Czech Republic Joining EU Austerity Ranks

While the American people is spending today deciding whether or not to correct a mistake they made four years ago, the wave of depressing economic news continues to sweep across Europe. Today we add the Czech Republic to the list of deficit-ridden, spending-cutting members of the EU.

The Prague Monitor reports (in somewhat stumbling English) that proposed budget cuts are meeting resistance from all corners of the economy:

The Czech government Monday interrupted its debate on the draft 2013 state budget until Wednesday, sources informed on the government meeting have told CTK. Businesses, academics and most ministries have voiced disagreement with the draft. Reservations were also voiced by the LIDEM party, a minor coalition government member. Its representatives are against the cuts in the sphere of transport. … “We have proposed the cuts in the individual [budget] chapters purely technically. It is a technical proposal the government is discussing,” Finance Minister Miroslav Kalousek (TOP 09) said, adding that it was essential not to exceed the budget deficit of 3 percent of GDP.

This is the cap that the EU constitution put in place some two decades ago.

As the Prague Monitor story continues, we learn that the Czech are trying the same policies as other EU countries to rein in their deficit, namely short-term spending cuts and tax increases:

The cuts would affect science and research, transport infrastructure, teachers’ salaries and programmes co-financed from the EU funds, among others. The government must submit the draft budget to the Chamber of Deputies by November 23. The revised version of the budget bill has taken into account the latest economic outlook and the failure to push through a tax package raising both VAT rates by 1 percentage point. The tax package has been tied to a vote of confidence in the coalition government of Necas (Civic Democrats, ODS). The Chamber of Deputies is to vote on the package on Wednesday.

These are the same policies that have been so unsuccessfully tried in Greece, Spain, Portugal, Ireland, Netherlands and Hungary. Raising taxes and cutting spending panic-style has not worked there, and it will not work in the Czech Republic either. Most important of all: this policy will not revive the Czech economy, which is stuck wtih a GDP at a virtual standstill. Over the past couple of years growth rates have hovered between zero and 1.7 percent.

Unfortunately, the link between austerity and tepid or negative growth seems to be absent in the Czech public debate.Another story from the Prague Monitor adds comments from analysts who express concerns about the austerity measures – but only when it comes to the loss of government spending:

The cutting of the expenditures of the Czech state budget for next year by Kc41bn [$2bn] will lead to a worsening of the economic development in the Czech Republic, analysts have told CTK in a poll. The new state budget draft, whose discussion the cabinet Monday put off until Wednesday, reckons with a drop in revenues and expenditures for next year by Kc41bn. It keeps the state budget deficit at Kc100bn [$5bn]. David Marek, an analyst at company Patria Finance, believes that cuts in investment will from a shorter-term point of view cause significantly greater harm in the economy than the hike in value added tax (VAT) that was originally proposed.

This makes no sense at all. If the government is spending money on investments, then it is calculating on a long-term return for the economy, not a short-term benefit. An increase in the value-added tax, on the other hand, inflicts harm on the economy virtually over night.

Perhaps Mr. Marek needs to re-examine his analysis of the two policy measures. That said, it is important to remember what the real problem is here. The choice is not between spending cuts and tax hikes, but between austerity and an orderly retreat of government on all fronts. That orderly retreat means structural spending cuts combined with appropriate tax cuts, executed over a period of several years. The goal is to allow the private sector to grow, step in and replace what government has previously monopolized.

Back to the Prague Monitor:

Representatives of entrepreneurs Monday rejected the cuts in state budget expenditures stimulating growth. They disagree with the restrictions on spending on support of research, export, co-financing of structural funds and transport infrastructure construction, Confederation of Industry president Jaroslav Hanak told CTK. Transport Ministry spokesman Martin Novak said the cuts in the budget of the State Transport Infrastructure Fund (SFDI), that have been proposed by the Finance Ministry in the new budget draft, will jeopardise the construction of the D3 motorway from Prague to the Austrian border and the further modernisation of the most dilapidated sections of the D1 motorway from Prague to the Polish border via Brno.

It is symptomatic of politicians that want to preserve their welfare state, that they go after spending that has nothing to do with entitlements and income redistribution. Even from a libertarian viewpoint it is possible to make the case that government should provide infrastructure. Therefore, highways and possibly even railroads may fall within the realm of essential government functions. Income redistribution, on the other hand, does not. The Czech government runs social welfare programs equivalent to 20 percent of the nation’s GDP, which tells us that there is quite a bit of room for reforms oriented at reducing the size of government.

Hopefully the Czech economy is not going to follow in the same footsteps as other welfare states in Europe. But with habitual austerity as the governing fiscal policy regime, and with an economy on the edge of negative growth, the outlook is not exactly positive.