Governing Coalition Passes Budget Consolidation Package

The package is expected to save around CZK 150 billion over the next two years. Credit: Freepik.

Prague, Oct 14 (CTK) – The Czech five-party government coalition pushed the government’s consolidation package through the lower house of parliament yesterday, which is expected to balance the state finances by around CZK 150 billion over the next two years.

The package introduces a two-tier VAT rate, of 12 and 21%, instead of the current three. The lower rate will mainly cover food, while some services and draft beer will move to the higher rate.

Corporate tax will increase from 19 to 21%.

Property tax will be 1.8 times higher than now, on average.

Excise duty on alcohol will rise by 10% next year and by 5% in each of the two following years. The package does not include a tax on still wine.

The changes must still be passed by the Senate and signed by President Petr Pavel. Most of the changes are due to take effect next year.

In the 200-seat Chamber of Deputies, 108 MPs voted in favour of the package; the coalition MPs were joined by Ivo Vondrak, an unaffiliated deputy who was originally elected for ANO. His former party is in opposition and voted against the package, as did the far-right Freedom and Direct Democracy (SPD).

A total of 194 deputies took part in the vote on the closely watched draft package.

Some of the money and savings will arise from the package just passed, whereas other cuts are in the government’s power to make. The sweeping changes to dozens of laws are intended to help the government consolidate public finances and reduce the structural deficit of the state budget. Earlier, Prime Minister Petr Fiala (ODS) described the pace of debt growth as horrifying.

The government has already submitted a draft budget for 2024, which proposes a deficit of CZK 252 billion, down CZK 43 billion from this year.

The parliamentary opposition disagrees with the package. ANO says the package is unnecessary and the highest tax increase in modern history, which could raise inflation and damage economic growth. The approval of the package was preceded by many hours of debate, with dissenting speeches by opposition MPs.

ANO leader Andrej Babis delivered a six-hour speech before last month’s second reading of the package in the lower house.

ANO criticises the government for abolishing the system of electronic registration of sales (EET), and claims that the government should focus on more efficient collection of taxes.

As for the increase in corporate taxes, the government says that compared to other EU countries, the domestic rate is among the lower, and the increase to 21% will bring it closer to the European average. According to the government’s explanatory report, the increase should bring CZK 22 billion to the state per year.

Property tax will rise by 1.8 times on average, and will gradually increase in line with inflation. The entire revenue from this rise will go to municipalities, whereas the government’s original proposal envisaged that municipalities would share part of the revenue with the state. The coalition later backed away from this plan, leaving the entire proceeds to the municipalities. Instead, municipalities will lose a part of the money from shared taxes.

In the case of the VAT, the reduced rate will mainly cover food, but also printed newspapers and funeral services. Books will be completely exempted from VAT. On the other hand, hairdressing services, draft beer, and municipal waste transport and dumping will be included in the higher rate. The government says that for many of these items, which were previously at the reduced rate for reasons such as the COVID pandemic, the reason for their remaining in the lower rate no longer applies. Water will be at the reduced rate but must not be flavoured, otherwise it would fall under the higher rate.

Other items to be in the higher rate include menstrual products, firewood and derived wood fuel, as well as baby water, nappies and mineral water. On the proposal of coalition MPs, the Chamber of Deputies approved a ban on promotional campaigns for the sale of tobacco products.

Furthermore, the approved package reintroduces a 0.6% levy on employees’ health insurance.

It abolishes some tax exemptions, such as the discount on fees connected with children’s attendance of a kindergarten, and the discount for students. It restricts the allowance for a spouse with no income of their own, unless they care for a child up to the age of three.

The excise duty on alcohol will increase over the next three years. It will rise by 10% next year and by 5% in each of the next two years. The proposal does not include a tax on still wine.

Employee benefits will be exempt from income tax up to half of the average wage. For next year, this means that employees will have tax-free benefits up to CZK 21,983, equal to CZK 1,832 per month.

The maximum amount of state support for building savings will be reduced from CZK 2,000 to CZK 1,000. However, building societies will now be able to advise clients on how to obtain public subsidies for sustainable housing or renewable energy. It will now also be possible to use loans from building savings for these purposes. For example, it will be possible to co-finance a subsidy from the New Green Savings Programme.

From March 2024, the price of an annual motorway vignette will increase from CZK 1,500 to CZK 2,300. From 2025, the price will increase in line with inflation. A new option of a one-day vignette will be introduced.

Municipalities will get more money from truck congestion fines, up to 30% instead of the current 15%. Truck tolls will also now reflect the emission class of the vehicles. Emission-free trucks running on electricity or hydrogen will have a zero rate. The changes to tolls could bring in up to CZK 2 billion, according to a ministerial report today. The state collects around CZK 14 billion in tolls annually, according to the Transport Ministry.

The opposition succeeded with a single amendment, tabled by ANO MP Zuzana Ozanova. This amendment says that on-the-spot fines could in the future be imposed electronically by all administrative authorities, including municipal police, not only by the national police and customs officers.

The consolidation package, as well as planned changes to the pension system, were previously welcomed by the National Budget Council. It said they will delay hitting the debt brake, set at 55% of gross domestic product.


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