Leading economist on austerity package: public sector still squandering money

The Finance Minister’s austerity plan for 2013, which includes far-reaching measures to increase state revenues and cut public spending, has raised an outcry from the opposition benches with the leader of the opposition Social Democrats Bohuslav Sobotka saying his party would table a vote of no-confidence in the three-party centre-right coalition.

While the finance minister’s proposal is now being debated by the three ruling parties and may undergo fundamental changes it has sparked plenty of controversy. Some critics say that the proposed austerity measures will stifle economic growth rather than incite it, others claim the government should reform the public sector rather than impoverishing people living on a low income. RP asked former finance minister and Raiffeisen Bank’s chief analyst Pavel Merlik what measures he would have taken under the circumstances.

"Similarly as the government, I would consider changes to the personal income tax and some increase of the VAT - that is I think still reasonable, but I am not sure about the 20 percent level that seems to me quite high and with the exception of Denmark it would be the highest VAT in Europe –the highest single rate VAT that is.

Pavel MertlíkPavel Mertlík But there is money to be gained from other sources. It is absolutely essential to overhaul the public sector with appropriate human resources management and things like that –this is not systematic in the Czech Republic and because of that we do not have appropriate work incentives in the public sector.

The second important point is management of public expenditures and particularly central procurement which is missing. Typically the prices for which the government buys products and services from the private sector are tens of percentage points higher than the standard among companies in the private sector. So to come out with the idea of cutting pensions is absurd in a country where it is clear even from reports in the press how mismanaged the public sector is and that the situation is worsening."

So even if ministries claim they are now barely able to operate and have been cut down to the bone so to speak, you say they are still squandering money?

"Definitely, definitely that is the case."

Which of the proposed measures would you say are completely counter-productive?

"What I see as completely crazy is for example the proposal to scrap maternity grants which per se is not such a huge sum–it is 300 million Czech crowns annually. But it is just another step in the changes regarding young families and there is no doubt that young families will be one of the victims here, together with pensioners. This is not wise in a country which has huge problems with its birth rate. In the past 4-5 years most of the reforms were counterproductive from the point of view of the demographic situation. I think in this respect we are undercutting the future."

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