EXPLAINED: Czech president signs consolidation package – what’s next?

The package changes the country’s value-added tax (VAT) system, increases many taxes and cuts a range of subsidies.

Expats.cz Staff

Written by Expats.cz Staff Published on 22.11.2023 12:25:00 (updated on 22.11.2023) Reading time: 3 minutes

President Petr Pavel signed into law today the government's much-debated and scrutinized budget consolidation package. The package is designed to help stabilize public finances and reduce the country's budget deficit and debt levels.

What is in the package?

The package makes adjustments to 65 laws, with most changes taking effect on Jan. 1, 2024. Key measures include consolidating value-added tax (VAT) rates, raising the corporate income tax rate, increasing property and other income-related taxes, and hiking certain consumption taxes over the next few years. It also cancels several government-sponsored subsidies.

How will it impact citizens?

Critics argue the package will harm the economy and burden citizens through higher taxes and a loss of some subsidies. Supporters counter that it is necessary to get spending under control and will allow for strategic investments, as well as paying people’s pensions in the future. Experts note some measures will increase costs for both businesses and the populace.

The austerity package: The major changes

  • VAT rates will change – from three brackets to two
  • Food will mainly be taxed at the lower 12 percent rate
  • Some services and draft beer will be subject to the higher 21-percent VAT rate
  • VAT for public transport, magazines, some medicinal drugs, and tickets for culture and sports events will rise from 10 percent to the new 12 percent bracket
  • The corporate income tax rate will rise from 19 percent to 21 percent
  • Property taxes will rise by an average of 1.8 times
  • There will be a staged increase in consumption tax hikes on alcohol (10 percent over the next two years, and an added 5 percent in the following year)
  • Insurance payments for self-employed people will increase in the next three years

What will it do to the Czech economy?

At its core, the package’s main aim is to raise public finances. Prime Minister Petr Fiala said earlier this year that he hopes the reforms will raise at least CZK 70 billion next year. According to the prime minister, if no action had been taken, the budget deficit for 2024 would be CZK 94 billion higher. The following year – under current conditions – it would be CZK 148 billion greater. 

Why is the opposition unhappy?

Opposition parties have slammed aspects of the package and called for the president to veto it. They have referred to it as “stealing” from citizens and unfairly placing extra tax burdens on many members of society – particularly the middle classes. Arguments over the package over the summer led to hours of gridlock in the Czech Chamber of Deputies. The opposition ANO movement announced plans to appeal to the Constitutional Court.

other notable changes

  • The package reintroduces a 0.6 percent employee health insurance levy on income
  • Tax exemptions like discounts for school fees and students will go
  • There will be limits on tax exemption for non-working spouse/partner to those caring for a child under three years of age
  • The threshold to pay the highest rate of income tax (23 percent) will decrease from a monthly income of CZK 161,000 to CZK 121,000
  • The package reduces maximum state support for building savings from CZK 2,000 to CZK 1,000
  • The annual highway toll sticker price will rise from CZK 1,500 to CZK 2,300, starting March 1
  • Companies will be legally allowed to keep their accounts in a foreign currency (such as euros or dollars)

The road ahead

While signing the package, the president pledged to scrutinize next year's budget to ensure it includes pro-growth policies and protects the most vulnerable from austerity measures. The government also plans future reviews of spending and potential savings.

What do the experts say?

  • Political commentator for Seznam Zprávy Martin Čaban says that the consolidation package will not do much to rehabilitate the state's public finances. Rather, it will simply mean that they will not deteriorate as sharply as before.
  • Political analyst Jiří Pehe writes in iRozhlas that the parliamentary debate between the government and opposition was a “battle of monologues,” with the opposition criticizing the reform, but offering no real solutions or alternatives to cutting the deficit.
  • Economic editor of Deník N Jan Úšela says that the reform “hurts everyone a little, but no one fatally.”
  • Editor-in-chief of the newspaper Právo Petr Šabata writes in iRozhlas that the consolidation package “will hit the socially weak very hard,” costing low-income households “thousands of crowns” every month.
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