According to the government proposal, next year should be a budget with a deficit of 320 billion crowns. Will it be enough?
I think a deficit of 400 billion crowns is more realistic. If the proposal does not include the abolition of the super-gross wage, which will require another 50 to 60 billion crowns, then we are already at this amount, which in my opinion is too high, and it is necessary to cut down on current expenses in particular. The government should no longer give bonuses to civil servants, but instead digitize the state administration and start laying off. These steps at the level of public administration are inevitable.
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At the moment, the costs of the coronavirus crisis are borne only by the private sector, not the public sector. This means that neither retirees nor civil servants feel anything. The burden of the crisis is not evenly distributed.
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However, if this did not happen, what would it mean for the Czechia in the long term?
Credit agencies will tolerate a high deficit later this year, but will take a much tougher position next year. At the same time, we need not to worsen the rating, which could lead to an increase in interest rates for the Czech Republic on international markets. Then we would borrow money to service the state debt much more expensive. So the state would have to spend most of its expenses on paying interest, and there would be not much left on road construction, railways or pensions.
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You mentioned the abolition of the super-gross wage. According to the proposal of Prime Minister Andrej Babiš (YES), the gross wage of employees would be taxed at a rate of 15 percent and for income over 140,000 crowns 23 percent. How do you see the impact on the economy here?
It can certainly boost demand, because people will have more money in their pockets. Technically, it is actually a saving in paying the tax. So, for example, for employees with an average wage (In the Czech Republic it is around 34 thousand crowns. – editor’s note) there will be savings of over twenty thousand crowns a year, which they will already know. The money will go partly on savings, but partly also on consumption, so the wheels of the economy will spin again. So I think it’s a step in the right direction, but it needs to be paid for.
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Otherwise, there is a risk that only one tax will be replaced by another. As part of the money collected goes to city budgets, the abolition of the super-gross wage affects not only the state budget, but also regional and especially municipal budgets. In response, cities are already raising property taxes to compensate for the loss of income from super-gross wages. So we go back to the beginning. In order to prevent one tax from being widely replaced by another, the public sector must also start tightening its belt.
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Let’s stop at the level of tax rates. The Minister of the Interior, Jan Hamáček (ČSSD), does not agree with the prime minister’s proposal, proposing a reduction in the current tax to only 19 percent. Can you compare the impacts of these proposals?
Nineteen percent is just a cosmetic change that doesn’t kick consumption as much as a cut to fifteen. In short, a reduction of five percentage points will already be counted. It will be easier for the economy to get on track before a pandemic breaks out, and the faster we will all get rich again and have to pay our taxes.
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In the near future, there is also talk of an impending bankruptcy in connection with the effects of the second wave of coronavirus. What will this mean for the next development?
Business failures are, of course, a disaster. Many of them go bankrupt because the economy closed for health reasons, but companies are often bleeding from the spring. On the other hand, if they come up with a business model that reflects a new reality, they will come to life again. Simply put, one type of company will be replaced by another. Restaurants will go bankrupt, but again we know that at the height of the coronavirus crisis, about three hundred new e-shops were born every week. So a lot of things move from the offline to the online world.
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And in what state do you think the economy of the Czech Republic is in comparison with abroad?
The damage is still adding up and it is impossible to cut the bear while it is still running through the forest. But at the moment I think that the Czech Republic is doing well. This is not so much my opinion or government’s opinion, but of global rating agencies. In recent days, they have issued evaluation reports, which also deal with the Czech Republic, and opinions are positive. They call our debt sustainable, and they also see the budget for next year as something that could contribute to the recovery. The Czech Republic remains one of the least indebted countries in the European Union. And another positive is that there was no increase in unemployment, on the contrary, its rate fell in October.
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But in discussions of low unemployment, it is often said that the government maintains it artificially through various programs. So can it be estimated when the restrictions will take effect and the biggest wave of redundancies will come? Do you think that the cabinet will try to hold this position until the parliamentary elections in October 2021?
It is offered. But if the government wants to keep unemployment low until the next election, it will cost a lot of money. I don’t think it will work and will have to let it go around the first half of next year, and then, in my opinion, unemployment will rise to about seven percent.
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