Czech government aims to cut 2024 deficit below 2% of GDP with savings, tax hikes

The Czech government will cut subsidies and lift taxes as part of plans to deflate a soaring deficit and get the fiscal gap below 2% of gross domestic product in 2024, Finance Minister Zbynek Stanjura said on Thursday.

The Czech government will cut subsidies and lift taxes as part of plans to deflate a soaring deficit and get the fiscal gap below 2% of gross domestic product in 2024, Finance Minister Zbynek Stanjura said on Thursday. The centre-right, five-party government unveiled a broad plan to rein in a budget gap that has faced upward pressure since 2020. The measures come alongside longer-term reforms to a creaking pension system that eats up a third of state expenditure.

After months of talks over a plan to cut the 2024 deficit - and facing new urgency with the 2023 budget shortfall already growing at a record pace - the parties agreed measures this week. Stanjura said the package included savings worth 46 billion crowns ($2.17 billion) in 2024 through reductions in subsidies.

Excise tax hikes and a higher real estate tax are planned, along with raising the corporate tax rate to 21% from 19%, with the latter bringing 22 billion crowns in extra revenue in 2025 when it will be first collected, according to the plans. The government is due to submit a 2024 budget by the end of September.

Prime Minister Petr Fiala said the budget deficit would be 94 billion crowns ($4.43 billion) higher next year without the consolidation package. "If we weren't able to step on the brake, the situation would get out of hand in several years and our children would suffer the consequences," Fiala said at the government's presentation.

The government has an approved deficit target of 295 billion crowns in 2023. Last year the deficit shrank to 3.6% of gross domestic product from more than 5% in the previous two years. Stanjura said the fiscal deficit would fall to 1.8% of GDP in 2024 and to 1.2% in 2025, which would bring it under the European Union's 3% ceiling for the first time since 2019.

The EU member country saw its budget deficits soar during the COVID-19 pandemic and following a major income tax cut approved under a previous centre-left cabinet, which Fiala's party had supported. It also faces higher spending requirements since Russia's invasion of Ukraine.

The Czech Republic is due to raise its defence spending to 2% of GDP to meet its commitments as a NATO alliance member and has sought to aid people hit by soaring energy prices. With inflation still at a double-digit rate, central bank Governor Ales Michl warned last week another interest rate hike might be needed without a credible fiscal package. ($1 = 21.2420 Czech crowns)