• Analysis
  • Economic Response to the Covid-19 Pandemic in the Czech Republic

  • Von Ilona Švihlíková | 16 Jun 20 | Posted under: Gesundheitsversorgung , Zentral- und Osteuropa , Tschechische Republik , Economic Governance
  • The Czech Republic has so far fared well in containing the pandemic. However, the economic consequences of the lockdown and the rapidly worsening situation in the world economy are yet to come. This article deals with economic measures implemented to mitigate the economic consequences of the pandemic through the eyes of political economy.

    The Czech Republic entered the pandemic in exceptionally good economic condition, with the lowest unemployment rate in all of the EU[1],  with solid economic growth (2.6 %) and increasing real wages together with low public indebtedness around the level of 31 % of GDP. Therefore, the Czech Republic does have sufficient room for manoeuvre to enact fiscal expansionary measures. On the other hand, the Czech Republic had a higher inflation rate and an exchange rate with the euro diverging strongly from the purchasing parity level[2].  The present Czech government coalition is comprised of the movement ANO, controlled by the billionaire Andrej Babiš, and the junior partner ČSSD (Czech Social Democratic Party). The minority government is supported by the KSČM (Communist Party of Bohemia and Moravia). Admittedly, the government has pursued social dialogue, although many long-term problems have not been tackled appropriately or have been completely ignored. 

    Tax burden in the Czech Republic and political implications 

    Although the level of public debt in the Czech Republic is very low, and its increase is for the most part not considered a major issue (unlike in other countries of the EU, for example Italy) and the demand for state bonds is quite high, the question of tax mix cannot be ignored. The Czech Republic is among the countries with a highly unbalanced tax mix. The tax burden is dominated by VAT, a regressive tax falling mostly on low-income households. However, this feature in the tax system is not accompanied by a progressive personal income tax. The property taxes are almost non-existent (and the abolition of the above mentioned tax will only make matters worse). Revenues from personal income tax is higher than those from corporate taxes, which is a very unusual feature for a country that claims to be ‘developed’. It should also be noted that personal income tax is almost entirely paid by employees, with the self-employed paying minimal taxes. Even without a fuller analysis of the tax mix, we can say that the tax mix in the Czech Republic is highly unfair and puts the burden disproportionately on the shoulders of employees and low-income groups. It is important to know this, because in implementing the measures, the question of tax justice was largely ignored. The groups that did pay the largest share of taxes (for example, the employees) have been neglected in the implementation of various programmes (more precisely, it is taken for granted that ‘their’ interests are covered by the Kurzarbeit programmes); by contrast, the self-employed are given various benefits (for example, child care benefits, compensation bonuses). It is especially the compensation bonus (500 CZK for every day of inactivity, which can amount to 15,000 CZK a month[3]) for the self-employed that shows the political preferences in the Parliament. (It should to be said that the minimum wage – 14,600 CZK – is lower.[4]) Nevertheless, the political discussion has concentrated on paying the self-employed more, since ‘nobody can survive on 15,000 CZK’ – but somehow employees are supposed to survive on it.

    Even worse is the situation for the unemployed. Unemployment benefits are very low and the period during which it can be drawn is very short. Unemployment benefits for low-income employees are around 8,000 CZK, yet this does not seem to be an issue. 

    One of the most dangerous proposals aimed at a permanent change of the tax structure[5] is the loss carry-back. This measure is tailored to big and powerful corporations that had large profits in previous years and now would be able (if this tax measure is adopted) to deduct the ‘estimate of the loss’. The company can thus guess at the loss and apply this ‘guess’ to the current tax period. The measure would be especially attractive for financial groups and banks, as they could easily show the loss and then let the state pay for it. Because the Czech Republic is deeply enmeshed in the international division of labour, there are many foreign companies involved. In fact, the Czech Republic can be described as a dependent economy, where key sectors are in foreign hands (from the banking to the automobile sector). Loss carry-back[6] would enable foreign mothers to artificially create losses and transfer them to the Czech Republic, where the state (that is, the tax payers) would bear the costs. There are two variations of this measure, one of them would comprise tax losses of 30 billion CZK. 

    Long term problems revealed by the epidepmic

    As indicated above, the epidemic revealed long-term problems that have not been dealt with, at least not sufficiently.

    One of them is the capacity of the state and the low degree of digitalisation. A typical example of insufficient capacity was the liquidity boost to companies, which was supposed to be channelled through the ČMRZB (The Czech-Moravian Guarantee and Development Bank) that does not even have enough qualified employees and, moreoever, does not really fit the description of a development bank. These issues of course can be solved through a speedy digitalisation of public administration. A more serious problem is the strong involvement of foreign actors in economic activity. It is difficult to propose plans for a Czech developmental bank in a situation in which Czech banks (that is, in Czech ownership) are almost non-existent. [7]

    Conclusion 

    The Czech Republic has been struck by the COVID19 pandemic (and the consequent economic crisis) while it enjoyed relatively positive economic conditions. With low unemployment, rising wages, a low debt-to-GDP ratio the room for manoeuvre has enabled an active state fiscal policy. On the other hand, the measures are being enacted on both the expenditure and income sides of the budget, which complicates the use of a transparent overall plan. the Czech tax mix is highly unfair, placing the biggest burden on low-income groups and on employees. This tendency could even worsen, as various lobby groups try to push through permanent tax changes in their favour. The same lobbyists, often represented by foreign transnational companies, vehemently refuse the conditionalities of state aid. The epidemic revealed long-term problems of the Czech Republic in terms of its dependency on imports of food and cheap labour, and especially the strong involvement of foreign actors. Low unemployment benefits and the growing fear of unemployment not only threatens purchasing power, but in the long run jeopardises the wage gains that have been achieved in previous years. This would further prolong the Czech economy’s function as a cheap-labour destination situated close to German industrial capacities. Without a consistent strategy of domestic industry support, the Czech Republic will remain a colony.[8]

     

    NOTES

    1. Czech Statistical Office states that the unemployment rate was the lowest from the whole EU reaching 2,1 % at the end of 2019. The rate of employment (for citizens of the age of 20-64) was 80,5 %, the fourth highest. See here.
    2. According to the Power Purchasing parity  the CZK to euro should by about 18-19 crowns for euro. In reality it is 27 CZK for euro. Simply put this means that part of Czech labour is exported for free.
    3. According to the current exchange rate of about 550 euro.
    4. The minimum wage involves about 150,000 employees.
    5. The permanency [I DON’T UNDERSTAND THE MEANING OF ‘PERMANENCY’ HERE.] reflects abuse on the part of lobby groups that want to push through changes convenient to them. Loss carry-back is a perfect example of rent-seeking.
    6. The author was able to cooperate in the resistance to this measure. One of the ‘compromise’ proposals includes a ceiling for loss, set at 30 million CZK (more than one million euro). Sadly, even social democratic and communist MPs supported this measure, with the logic that ‘big companies are big employers’. The measure of course was not connected to employment, unlike Kurzarbeit.
    7. Currently, there are proposals for the combining of disperse funds in one institution and/or plans for the institutional strengthening of the ČMRZB. 
    8. Ilona Švihlíková, Jak jsme se stali kolonií, Prague: Rybka Publishers, 2015.

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