The National Fiscal Council (NRR) is casting doubt on whether the plans that the government has announced for changes to pensions and the tax system comply with the budgetary limits. In particular the NRR are worried that the recently announced pension increase and the abolition of super-gross wages will unbalance the budget and not be sustainable in the medium to long-term. Photo credit: Freepik / For illustrative purposes.

Czech Rep., Aug 10 (BD) – The formula encoded in the current pension law already accounts for a monthly increase of 840 CZK from next January. This follows increases of over 900 CZK a month in the previous two years. Yet both Prime Minister Babiš (ANO) and Deputy Prime Minister Hamáček (ČSSD) are talking about several hundred crowns a month on top of this. With the statutory increase most pensioners would receive 15,200 a month compared to 14,400 now. The statutory increase alone would add CZK 32 billion crowns to the budgeted expenditure. Other parties, such as SPD and the communists are looking for even bigger increases, whilst ODS and the Pirates, worried about increasing the budget deficit, would stick with the legally mandated adjustment.

The NRR is the body established to ensure that the government operates within legal budgetary restraints. It has warned that the proposed large pension increases risk pushing the scheme into a long term deficit which would have to be made up from non-insurance income. This would limit the government’s scope for other spending. The Council also pointed out that as this would be the third year running that the increase would breach the legal pension adjustment scheme, it ‘raises the question of why this statutory adjustment scheme exists at all, or what its meaning is.’ In addition they warn that the recent increases which exceed the legal obligation could, in years of budgetary constraint, be used as justification for paying less than the law required.

Just reducing taxation from super gross to gross, without any compensating measures, would cause a shortfall in revenues of CZK92 billion, said the NRR. Photo credit: Freepik / For illustrative purposes.

The government also wants to introduce major tax reform. “I will certainly push for the abolition of super-gross wages not only according to the government’s programme statement, but to make it more ambitious,” Prime Minister and ANO Leader Andrej Babiš said on Czech Television. Super-gross income includes employees’ health and social insurance contributions, which at the moment are also taxed at 15%. The more ambitious plans include the abolition of the 7% ‘solidarity tax’ applied to monthly incomes above 140,000 CZK. According to Finance Minister Alena Schillerová (ANO), the government is looking to replace this with a progressive tax. And the Prime Minister is even considering abolishing social insurance contributions.

There is definitely support for simplifying the tax system and “The NRR considers it desirable to reduce the tax burden on labour itself. At the same time, however, it should be noted that the main reason for its high value in the Czech Republic is not income tax, but statutory insurance premiums. Therefore, the council believes that the labour tax arrangements should be part of more comprehensive changes to the tax and insurance system,” the council said. They point out that just reducing taxation from super gross to gross, without any compensating measures, would cause a shortfall in revenues of CZK92 billion, two-thirds of which would hit the national budget and one third local government.

The NRR questions the long-term viability of government plans. There is already a structural budget deficit of 2% of GDP and the tax change discussed above would add another 1.5% to this. There are other proposals which would add to this. They warn that this structural imbalance is not sustainable as the fiscal budgetary limits are set at -3.5% for 2022 and tighten by 0.5% every year for the remainder of the 7-year plan. Although this could be sustainable for about a year, ‘it almost eliminates the scope for an increase in investment expenditure from national resources.’

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