Tax Changes on Hold

The center-left CSSD won a snap election held in late October, but its net loss of four seats ruled out any chance of forming a minority government.  CSSD leader Bohuslav Sobotka’s coalition strategy was turned on its head by ANO 2011, an anti-corruption party with euroskeptic tendencies that won an astonishing 18.7% of the vote, compared to 20.5% for the CSSD, and claimed 47 seats, only three fewer than the Social Democrats.  In mid-December, the CSSD, ANO, and the smaller KDU-CSL agreed to form a broad coalition that will claim a comfortable 11-seat majority in the Chamber of Deputies.

Sharp differences between the positions of the CSSD and ANO on tax matters posed perhaps the biggest obstacle to reaching an agreement.  The Social Democrats’ proposed increase in the corporate tax rate figured to be the most difficult hurdle to clear, and the CSSD ultimately compromised in order to seal a deal with the ANO.

No changes will be made to the tax structure before 2015.  As for what changes might occur in 2015, general increases in income and corporate tax rates are off the table, but the CSSD’s proposal for special taxes for targeted industries will be open for discussion.

Otherwise, the three parties have agreed to increase pension benefits (and to link future increases to inflation), implement a phased increase in the minimum wage, and eliminate numerous fees for health care.  In addition, the partners are all behind the CSSD’s plans to reverse some of the previous government’s structural reforms, including the introduction of a second (private) pension pillar.

At the same time, the coalition partners have pledged to hold the fiscal deficit below the EU ceiling of 3% of GDP by focusing on revenue collection and cuts to the civil service work force.  Babiš has stated that any ministries headed by ANO can expect “brutal” cuts.

The decision to put off any major tax changes until 2015 should bolster the stability of the coalition in the near term, but other issues could generate tensions that threaten the unity of the alliance.  Shortly after the election, Babiš reiterated his discomfort with the country’s membership in the euro zone and his opposition to further integration with the EU.  Although the euro-zone debt crisis has abated significantly, a permanent resolution of the problem is still to be worked out, and ANO could pose an obstacle to Prague’s constructive engagement in the process.

Forecast Summary

SUMMARY OF 18-MONTH FORECAST
REGIMES & PROBABILITIES *Broad Coalition
65%
Center-Left Minority 25% Center-Left Coalition 10%
RISK FACTORS CURRENT  
Turmoil Low Same Same Same
Investment
  Equity Low SLIGHTLY LESS SLIGHTLY LESS Same
  Operations Moderate Same SLIGHTLY MORE Same
  Taxation Low Same SLIGHTLY MORE Same
  Repatriation Low Same Same Same
  Exchange Low Same Same Same
Trade
  Tariffs Moderate Same Same Same
  Other Barriers Moderate Same SLIGHTLY MORE SLIGHTLY MORE
  Payment Delays Low Same Same Same
Economic Policy
  Expansion High Same Same SLIGHTLY LESS
  Labor Costs Moderate SLIGHTLY MORE SLIGHTLY MORE SLIGHTLY MORE
  Foreign Debt Low SLIGHTLY MORE SLIGHTLY MORE MORE
SUMMARY OF FIVE-YEAR FORECAST

 

REGIMES & PROBABILITIES *Center-Right Coalition 45% Center-Left Coalition 40% Broad Coalition
15%
RISK FACTORS BASE  
Turmoil Low Same Same Same
Restrictions
   Investment Low SLIGHTLY LESS Same Same
   Trade Moderate Same SLIGHTLY MORE Same
Economic Problems
   Domestic Moderate Same Same SLIGHTLY LESS
   International Moderate Same Same Same
   * When present, indicates forecast of a new regime

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