You can’t have everything, sometimes desperate parents say as they face the escalating demands and desires of their children. Prime Minister Andrej Babiš, with his approach to budgetary policy, is not really helping these parents. The idea of a branch pointing to a screen with a prime minister speaking with a reproachful “but…” can be a nightmare for many fathers and mothers.
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While the fiscal policy planned for the 2021 election year itself may become a nightmare for economists and its consequences in turn, a taxpayer’s nightmare.
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The first meeting on the state budget for 2021 took place at the Ministry of Finance. And during it, Babiš decided, in spite of everything that his parents certainly told him at the time, that he could have everything.
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The “priorities” for the Prime Minister are three things – the abolition of the super-gross wage (meaning a reduction in income tax), an increase in pensions and investment. This approach to “priorities” has long been fascinating not only for Babiš. When you put these three things together, you don’t get any “priorities”, something you need to focus on more than anything else. On the contrary, you get everything – definitely all the ways in which state finances can be burdened.
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The tax reduction will leave a hole in the budget of tens of billions of crowns from year to year due to a loss of revenue. If Babiš’s wish is fulfilled and the rate of 15 percent of the gross wage passes, it can be up to 90 billion.
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By contrast, raising pensions by tens of billions will raise budget spending. Because the race to add more to pensioners beyond the legal framework is not over, we don’t know exactly how many tens of billions it will be.
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And finally, there are the popular ephemeral “investments”, which can be, according to the government, anything from important transport constructions to throwing money out the window – Havlíček, the bi-minister, would like to send 120 billion into roads and railways for now. Chief government athlete Milan Hnilička wants billions for “sports”, which are probably those hockey halls from the National Investment Plan that the mayors of the affected municipalities do not yet know that they actually want. In the broad sense of the Minister of Labor Jana Maláčová, there are also “investments in people”, for which, for example, salary growth in the state administration can be hidden.
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Some sensible strategy to look for with a magnifying glass. Perhaps except for the election.
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Civil servants and retirees are key voter groups for the government coalition. By reducing the income tax, the prime minister would probably also like to meet the working middle class, perhaps the future coalition with the ODS (whose old proposal he shamelessly copied), but the words of the Minister of Finance about the need to introduce a progressive tax rate do not go well together. Just confusion.
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The spell “with the help of economics” no longer works at all. None of the “priorities” that Babiš presented at the beginning of the budget negotiations help the economy – perhaps with the honorable exception of some concrete in which, if it is poured in the right place, there is still some return.
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Raising pensions is not helping the economy, it is just a pleasure for one group of voters and a structural burden for the already poor public finances. The same applies to the reduction of income tax, although the scope is wider here. However, even economists whom the government sometimes listens to from time to time – for example Danuše Nerudová or people around CERGE – point out that income taxation is not the main problem in the Czech Republic.
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A lower personal income tax will not reduce the extremely high contribution burden on labor. Low-income groups will not get anything from the abolition of the super-gross wage, because today, thanks to discounts and bonuses, they no longer pay any income tax. Employers, who every “help to the economy” should think of first and foremost, will also save nothing on lower employee taxes. Businesses – as well as the poorest employees – would only benefit from a reduction in mandatory social or health benefits. But unlike the income tax, no one wants to mess with them.
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Overall, the government seems to be preparing something in the midst of an unprecedented economic downturn that it would like to sell as a “fiscal stimulus,” encouraging an injection into a sick economy. But instead of a well-thought-out fiscal stimulus that would work in the affected parts of the economic structure, he is simply going to spend a huge package of money without thinking of any, at least medium-term effect.
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The International Monetary Fund has published a remarkable study in which its economists have calculated that budgetary incentives, at the same level, have a significantly lower effect in economies with an aging population than where they do not have a demographic problem. This calculation is, of course, quite abstract in this respect, but with relatively clear conclusions: “Given the smaller strength of budget expenditures, a larger fiscal stimulus will be needed to achieve the desired support for demand. Incentive packages should be designed to allow for targeted and temporary spending increases in areas with a higher multiplier effect. “
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So let’s just say that raising pensions well above the legal framework is not targeted, much less temporary, and the multiplier effect is questionable at best. If the state raises tens of billions of tax revenues, it may well be that all the “anti-crisis” money from the billions of deficits will fly out of the chimney in a few years and we will just watch our debt and structural deficit grow. Which are two indicators that are also of interest to investors, who have so far lent us quite happily.
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Drawing up the budget for the year in which the parliamentary elections take place will still be a great feast for the eyes.
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