Czech Poll-Leading Party Pledges Orban-Style Tax Shift

The leading Czech opposition party, dominating in opinion polls, will shift the tax burden to larger companies from consumers to revive the economy, shadow finance minister Jan Mladek said.

The Social Democrats, or CSSD, would raise taxes on financial, energy and telecommunications companies to 30 percent from 19 percent, while others would pay 21 percent, Mladek said in an interview at the Bloomberg office in Prague yesterday. They would also scrap a law allowing taxpayers to divert part of pension taxes to private accounts, he said.

Those moves would follow the economic blueprint of Hungarian Prime Minister Viktor Orban, who rose to power in 2010 with a pledge to end five years of austerity. Czech Premier Petr Necas has cut spending and raised taxes on goods and top earners to curb the budget deficit, helping to lower bond yields to record lows. The measures damped domestic demand while exports to the crisis-stricken euro region slowed, sparking the second recession in three years.

“The key task is to turn the economy around because fiscal consolidation is impossible without growth,” said Mladek, an economist and former agriculture minister and deputy finance minister. “Given our priorities, the reform effort, as rating agencies call it, would be less intensive. It would be very good to keep the trend of deficit reductions, but at a slower pace.”

The export-led economy had grown for 10 consecutive years through 2008, when the collapse of Lehman Brothers Holdings Inc. triggered a global financial crisis. Last year, gross domestic product shrank for three quarters through September 2012.

Safe-Haven Appeal

Necas’s pledge to cut the deficit to within the European Union’s limit of 3 percent of GDP this year for the first time since 2008 has boosted the nation’s safe-haven appeal, helping the biggest rally for Czech bonds in a decade. Yields on five-year koruna notes fell 172 basis points, or 1.72 percentage points, in 2012, touching a record-low 0.66 percent on Dec. 27.

The five-year rate stood at 0.82 percent as of 2:47 p.m. in Prague, compared with same-maturity securities at top-rated Germany and Sweden trading at 0.62 percent and 1.21 percent, respectively, according to generic indexes compiled by Bloomberg.

In Hungary, where public debt was 78 percent of GDP last year, or almost double the Czech ratio, five-year yield stood at 5.96 percent.

Necas’s voter support has plunged while other leaders in Europe have been ousted as they pushed through spending cuts that stunted economies from Romania to Spain. The CSSD would get 84 of 200 seats in the lower house of parliament if elections were held now, compared with 42 seats for the Civic Democrats, known as ODS, and 29 for the junior coalition partner TOP09, according to a Stem poll conducted two weeks ago.

Praising Orban

Orban has used what his government has described as “unorthodox measures” to close budget holes and avoid cuts in EU funding, contributing to an economic slump. They included the effective nationalization of private-pension fund assets, imposing industry taxes, levying the highest bank tax in Europe and curtailing the power of courts.

Mladek praised Orban for taking over about 3 trillion forint ($14 billion) of privately-managed pension assets in 2011 to help cut the public deficit. The forint was the world’s worst-performing currency that year as the EU’s most-indebted eastern member lost its investment-grade status.

Hungary’s Cabinet gave private pension fund members an ultimatum in 2010, telling them to return their private pension fund portfolios to government control or lose state retirement benefits.

‘Brilliant’ Orban

“Orban’s solution was brilliant -- he didn’t nationalize any funds, he only changed the conditions to transfer people back into the state pillar,” Mladek said. “We were honest to announce our intention. Multinational institutions understand now they should not take part in this adventure.”

If implemented, the CSSD’s tax plans would hurt companies including power producer CEZ AS, phone company Telefonica Czech Republic AS, and Societe Generale SA (GLE)’s unit Komercni Banka AS. CEZ has tumbled 16 percent in the past 12 months, compared with drops by 8 percent for Poland’s PGE SA, 13 percent for Germany’s EON SE and 14 percent at France’s Electricite de France SA.

Czech banks have enough capital and liquidity to withstand an escalating crisis in Europe and a protracted recession at home, according to stress tests published by the central bank last month. Deposits at Czech lenders exceed loans by more than 30 percent, according to statistics on the bank’s website.

Bank Profit

Net income at Komercni Banka probably rose to a record 13.5 billion koruna ($702 million) last year from 12.7 billion koruna in 2011, according to the average estimate of 15 analysts polled by Bloomberg. That makes up about 25 percent of the profit at its parent SocGen, which probably shrank to 2.1 billion euros ($2.8 billion) from 3 billion euros, according to a separate survey of 23 analysts by Bloomberg.

While the CSSD is targeting selected industries with higher taxes, it wants to lure foreign manufacturers to invest in the country, according to Mladek.

The country has attracted foreign direct investment of almost 78 billion euros since the 1993 partition of Czechoslovakia, according to data from the country’s foreign-investment agency as of May 2012. The inflow culminated at over 9 billion euros in 2005, dropping to 3.8 billion in 2011.

Exports, which account for about 75 percent of Czech GDP, are led by manufacturers including units of carmakers Volkswagen AG (VOW), Hyundai Motor Co. (005380), Peugeot SA (UG), Toyota Motor Corp. (7203) and electronics producers such as Foxconn Technology Co. (2354)

‘Big Investment’

“We would like to go back to this tradition of the late 1990s and stimulate FDI because the Czech Republic is a country of manufacturing,” Mladek said. “My party is affiliated with large companies and the trade unions. We have an honest interest that big investment is done in the country.”

Once in power, the CSSD will reverse changes to the pension system introduced from this year that allow taxpayers to divert part of their social-security tax to private accounts, Mladek said. Necas’s government says the overhaul would cut taxpayers’ dependence on the deficit-making public pay-as-you program, in which current employees pay for pensions of the retired.

While six financial institutions began to attract pension savings under the so-called second pillar this month, ING Groep NV (INGA)’s Czech unit said in November it won’t join the program because a lack of political consensus poses “too much risk.”

Opposition Threats

The opposition’s threats to reverse government policies designed to improve public finances are preventing an upgrade of the Czech credit rating, Moody’s Investors Service said last week. The company ranks Czech debt at its fifth-highest grade of A1, four steps above Italy and five above Spain.

“Structural reforms are an important component that can enhance the Czech Republic’s creditworthiness,” Jaime Reusche, a sovereign-debt analyst at Moody’s, said in a Jan. 16 telephone interview from New York. “The current government has been pursuing these reforms throughout most of its tenure in power, but the political environment in the Czech Republic is quite unsettled. Reform reversibility is a possibility in many cases.”

To contact the reporters on this story: Krystof Chamonikolas in Prague at kchamonikola@bloomberg.net; Peter Laca in Prague at placa@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net; Wojciech Moskwa at wmoskwa@bloomberg.net

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