Czechs target budget deficit

The Czech government has announced plans to cut its budget deficit to below 3% of gross domestic product (GDP) next year thanks to a new package of tax reforms narrowly approved by the state’s parliament at the end of August.

The Czech finance ministry said on Monday (3 September) that it aimed to reduce the country’s budget deficit to 2.95% of GDP in 2008, which compared with earlier forecasts by the government of 3.2% next year and by the Commission in May of 3.6%. The Czech economy is expected to run a deficit of 3.9% this year, according to the Commission’s forecasts.

On 21 August the centre-right government led by Mirek Topolanek squeezed a tax reform package through the Czech parliament with a majority of only two votes. The package will cut corporation tax to 21% from 24% and introduce a new flat rate income tax of 15% next year.

A range of social welfare payments will be cut, the rate of value-added tax for food and medicine would be raised from 5% to 9% while charges will be introduced for visiting doctors.

The package has to be approved by the Senate where the governing parties have a majority and by Vaclav Klaus, the president.

But the new target will not get Prague off the hook with the European Commission. The Commission is expected to approve a new recommendation on 12 September criticising the Czech government for failing to take adequate action to cut its deficit. The Czech Republic is one of six countries currently subject to the EU’s excessive deficit procedure and faces strict surveillance of its economic performance and public finance plans.

The government is planning to submit a revised convergence programme, setting out its plans for raising revenue and spending, at the start of December. But the Commission will not decide on whether to suspend the deficit procedure until 2009 after it has seen whether the government has implemented the measures it has outlined to cut the deficit and shown that the gap can be kept down in 2009 and 2010.

The Czech government has announced plans to cut its budget deficit to below 3% of gross domestic product (GDP) next year thanks to a new package of tax reforms narrowly approved by the state’s parliament at the end of August.