Business reacts to OECD report

Once haughty defenders of the Czech economy's independent stability, politicians and economists seem more willing than ever to listen to suggestions from international economic bodies, but whether consideration translates into action remains to be seen.

The OECD's 156-page economic survey of the Czech Republic, released April 6, has taken two years to compile, years in which the domestic economy has been subject to unprecedented volatility. The Czech crown became one of the world's most quickly appreciating currencies before peaking in July 2008 at less than 23 Kč to the euro and plummeting to almost 29 Kč against the euro in early 2009. Gross domestic product (GDP) growth has also fallen significantly, from 4 percent in 2008 to forecasts of 1 percent for 2010. Most alarmingly, the budget deficit has skyrocketed from about 20 billion Kč in 2008 to 195 billion Kč in 2009.

The OECD report outlines a number of procedures to get the economy back in check, including increased governmental focus on controlling expenditures, bringing the structural balance to zero, implementing independent economic councils to monitor the budget and the economy, reforming the social spending system and decreasing corruption among businesses and public procurement.

Gurria

Michl

Šeich

Lobotka

Zámečník

Controlling expenditures

Countries trying to cut budget deficits rely on a combination of raising tax revenues and cutting expenditures. But the Czech government's 2010 budget austerity package, which aims to cut the budget deficit by 35 billion Kč, is "heavily tilted toward the revenue side," according to OECD Secretary-General Angel Gurría, who recommends that "consolidation plans for 2011 should therefore give greater weight to controlling expenditure."

According to Aleš Michl, an analyst at Raiffeisenbank, "This is the most important sentence in the OECD report."

"The best scenario would be to focus solely on expenditures without raising taxes at all. If this doesn't happen, then a 70 percent reform

through expenditure cuts - which is the inverse of Janota's package - would be feasible," he said.

Radek Ležatka, spokesman for the Finance Ministry, also stressed the importance of such measures, saying, "The Finance Ministry, in accordance with OECD, prefers decreasing expenditures rather than increasing revenues," though the political skirmish that preceeded the austerity package's approval prevented such a one-sided approach.

Bringing structural balance to zero

The OECD believes the Czech economy remained relatively buoyant in the crisis due to strong macroeconomic fundamentals and a sound banking system. But, in order to protect the economy from "future external shocks, ... an important goal for the midterm should be to bring the structural balance close to zero," Gurría said.

The government has overspent during times of economic prosperity, leading to fiscal policy that Gurría called "rather pro-cyclical." Therefore, the economic crisis caused public finance to deteriorate further and more rapidly than expected.

According to Michl, balancing the budget has been hindered by populist politics, which has made the government hesitant to cut back on spending when there appears to be no reason to do so. Like the other changes suggested in the report, a balanced budget will have to wait until after the elections, he said.

"This is a very important goal, but I don't see any political willingness to do this. It's a policy issue," Michl said. "This summer, when the first draft of the 2011 budget is released, we will clearly see whether the next government is moving toward the vision of a balanced budget."

Fighting corruption

Corruption among government officials and businesses has been a black mark on the country's record for some time, but, according to the OECD report, its adverse effects on the economy have become more pronounced than ever. Therefore, Gurría suggests there is a need "for continued vigilance against exploitation of market power by dominant players. Also, corruption - particularly in public procurement - has been highlighted as a major problem by Czech firms. Here, the government should enhance transparency and competitiveness of public tendering."

David Šeich, president of the Czech Union of Small and Midsize Enterprises, hailed these suggestions as "a reasonable challenge."

"We need to realize that the hole in the treasury cannot be filled only by constantly raising taxes," he said. "I've had the opportunity to record the reactions of some members of the union who are pleased that the OECD also highlighted the problem of differential access to employees and self-employed persons mainly in the taxation of labor and capital. This is a problem that Czech legislators still have not coped with," he added.

Reforming the social system

Pension and social payment reform is perhaps the most complicated economic reform the OECD report suggests, and one that underlies the bulk of the report's proposals for cutting the deficit and expenditures. Social payments - from unemployment benefits to pensions - make up about 25 percent of the total budget, a percentage that will rise as the Czech population ages, "putting Czech public finances under pressure over the long term," according to the report.

The OECD recommends cutting maternity payments to boost productivity and lessen gender pay gaps while cutting back on expenditures, among other reforms. The first step is "to phase out the differentiation of women's retirement ages depending on the number of children they bear," Gurría said.

According to Martin Lobotka, an analyst at Česká spořitelna, full reform of the social pension system could take up to 15 years to implement and require governmental expenditure cuts of up to 100 billion Kč, all of which highlights the necessity of a balanced budget.

"We need a budget that isn't only balanced but in surplus to accumulate resources in order to pay for the reforms we have to make," he said. "Reforming the pension system is complicated and pricy."

Reforming the social system

Pension and social payment reform is perhaps the most complicated economic reform the OECD report suggests, and one that underlies the bulk of the report's proposals for cutting the deficit and expenditures. Social payments - from unemployment benefits to pensions - make up about 25 percent of the total budget, a percentage that will rise as the Czech population ages, "putting Czech public finances under pressure over the long term," according to the report.

The OECD recommends cutting maternity payments to boost productivity and lessen gender pay gaps while cutting back on expenditures, among other reforms. The first step is "to phase out the differentiation of women's retirement ages depending on the number of children they bear," Gurría said.

According to Martin Lobotka, an analyst at Česká spořitelna, full reform of the social pension system could take up to 15 years to implement and require governmental expenditure cuts of up to 100 billion Kč, all of which highlights the necessity of a balanced budget.

"We need a budget that isn't only balanced but in surplus to accumulate resources in order to pay for the reforms we have to make," he said. "Reforming the pension system is complicated and pricy."