Fiscal measures and their impact on the economy in 2008
In line with its July 2007 programme declaration, the government has adopted a number of fiscal measures in order to stabilise public finances, meet the Czech Republic’s obligation to speedily correct the excessive government sector deficit in 2008, and gradually reduce its budget deficits in the following years. Most of these measures are included in the Act on the Stabilisation of Public Finances, although some measures were adopted directly by the government under its powers.
The measures on the revenue side of the public budgets consist in transferring the tax burden from direct to indirect taxes. The lower VAT rate will go up from 5% to 9% in 2008, while excise duties on tobacco products will increase to the minimum level arising under harmonisation agreements with the EU. At the same time, new environmental taxes on fuels and energy will be introduced and environmental charges will be increased. By contrast, corporate income tax will be gradually lowered from the current 24% to 21% in 2008 and by a further 1 percentage point in both 2009 and 2010. As for personal income tax, the progressive taxation system (with rates ranging from 12% to 32%) will be replaced by a flat tax on the so-called “super-gross wage”, with a single rate of 15% in 2008 which will be reduced to 12.5% in 2009. Some property taxes will also be abolished. In the case of real estate tax, municipalities will be free to set coefficients or exempt agricultural land. The measures on the expenditure side include cuts in state social benefits, most notably reductions in birth and family allowances and child benefits, and the complete abolition of some allowances (the funeral allowance). Sickness benefits will be also reduced as a result of parametric changes. Falling expenditure will be also fostered by a cap on nominal wage growth in selected segments of the public sector to 1.5% a year (in 2008–2010) and the postponement of the effect of the Health Insurance Act.
Overall, the above fiscal measures should reduce the public finance deficit by 1 percentage point of GDP in 2008. This fiscal policy tightening will reduce GDP growth by about 0.5 percentage point next year, mainly by depressing demand in the household sector. The overall impact of the flat tax and social reform will be a slight increase in the nominal income of households, which may positively affect their consumption, but this impact will be partly offset by a higher saving rate among higher-income households. Conversely, the introduction of payments for health care (visiting the doctor, staying in hospital, prescriptions) and the environmental tax on energy will foster higher growth in household expenditure. In real terms, household consumption will be negatively affected by the increases in the lower VAT rate and the excise duty on tobacco products and by the introduction of environmental taxes. The overall impact on real household consumption growth will thus be negative and can be estimated at around 0.7 percentage point.