investors that the government is capable of agreeing on such a significant issue. But many analysts disagree about the path the government has taken to closing the budget gap. In the end, a compromise between conflicting political opinions was inevitable, and the austerity package will indeed be effective, but perhaps not efficient, said Aleš Michl, an analyst at Raiffeisenbank.

"The only way to generate funds during a recession is to cut costs. But, at the same time, we're having tax hikes," he said. "This is a pseudo-economic policy."

The price of goods and services is unlikely to rise significantly because of the tax hikes, or at least not immediately, Michl said, adding the raise in taxes is not a very efficient way to raise government capital.

"Higher taxes mean lower profits for companies or higher taxes for consumers," he said. "It's not very efficient, and I think those who are affected are right to complain."

Stephan Delbos can be reached at
sdelbos@praguepost.com