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Czech Republic: No VAT Increase

Published: September 7, 2012; 19:11 · (Vindobona)

The governing coalition failed in seeking approval by the parliament. In order to lower the budget deficit, the government intended to lift the VAT rates.

Czech Republic: No VAT Increase / Picture: © Vindobona.org

Since the beginning of this year, the Czech Parliament discusses the VAT increase. According to the government´s plan, the lower tax rate should be lifted by one percentage point to 15%. The normal VAT rate was planned to increase from 20% to 21%. In 2013, the tax intake should have increased by € 1.0bn. The VAT increase should improve the situation of the state budget. The increase in VAT may reach up to 0.7% of GDP.

However, the Czech Parliament disapproved the government´s proposal. The governing coalition which consists of five parties only has a thin majority in the Czech Parliament. The oppositional social democrats could prevent the plans of the weak coalition already in the senate. Now, also in the Czech national council, the governing parties were overruled. 101 votes were needed, but only 94 members were in favor of the government´s proposal.

According to analysts, the rejection of the austerity package could be an immediate risk for the government´s stability. Prime Minister Petr Necas said that the VAT increase was necessary to keep the budget deficit below 3.0% of GDP. After the vote, Necas underlined that the Czech government will continue its austerity policy in order to retain the trust of the financial markets.

As the Czech export share amounts to 80%, the country is highly dependent on Europe. As most European countries are in a stage of stagnation or recession, also the Czech economy is hit hard. In the second quarter, the Czech GDP was down by 0.2%.

Before, the Czech National Bank has expressed its concern that the VAT increase would further slow the economy. Also President Vaclav Klaus criticized the planned VAT increase as the Czech Republic faces a recession at the moment.

At the moment, the public debt level amounts to about 40% of GDP. In the Eurozone, the average debt quota is about 90%. However, the Czech budget deficit remains relatively high. After a deficit of 4.8% in 2010 and a deficit of 3.1% in 2011, there is a slight upward trend. For 2012, economists anticipate a budget deficit of 3.4% in 2012 and in 2013.

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