Content of Lecture
Fiscal Imbalance Problem and Public Financ^ w*»*^«^»
Czech Case
3rd Lecture Transformation of the Public Sector
l. Fiscal Imbalance Problem
2. Public Budget Reform
Fiscal Imbalance - definition
i fiscal imbalance occurs in situation when budget revenues differ from budget expenditures in certain period (budget year)
revenues > expenditures —> surplus
revenues < expenditures —> deficit
Primary x secondary deficit
Primary deficit is created in certain budget period (year) and expresses growth of public debt due to government fiscal policy and (or) exogenous factors (exception - interests from the public debt).
Total deficit = primary deficit + interests from the public debt.
Secondary deficit arises in connection with financing of public deficit (e.g. bonds,...)
Characteristics of Czech fiscal system
Czech fiscal system is extremely vulnerable to
demographic pressures (graph)
pro-cyclical features of Czech fiscal system
(cyclical x non-cyclical factors)
deficits have structural character, not cyclical
transparency of the fiscal system is insufficient
size of off-budget operations is not negligible —> transformation institution, state funds
Basic thesis of the Czech Reform
Public Budget Reform
Defore setting up the reform was not e for a long time
continued decreasing of the public deficit in
order to Maastricht criteria
maintenance of width and quality of provided services
preference in changes on expenditures side rather on revenues side of public budgets
stages of the Czech Public Budget Reform:
Stage - main goal: —> bring the deficit trend to a stop —> slowing down the dynamics of public d< increase;
Stage - main goal:
—> fiscally-neutral tax package for
enhancement of economic grow —> preparation of pension and health care
reform
Targets on the revenue side
(around 40 %)
harmonization with EU tax-law restriction of tax evasions together with increasing of tax justice
simplicity of tax-system and levy of taxes
Income Tax
the corporate income tax should be reduced from 28 % (January 2004) to 24 % (January 2006)
the "minimum tax" was set
partial broadening of tax base - setting of a price limit for depreciation of acquired cars to
taxation of individuals not go through significan changes in 2004 - 2006, only dec?"-^ul- <+™ f~ children is raised bv CZK 2000
Estate	Tax		
Real Estate Tax			
■ new legal regulation —>	the tax (	on Ian	dis
transferred in full to a v:	due prii	ticiple.	, without
participation of experts	or asses	;sors -	-> reducing
the total cost of this tax	admini:	stration	
Real Estate Transfer Tax			
■ tax rate is reduced from	5 % to	3 % (	1 July 2004)
■ certain exemptions concerning		this tax was	
cancelled			14
Other Taxes		
Inheritance Tax		
■ the inheritance in the group I of he	irs is	
exempted from the tax		
Local Fees		
■ transformation to municipal taxes		
■ the range of municipal taxes will be	extei	ided if
need be		15
Tax Administration
taxes and tax control —> new process regulation,
the so-called tax code
obligation to register cash payments by means of
cash registers on marketplaces or through stall
sales
the bookkeeping of the VAT non-payers will be
simplified
Social and Health Insurance
ance for students
unlimited possibility to have gainful employment together with obtaining parent's contribution
incomes from student's summer jobs will not be counted to total income of family —> family will not loose social benefits
the assessment base of self-employed persons for both type of insurance will be increased
35 % (2004) to 50 %
Social and Health Insurance <2>
the principle of a fictive income in the amount of 50 % of the average wage in the national economy will be applied —> establishing minimum income tax, calculation of a minimun payment of social security insurance premium and state employment policy contribution, minimum assessment base for the health insurance and for evaluation of the entitlement to social benefits
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Expenditure Side
financially very demanding programs following from the declared government's priorities
government engaged itself to stabilize the public
ire of the State Budget
Sickness Insurance
Aim —> to prevent misuse and deformation of effects of the system:
the decisive period for the determination ol the
assessment base is prolonged from 3 to 12 months
reduction of the assessment base for the time of the first 14 days of sickness from 100 to 90 %
for the first three calendar days of sickness the amount of sickness pay is reduced to 25 % of the daily assessment base
State Social Assistance and Social Welfare Benefits
necessity of quick and deep reform —> intensive targeting of benefits to those in need increasing motivation of participants
revision and reduction of state social assistance benefits and social welfare benefits reconstruction of the subsistence minimum conditions should generally be stricter and
separation of the roles of the state and territoria self-eovernine units
Public Health Insurance		
■ necessity of reforrr	i because of finan	cial
demands on public	: health insurance	system L
connected with age	iing of population	
■ regulation, cost control and increase		of
effectiveness of mi	magement of the	health care
facilities —> regulat	ing of expenditures	
■ implementation of	a payment for dia	Lgnosis in
the bed care segme	mt	
■ regulation of exper	lditures for medic	aments 23
State Assistance to the Building Savings
J state support of the building savings decreased from 25 % to 15 % of the annually saved amount ("assisted maximum increased from CZK
extension of the five years' binding period
provision of the state assistance to the participants who reach 15 years of aee
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Public expenditures Management
maintenance of aggregate fiscal
i allocation efficiency - allocating of sources in order to government priorities
i economic efficiency - support of
Improvement of Public Expenditures Management
5 years horizon
)lementation or expei
instead or buc
expenditure audit
centralization of certain purchases in the public sect
Risks of the Reform's Realization
insufficient support —> Government, across the political scene, laic and professional public, media —> necessity of transparency
fragmentation or public budgets —> consolidation of expenditures ceilings, local budgets, state funds, transformation institutions
"new skeletons" —> debt of the past, state guarantees, ...
political factors —> inclination of politics, elections in 2006 for earlier?)
Risks of the Reform's Realization (2)
adaptation of the chapter administrators to new challenges —> internal competition in given financial sources, qualitatively different environment
employees are responsible for creation, realization, monitoring and evaluation of the State Budget —> necessity of continuous professional training, co-operation wi appropriate faculties of Czech universities
The Main Issues of the 2nd Stage of the Public Finance Reform
J support of families with children (shared
taxation of married couple, child allowance) i commerce support (accelerating of amortization
in 1.-3. class
science (increasing of limits for gift
depreciation)
fight with tax evasions (control labels on spirits, limitation of cash pays, cash registers ...)
The Approach of ODS
principal changes of the economic policy environment favorable for business activ
s s activities
small   state
deep changes in social system (cancellation of benefits, principle of negative tax) and pension system (minimum pension guaranteed by state
unification of the tax rates to 15 % (VAT Income Taxes)
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The Approach of ODS <2>
■ health insurance reform
■ deregulation of rentals
■ rationalism of legislative
■ rationalism of public institutions
■ consolidation of public budgets
■ fixation of proportion of consolidated
expenditures on GDP
■ obligation of balance budgets (except of the
State Budget) 31
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