Cabinet approves budget outline

The Cabinet has agreed on the fiscal outline for the 2012 budget, setting the scene for a fresh round of interministerial and cross-coalition rancor over where to make cuts in public spending once ministers return from a two-week holiday.

Under the supplement to the coalition agreement added by the governing parties - the Civic Democrats (ODS), TOP 09 and Public Affairs (VV) - a special group of experts is to examine how much funding to allocate to individual departments and services next year.

Draft budget proposals are then expected to emerge sometime in August, kick-starting what Foreign Affairs Minister Karel Schwarzenberg has predicted will be "a war" over the inevitable cuts in what is certain to be another budget characterized by sharp austerity measures.

Finance Ministry spokesman Ondřej Jakob told The Prague Post more detailed information on the budget proposals would likely emerge after the departmental consultation period finishes Aug. 5.

Declining to specify further details of when the budget would be agreed upon, Jakob would only say the negotiation process ahead in reaching the final text would conform to relevant legislation.

Under the fiscal outline agreed July 20, the state deficit will be set at 105 billion Kč, or 3.5 percent of GDP, a level 10 billion Kč higher than originally sought by Finance Minister Miroslav Kalousek.

The Finance Ministry expects the state to spend 580 billion Kč on mandatory expenditures in 2012, up from 557 billion Kč this year. Interest repayments on the state debt are to rise from 78 billion Kč this year to 82 billion Kč next year.

Leaders from the tripartite coalition agreed to revert to the reform plans on the value-added tax (VAT) to the plan from earlier this year, under which the lower rate would rise from 10 percent to 14 percent in 2012 and the higher rate would stay at 20 percent.

Both rates would then be unified at 17.5 percent in 2013.

An alternate option advocated by Kalousek would have seen VAT rates unified at 19 percent starting Jan. 1, 2012, with only books, newspapers and medicines exempted.

The minister said 22 billion Kč could have been raised by the measure, allowing the state deficit to be reduced to 95 billion Kč instead of 105 billion Kč, and for the current deficit in the state pension fund to be cleared.

"The latter variant is more ambitious. It would accelerate the lowering of the structural deficit," Kalousek said.

However, VV torpedoed this plan, which said it would not accept the measure unless the government took on its proposal for higher income tax of 30 percent on high earners of 90,000 Kč or more per month.

'Just and right'

VV deputy group head Vít Bárta told news site iDnes.cz this tax change was "a just and right thing" that would bring in an extra 5 billion Kč a year to the state budget.

"VAT clearly affects mainly the medium- and low-income groups," he said. "If this state is to raise taxes, companies and high-income groups must participate in it."

The party also wants a 1 percent rise in corporate taxes.

However, both Prime Minister Petr Nečas and Kalousek have ruled out a rise in either tax.

"I, and along with me 99 percent of economic experts, believe increasing direct taxes in a time of fragile economic growth would be economic silliness," Nečas told reporters July 19.

Ahead of the publication of detailed proposals, it has already been suggested the ministries headed by VV, Transport and Education, could be the worst hit by spending cuts in the budget.

The government is also considering making a permanent payment from its annual privatization revenue - a fund largely derived from dividends on government shares in energy giant ČEZ - into the state pension fund.

- Klára Jiřičná contributed to this report.

Bill Lehane can be reached at
blehane@praguepost.com