Tax talk: Czechia faces tough economic choices in 2023

Like countries throughout Europe, Czechia is facing difficult economic choices. A series of crises in recent years have hastened consideration of structural changes to the country’s economic and social systems.

Top of the list is pension reform, with Minister of Labor and Social Affairs Marian Jurečka leading discussions in Czechia on how to make the pension system more sustainable. Major pension increases resulting from double-digit inflation last year, coupled with an aging population, mean there is a huge and widening deficit in the pension system, with pensions forecast to account for almost 30 percent of all state expenditures next year.

Jurečka said in an interview with Právo that “if we do nothing” then the pension deficit “will exceed 5 percent of GDP by around 2050.” The expected solution is a raising of the retirement age, which is currently 65 for everyone born from 1971 onwards.

The expense of paying out pensions to an aging population is an economic headache facing developed countries around the world, and Czechia can look to the West for examples of how explosive the issue has become. 

In France, attempts to raise the retirement age by two years, from 62 to 64, have led to a series of nationwide strikes. In the U.K., former Prime Minister Liz Truss has in recent days blamed her ousting as leader last year on panic over pension funds caused by her economic policies.

The Czech government faces a difficult balancing act: reforming a problematic pension system without creating similar turmoil.

Jurečka has promised that “for those born before 1973, nothing will change.” He has also stressed that any increase in the retirement age would not be a blanket measure; he is “fully aware that there are physically demanding professions in which it is difficult for people who work in them all their lives to last until the age of 65.”

Jurečka and others, including President-elect Petr Pavel, have said that changes to the retirement age must be flexible because “it is not possible to set one age for all professions.”

But pension reform isn’t the only unpopular change facing Czechia. Recent government communications also indicate that tax hikes are coming to boost state revenues.

Taxes are another area in which long-term issues have been highlighted by recent short-term shocks. As leading economist Lukáš Kovanda told Expats.cz in November 2022, “this government will probably have to increase taxes, possibly including personal income tax.”

The drive to raise taxes aims to deal with the immediate issue of Czechia’s ballooning budget deficit, which was over CZK 360 billion last year.

Various tax changes have been proposed, and it’s clear that the government is working intensively on the issue. Finance Minister Zbyněk Stanjura is discussing an increase in property tax, while the Ministry of Finance has expressed potential support for raising so-called “vice taxes” on products such as cigarettes, alcohol, and gasoline.

The government wants to avoid tax increases on income, which are seen as a “punishment for being hardworking,” according to TOP 09 MP Miloš Nový. Taxing consumption is seen as a fairer way of raising the state’s income.

But there are also suggestions that more sweeping changes could be enacted. The self-employed may face higher taxes to make their tax burden equal to that of employees.

Stanjura admitted that the government is “debating” bringing the tax burden for the self-employed more closely into line with that of employees. Yet, he has emphasized that after reform last year, the paušalní daň system of flat-rate taxation will “run for at least two or three years” before further changes are considered.

How far the government is willing to go will be influenced by political considerations. The opposition led by former Prime Minister Andrej Babiš likes to accuse the current administration of not caring about ordinary people, even though many of the economic problems now facing the country began under Babiš’s leadership.

However, it seems likely that significant changes will come before the next general election in 2025. The government will want to make the necessary reforms as painless as possible, but those working in Czechia should not expect to escape their impact in the years to come.