Current Affairs No agreement yet by coalition on new VAT rate or spending cuts
A meeting between government coalition leaders on Monday failed to produce conclusive results on how the government will offset falling tax revenues. But two variants, narrowed down, are on the table: to introduce new spending cuts at most government ministries as well as in some social benefits to bring the public finance deficit down to 3.5 percent of GDP in 2012. Or, alternatively, to raise the VAT to a uniform 19 percent (with minimal exemptions on books, medicines, newspapers & magazines).
Given the impact of either variant, or a combination thereof, it is no surprise no final agreement or compromise has been reached yet, even as coalition members met again on Tuesday to try and hammer out possible solutions. Until now, the junior government party Public Affairs has strongly opposed further increasing the Value-Added Tax, calling it a hoax on voters. And it’s not clear they will budge: just on Monday, here’s what the party’s leader Radek John had to say:
“The 19 percent proposal a swindle and said it was a means of getting the middle class and the poor to pick up the tab.”
The idea has equally been rejected by the newly-elected head of the party’s deputies’ club Vít Bárta as well as the party’s economics expert Michal Babák. By contrast, Public Affairs would like to see a different solution: the return of progressive taxation and higher taxes for corporations But it’s hard to see how they’ll make any gains there: bringing back progressive taxation is something that senior coalition members the Civic Democrats and TOP 09 are both firmly against and Prime Minister Petr Nečas rejected the idea of raising taxes point blank, saying it would only see competitiveness suffer.
It is clear that whichever solution is chosen, the further belt-tightening will be difficult. The benefits of agreeing on the proposed 19 VAT rate are clear: an additional 22 billion crowns in the state coffers and a projected deficit next year of 95 billion - 3.2 percent of GDP. But it is also obvious that many are against: a new public opinion poll suggests that two-thirds of the population are not in favour, while only a fifth back the idea.
Alternatively, slashing spending at ministries that are already cash-strapped is also a tough decision: Public Affairs in particular are particularly uneasy over more cuts at the Transport and Education ministries. The latter is slated to lose four billion crowns next year, a scenario described as “catastrophic” by the Deputy Education Minister Ladislav Němec, although preferable to an earlier proposal slashing nine billion crowns (after the finance minister, Miroslav Kalousek, made concessions to Public Affairs and agreed to lower the numbers).
Regardless, it will leave the Education Ministry in an unenviable spot: Education Minister Josef Dobeš made improving conditions for the country’s teachers a top priority upon entering government, and a reversal there could prove deeply unpopular. Other ministries such as Transport and Defence have also been slated for new cuts in the billions, so it is clear it will take some time – and probably a good deal of heated negotiations – before an acceptable solution is found.