The Czech government’s attempts to reduce its fiscal deficit by increasing VAT charges have been failing, and the latest figures have sparked a re-think by the Czech finance ministry. The news follows revelations that VAT collection will be CZK 2bn lower than expected next year, 1.5bn off the pace in 2014 and 1bn short in 2015.
The reason for the shortfall is that the Czech economy is doing worse than the government, and the Czech central bank expected, with neither public nor domestic demand achieving the foreseen 4 percent growth. A new forecast is for state spending to fall by 2.8 percent and private demand by 2.2 percent. The lowest of the VAT tax rates was lifted to 14 percent from 10 percent in January, despite fears by some economists that this could strangle domestic consumption.
Yet the government insists it would further increase VAT next year – this time both rates to 15 and 21 percent from their current 14 and 20 percent respectively, and insists that in the longer term the effect will be positive. “Our goals for fiscal consolidation remain. It’s clear that any austerity measures on either the expenditure or revenue side have a short-term restrictive effect; nevertheless in the long run healthy public finances are a necessary condition for economic growth,” Jakub Haas, deputy spokesman for the finance ministry told the Wall Street Journal.
