Parties in the centre-right coalition have also considered rise in corporate tax, or tax paid by high earners, and reduction in tax deductibles. Tens of billions of crowns worth of state subsidies could be looked at for cuts. The negotiations among the five-party coalition have taken on more urgency as the 2023 deficit is rising at a record pace.
The budget is facing pressure from spending commitments for pensions and state wage hikes, along with more benefits to help people and firms hurt by spikes in energy costs and inflation. Defence spending is also rising following Russia's invasion of Ukraine, and next year is set to hit 2% of gross domestic product for the first time since 2005, as part of NATO commitments.
At the same time, a massive income tax cut under a previous government has deprived the budget of around 100 billion of crowns of revenue. "The long, hard and fair negotiations are basically over," Stanjura said on Wednesday, adding the details were still being fine-tuned. The government is due to present its plan on Thursday along with reforms to a pension system that will account for 30% of state spending this year.
The changes are expected to include later retirement age than the current 65 for younger people, lower indexation of pensions, or higher contributions by self-employed. This year's central government budget deficit is planned at 295 billion crowns, and the finance ministry forecasts the overall public-sector deficit at 3.5% of gross domestic product, above European Union-mandated limits. The government deficit hit a record 420 billion crowns in 2021 as COVID-era aid along with promises of faster pension and wage hikes, and reduced taxes, pushed up deficits and debt, which has risen fast but is still below EU averages. With inflation still at a double-digit rate, central bank Governor Ales Michl warned last week warned another interest rate hike might be needed if no fiscal package was agreed.
The goal remains a deficit reduction of 70 billion crowns, although Stanjura said overall savings and revenue increases must be significantly higher as spending on defence or teachers' salaries is set to grow next year by tens of billions. ($1 = 21.2420 Czech crowns) (Reporting by Jan Lopatka, Robert Muller and Jason Hovet; Editing by Philippa Fletcher and Alison Williams)
