1 Fiscal Imbalance Problem and Public Budgets Reform Czech Case Ing. Petra Dvořáková KVE ESF MU 2 Content of this lecture 1. Fiscal imbalance problem 2. Budgetary Outlook 2003 ­ 2006: Concept of Public Budgets Reform 3 Fiscal Imbalance - definition fiscal imbalance occurs in situation when budget revenues differ from budget expenditures in certain period (budget year) revenues > expenditures surplus revenues < expenditures deficit 4 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). Secondary deficit arises in connection with financing of public debt (e.g. bonds,...). Total deficit = primary deficit + interests from the public debt. 5 System of the Czech Public Budgets the State Budget budgets of regions and municipalities (local budgets) state extra-budgetary funds privatization funds (NPF and Land Fund) budget of the public health insurance system 6 Characteristics of the Czech fiscal system situation before setting up the Reform was not sustainable for a long-term the Czech fiscal system is extremely vulnerable to demographic pressures (graph) pro-cyclical features of the 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, extra-budgetary funds 2 7 Characteristics of the Czech fiscal system (2) fiscal policy did not create conditions for a sustainable economic growth Government possibilities to realize its priorities (e. g. effective social state) were low significant increase of mandatory expenditures instead of expenditures in spheres with a long-term positive multiplication effects (infrastructure investment, education, etc.) Budgetary Outlook 2003 ­ 2006: Concept of Public Budgets Reform (approved by the Government of CR with resolution 624/2003) 8 Graph: Primary Deficit and Public Debt -18 -16 -14 -12 -10 -8 -6 -4 -2 0 2 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 Primarydeficit(%ofGDP) 0 100 200 300 400 500 600 700 800 900 1000 Debt(%ofGDP) Deficit Deficit without reform Debt Debt without reform Source: Czech Ministry of Finance, 2003. 9 necessity to meet principles and rules followed by the fiscal policy of EU countries (Maastricht criteria, Stability and Growth Pact) maintenance of width and quality of provided public goods and services preference in changes on expenditures side rather on revenues side of public budgets Basic thesis of the Czech Reform 10 Foreign practical experience: reactions to causes of difficulties and not to their external demonstrations an optimal mix (structure) of reform measures and their correct timing the revision of the institutional framework, within which public budgets are realized wide political support co-operation (collective responsibility of the whole Government) 11 Public Budgets Reform 2 stages of the Czech Public Budgets Reform: 1. Stage ­ main goal: bring the deficit trend to a stop slowing down the dynamics of public debt increase; 2. Stage ­ main goal: fiscally-neutral tax package for enhancement of economic growth preparation of pension and health care reform. 12 Graph: Development of deficits of public budgets and public debt (without obligations of the Czech Consolidation Agency) in the passive and active scenarios -10,0 -9,0 -8,0 -7,0 -6,0 -5,0 -4,0 -3,0 -2,0 -1,0 0,0 1998 1999 2000 2001 2002 2003 2004 2005 2006 Deficitin%of GDP 11,0 18,0 25,0 32,0 39,0 46,0 53,0 60,0 67,0 74,0 81,0 Debtin%of GDP Deficit ­ passive scenario Deficit ­ active scenario Debt ­ passive scenario Debt ­ active scenario Fiscal reform Maastricht "criterion" of fiscal deficit and debt 3 13 Targets on the revenue side stabilization and maintenance of compound tax-quota (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 14 Value Added Tax the turnover limit for mandatory registration to VAT was reduced from CZK 3 mil per year to CZK 2 mil per year (in 2003), with further reducing to CZK 1 mil per year (in 2004) decreasing of the standard rate VAT from 22 % to 19 % transfer of a certain part of goods and services from the reduced rate (5 %) to the standard rate (19 %) according to EU (e.g. internet, telecommunication services, layers, hair-dressers, cleaning services, ...) transfer of some goods from the standard to the reduced rate (e.g. coffee, tea, chocolate, chewing gums ...) transitory provisions for heat supplying and construction of buildings for living transfer of hotel services to reduced rate until the end of the year 2005 (together with fees to sport actions and cultural events) provision on the system of the internal trade between the EU member countries 15 Excise Duties increase of rates up to level of minimum rates applicable in EU for those commodities, where the rate applicable in the CR is under this level introduction of a suspension arrangements with so-called tax warehouses gradual attainment of 57 % tax burden on cigarettes by 31 December 2006 ethyl alcohol tax was raised from CZK 234/liter to CZK 265 of pure ethyl alcohol tax imposed on ethyl alcohol related to homemade spirits stays on 50 % (permanent exception) the sale of tobacco and spirits on marketplaces is prohibited marking of spirits by control labels administration of excise duties is secured solely by the custom administration 16 Income Tax the corporate income tax was reduced to 28 % (2004), to 26 % (2005), finally to 24 % (2006) the "minimum income tax" was set (CZK 6000) partial broadening of the tax base ­ setting of a price limit for depreciation of acquired cars to CZK 900 000 since 2004 cancellation of the tax relief in the amount of half tax deducted from dividend income since 2005 taxation of individuals not goes through significant changes in 2004 ­ 2006, only deductible item for children is raised by CZK 2000 obligation of the self-employed persons to pay at least a minimum income tax corresponding to fictive income in the level of 50 % of the average wage in the national economy. 17 Estate Tax Real Estate Tax new legal regulation since 2005 the tax on land is transferred in full to a value principle, without participation of experts or assessors reducing the total cost of this tax administration Real Estate Transfer Tax tax rate is reduced from 5 % to 3 % (1 July 2004) certain exemptions concerning this tax was cancelled 18 Other Taxes Vehicle Excise Duty from the accession to EU includes exemption from the tax subject of vehicles registered in other states of EU cancellation of customs offices on the border crossing in case of entities from the third countries Inheritance Tax the inheritance in the group I of heirs is exempted from the tax Local Fees transformation to municipal taxes the range of municipal taxes will be extended if need be 4 19 Tax Administration taxes and tax control new process regulation, the so-called tax code obligation to register cash payments by means of cash registers made on marketplaces or through stall sales the bookkeeping of the VAT non-payers will be simplified 20 Social and Health Insurance canceling of the transport allowance 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 from 35 % (2004) to 50 % (2006) 21 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 minimum 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 22 Expenditure Side financially very demanding programs following from the declared government's priorities (e.g. R&D, education, transport infrastructure, programmes co- financed from the EU budget) X government engaged itself to stabilize the public budgets (together with rationalism of mandatory expenditures, emphasis on program-oriented structure of the State Budget) 23 Pensions Current pension insurance scheme is financially unsustainable in the long term, modifications: the age limit for retirement will be increasing until reaching the equal level of 63 years for both man and woman (2013) the possibility of a temporary reduction of the old-age pension at pre-mature retirement is cancelled (the permanent reduction remain) unlimited earnings for pensioners suggestion of the Pension Insurance Scheme Reform transition from the benefit-defined system to contribution-defined system (NDC ­ Sweden model) 24 Sickness Insurance Aim to prevent misuse and deformation of effects of the system: the decisive period for the determination of 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 5 25 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 control of the benefit payments more intensive separation of the roles of the state and territorial self-governing units 26 Public Health Insurance necessity of reform because of financial demands on public health insurance system connected with ageing of population regulation, cost control and increase of effectiveness of management of the health care facilities regulating of expenditures implementation of a payment for diagnosis in the bed care segment regulation of expenditures for medicaments 27 State Assistance to the Building Savings state support of the building savings decreased from 25 % to 15 % of the annually saved amount (assisted maximum increased from CZK 18 000 to CZK 20 000) extension of the five years' binding period to six years provision of the state assistance to the participants who reach 15 years of age 28 Public expenditures Management maintenance of aggregate fiscal discipline allocation efficiency ­ allocating of sources in order to government priorities economic efficiency ­ support of effective providing of services 29 Improvement of Public Expenditures Management medium-term budgeting ­ 3 years horizon implementation of expenditure frameworks programme financing instead of budget financing expenditure audit centralization of certain purchases in the public sector and usage of PPP (Public Private Partnership) reduction in the total number of employees in the centrally controlled public services by 6 % till the year 2006 30 Risks of the Reform's Realization insufficient support Government, across the political scene, laic and professional public, media necessity of transparency fragmentation of 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 6 31 Risks of the Reform's Realization (2) adaptation of the chapter administrators to new challenges internal competition in given financial sources, qualitatively different environment Human resources many government employees are responsible for creation, realization, monitoring and evaluation of the State Budget necessity of continuous professional training, co-operation with appropriate faculties of Czech universities 32 The Main Issues of the 2nd Stage of the Public Budgets Reform support of families with children (shared taxation of married couple, child allowance) commerce support (accelerating of amortization in 1. ­ 3. class) support of science (increasing of limits for gift depreciation) fight with tax evasions (control labels on spirits, limitation of cash pays, cash registers ...) 33 The Approach of ODS principal changes of the economic policy environment favorable for business activities "small" state (limitation of bureaucracy) deep changes in social system (cancellation of benefits, principle of negative tax) and pension system (minimum pension guaranteed by state + individual savings) unification of the tax rates to 15 % (VAT, Income Taxes) 34 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) 35 Graph: Structure of Demographic Development in the CR - 1 6 0 - 1 2 0 - 8 0 - 4 0 0 4 0 8 0 1 2 0 1 6 0 2 0 0 3 2 0 1 0 2 0 2 0 2 0 3 0 2 0 4 0 2 0 5 0 ths.persons L iv e b ir th s N e t m ig ra tio n N a tu r a l d e c re a s e T o ta l in c r e a s e Source: CSO. back 36 Graph: Development of Individual Age-Dependent Expenditure Items. 0 5 10 15 20 25 30 35 2000 2010 2020 2030 2040 2050 %ofGDP Pensions Health care Education Social benefits Source: Czech Ministry of Finance. back 7 37 The End