Stimulus Dispute Complicates Czech Coalition Negotiations

Czech coalition talks are dragging as potential partners clash over how much fiscal stimulus the government can afford without raising taxes, said Jan Mladek, a member of the Social Democratic Party.

The Social Democrats and the ANO party will meet today to resolve an argument over state spending aimed at re-igniting economic expansion after a record-long recession. While the two parties agree they can’t provide significant support next year because of limited time to pass the 2014 budget, the size of stimulus measures from 2015 is unclear, Mladek said in an interview in Prague yesterday.

The ex-communist European Union member is struggling to end the political gridlock that ensued in June after Premier Petr Necas’s cabinet collapsed in an illegal spying and corruption scandal. The Social Democrats are seeking a way to rule with ANO, led by billionaire Andrej Babis, and the Christian Democrats, who have both rejected plans to raise corporate taxes to fund more state spending.

“Looking at 2015 and onward, it’s possible to provide some support for economic growth with better tax collection and by making state operations more efficient,” said Mladek, who was the Social Democrat candidate for finance minister before party leaders agreed to give that post to ANO. “But the reason why talks are still going on is that we don’t have an agreement yet on how much of this is possible, because our calculations aren’t as optimistic as” the ANO party’s, he said.

Political Upheavals

There is a history of political upheavals in the Czech Republic, which is preparing to install its ninth government in the past 10 years. Investors have ignored the instability as close proximity to western markets, a cheaper workforce than Germany and a tradition of manufacturing helped the Czech economy double its size to $196 billion in that period.

The yield on the country’s 10-year government debt has averaged 3.8 percent over the past decade, compared with 5.6 percent for Poland and 3.5 percent for higher-rated France. The Czech 10-year yield rose 1 basis point, or 0.01 percentage point, to 2.29 percent as of 9:35 a.m. in Prague today.

After ANO proposed last week to freeze taxes for two years and seek savings in the state’s operations, the Social Democrats asked their potential partner for its calculations on how increased spending on pensions and education, as well as costs arising from scrapping doctor fees, could be covered.

Budget Deficit

The parties negotiating coalition cooperation said they agree to keep the budget deficit below the EU limit of 3 percent of economic output. While the Social Democrats want to approve the 2014 budget by the end of the year, it wouldn’t be a “major risk” if the final approval came a few weeks later in January, Mladek said.

His party, which was in opposition for the last seven years, wants to change the tax system to introduce more solidarity in addition to boosting budget income, Mladek said.

“We aren’t satisfied with the distribution of the tax burden here,” he said. “People need to feel that the burden is shared in a fairer way, that we aren’t a tax hell for someone and a tax heaven for someone else.”

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