Jan Macháček

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Czech Business Weekly

Even the Gipper would frown at these sums

16. 04. 2007
Can it be true? Has the son of Ronald Reagan really been born in the shape of former Civic Democrat (ODS) Minister of Finance Vlastimil Tlustý? With Tlustý currently hogging the limelight while very publicly pondering whether to support the fiscal “reform package” presented by Mirek Topolánek’s ODS-led government, some commentators, such as Daniel Kaiser in daily Lidové noviny, would probably have us believe Tlustý is a typical supply-sider shaped by the Reaganomics famously espoused by the actor-turned-president known as “the Gipper.”

The Tlustý-devised economic reform proposals, put on show by the ODS before last year’s elections and tagged the “blue chance” or “fat wallet“ package, were indeed much more radical than what’s on offer now. Like Reagan, Tlustý was willing to risk big deficits that would theoretically pay for themselves through the economic stimulation achieved by the simultaneous dramatic lowering of taxes. This was despite consistent warnings in mainstream academic economic textbooks that the theory doesn’t hold water.

Though Reagan ended up accused of having given America a damaging free-lunch fiscal policy, he was actually more responsible than Tlustý. He may have failed but he honestly wished to cut spending and achieved some success in taming legislatively planned spending growth. Tlustý wanted social spending to grow dramatically and had no plans to rein back penciled-in government outlays.

Tlustý’s plan also seemed to neglect a new reality: This country isn’t even allowed to risk ballooning deficits–it is a member of the EU, which forbids such behavior.

Six cardinal sins

Criticism of the offered fiscal package is nevertheless more than justifiable.

1–Where are the promised simple one-page tax forms? With the government set to maintain the complex list of tax relief items, deductions and exceptions, legions of tax advisers and consultants must be rubbing their hands in glee.

2–The ODS had eight years of opposition to tabulate carefully considered proposals. But this package seems to have been quickly knitted together. Ask ministers about some of the likely consequences and they seem rather uncertain.

3–Don’t bother calculating the reforms’ impact on local capital markets. Just write in one big fat zero. Gone are the promises to cancel or lower the dividend and capital gains taxes. This is despite the economy’s over-dependence on bank loans. More initial public offerings (IPOs) would make it more dynamic.

4–No pain, no gain. But the income tax changes are designed “to help everybody” (or so says Minister of Finance Miroslav Kalousek). Somebody, somewhere on the social ladder must feel the heat. All deep, real reforms hurt a lot of people but help them and their kids in the longer term.

5–It’s clear the value-added tax (VAT) changes will sting the middle classes while saving those on Kč 80,000 (€ 2,800) monthly salaries some Kč 10,000. Government assistance for widening social inequality isn’t the smartest political trick.

6–Next year, the budget deficit will hit 3.2 percent. Once again we’ll break the Maastricht rules which, if anyone needs reminding, we’re obliged to fulfill.

The reforms are aimed in the right direction, but they’re generally too moderate and shallow. Don’t blame the coalition government. Take a good look at the ODS. The blues just got yellow.

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