Czech Republic doubles down on austerity measures

Czech Republic doubles down on austerity measures

Prague – A reform package prepared by the German government of Chancellor Angela Merkel is the most austere in the country’s history. However, the reforms would still appear rather „soft” for

The federal government of Germany plans to save EUR 11 bil already by the end of 2011. By 2014, the overall cuts in public spending are expected by the German government to equal EUR 80 mil.

Czech Finance Minister Eduard Janota from the caretaker government said that the Czech Republic must save CZK 60 bil (EUR 2.3 bil) in 2011. Given the public spending and economic power of the Czech Republic, this means that Czech reforms will have to be at least two times more severe than the German reform package.

The caretaker government is expected to be replaced soon by a coalition of three center-right parties that control 118 out of 200 seats in the Lower Chamber and agree on the necessity of implementing austerity measures.

Germany is going to cut three percent of the state’s expenses, the Czech Republic – according to Janota – must save five percent.

In the GDP terms, Germany’s spending cuts are going to equal 0.5 percent of its GDP in 2011, and 1.5 percent in 2014. According to Janota’s suggestions, the Czech Republic should save 1.5 percent already in 2011.

Both Angela Merkel’s government and the center-right coalition currently being negotiated in the Czech Republic want to avoid tax hikes. However, there are some differences between the Czech and German approach.

Subsidies to companies

The cuts proposed by the German government are divided into three roughly equal parts. The first one is composed of cuts in spending on firms, the second one concerns expenses on citizens, and the third affects the federal government’s operating costs.

However, from the Czech point of view, cuts in subsidies to companies are unusual.

Germany’s companies will be denied some benefits, including an environmental tax exemption. Electricity companies will have to pay a special tax in order to be allowed to extend the lifespan of their nuclear plants. Airports will have to pay special ecology taxes, the state railway company will pay dividends to the state, while German banks will have to give part of their stock exchange profits to the state. Germany’s treasury is going to receive EUR 5 bil from these cuts in 2011 and more than EUR 9 bil in 2014.

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If the Czech Republic was to be two times more austere than Germany, it would have to save CZK 25 bil (roughly 1 billion euro) in cuts in subsides to Czech companies. And this is really hard to expect in the Czech political-economic environment.

Welfare state to shrink

In 2011, Germany plans to save EUR 3 bil on welfare benefits, EUR 11 bil by 2014. These cuts are not going to affect pensions and health care. Rather, Merkel wants to change the system of unemployment benefits known as Hartz-IV. Also, she wants the benefits for mothers paid during the first year of life of their children to decrease by 4 percent. 

For the Czech Republic, this would equal cutting CZK 15 bil in 2011 and more than 50 bil in 2014 (EUR 0.6 and 2 bil). The three center-right parties plan to cut EUR 10 bil in unemployment benefits. In addition, the TOP 09 plans to save the same amount by cutting benefits paid for families, especially the parental benefit which the families with newborn children may recieve until the children are four years old. 

However, the social welfare systems of both countries are hard to compare. Germans have allocated  much more funds in anti-unemployment measures than Czechs who focused on parental benefits. And both countries now want to focus on cutting unemployment benefits.

The unemployed in Germany receive 60 percent of their salary for the first year without job, and this system will not be changed by the reforms. The Czech unemployed get benefits only for the first five months, and after the first three months they get less than the initial 60 percent.

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If an unemployed German is still without job after 12 months, he or she will be entitled to receive  the living minimum which in Germany equals EUR 359 a month, a little more than one tenth of the average brutto salary. German families of four will receive three quarters of the average salary. This measure too will not be changed by the austerity measures. However, the reforms will abolish some other benefits for families.

Also, the German unemployed will stop receiving life insurance and additional insurance by the state which will save EUR 2 bil every year thanks to this measure.

The Czech unemployed receive the living minimum, EUR 115 (CZK 3,000), which equals one eight of the average salary. A family of four would receive a little above one third.

However, an average German family has double purchasing power than that of an average Czech family, which means that Czechs would be much more threatened with poverty if the benefits that are paid in addition to the minimum wage were scrapped. The Czech state spends EUR 20 bil every year in unemployment benefits, and cutting this sum to half would be very painful.

On the contrary, even after cutting one tenth from the benefits paid to families with young children, the Czech Republic would still be more family-friendly than Germany.

State operating costs

As for the third part of the German reform package, Merkel wants the German state’s operating costs to be EUR 3 bil less in 2011 and EUR 6 bil less in 2014. One billion euro will be saved by laying off 5 percent of state employees, while EUR 1.5 bil will be cut out of the German army’s budget.

If the Czech state was to follow Germany’s example and be two times more austere, the country would have to save EUR 13 bil on the salaries of Czech state employees and other expenses. This is in accord with the programs of the TOP 09 and Public Affairs, two minor parties of the coalition project currently being discussed. They both want to save EUR 15 bil in the state operating costs in the following four years. They want the salaries of state employees to decrease by 10 percent by 2010 and to stay frozen for three more years. However, the cuts they propose will not affect teachers.

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Theoretically, the sum Czechs will be able to cut out from the state operating costs is corresponding to the sum Germany will save. However, in the particular case of welfare benefits, if Czechs focus only on cuts in unemployment and family benefits, they will hardly save as much as Germans.

However, unlike Germany, the Czech Republic is not ready to scrub subsides and other benefits for companies. Instead, Finance Minister Janota from the caretaker government suggests a tax hike that would make food and drugs more expensive. This step was until recently unacceptable by the Czech right-wing parties, but currently it is being re-considered. Petr Nečas, the leader of the ODS, the largest member of the coalition being formed, was recently quoted by Hospodářské noviny daily as admitting that this measure may have to be implemented.



Read more: After election:Czechs to become Europe’s reform leaders

Read more: Czech students to pay fee at university, parties agree


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