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Czech finance minister looks to keep momentum going

Having tackled the country's tax system in 2016, Czech Republic finance minister Andrej Babiš is turning his energies to the task of promoting growth while reducing the deficit. He talks to Stefanie Linhardt.
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Andrej Babis

Q: The Czech Republic has had a positive current account balance since 2014, as well as low and falling debt-to-gross domestic product (GDP) ratios. In 2016, what achievements were the most important to you?

A: I’m proud to say the Czech Republic acts as a fiscally responsible entity. In 2016, we achieved the best financial results in the history of the independent Czech Republic. We have managed to achieve a budget surplus, mainly due to the better collection of taxes. At the end of 2016, the country’s debt was €2.6bn lower compared with the starting point of our government term in January 2014.

We are the seventh least-indebted country in the EU with both state debt-to-GDP and general government debt-to-GDP [ratios] of below 37.5%. Tax revenues increased significantly, even though we partially decreased tax rates.

This is the positive effect of our anti-tax fraud measures, especially the VAT control statement and expanding the use of the reverse charge mechanism. We are convinced that this measure must be further broadened if we want to combat efficiently the missing trader VAT fraud that so often goes hand in hand with organised crime.

I am very happy the European Commission finally accepted that this problem is particularly gruelling in some EU member states. At the end of 2016, the commission adopted a legislative proposal that allows interested member states that meet rather strict conditions to apply for a temporary [exemption] that, if authorised by the commission, would enable them to implement a generalised reverse charge mechanism [on] any taxable supply above €10,000.

Furthermore, we have launched the initial phase of the electronic registration of sales that brings an advanced and fully automated online communication among entrepreneurs and the tax administration in our tax collection system. This will contribute to restoring the level playing field, and secure a considerable portion of tax revenues, without any need to raise taxes.

Q: After 2016’s emphasis on improving the tax system, what are the areas of focus for your 2017 budget?

A: This year’s budget pursues the strategy of gradual deficit reduction, promotes the growth of our economy and encourages consumption. The budget targets government priorities, such as security, defence, increasing budget revenues, increasing the wages of workers in education and other spheres of public administration, raising expenditures for science and research, [the] creation of conditions for drawing from the EU funds and for investment growth.

 Q: You have mentioned both the need to reduce the deficit as well as investment plans. How do you balance growth with fiscal discipline in your budget policy?

A: There are regular shifts between periods of growth and periods of stagnation or decline in almost every economy. Now we are in a phase of growth and it is our job to do everything possible to prepare for the phase of possible crisis.

As the minister of finance I am doing everything possible to cut the state budget deficit and national debt. However, I am deeply aware of the fact that mindless deficit reduction may strangle the economy. Therefore, we are also taking steps to increase the growth of the domestic economy. We have prepared a budget that increases spending on investment and research and development. It is necessary for us to have both healthy public finances and a strong economy in order to deal with potential shocks.

Q: In that case, what is your outlook for the economy in 2017? And what challenges and opportunities do you see in the near future?

A: The economy is doing very well – 2015 GDP growth was 4.5% and in the first nine months of 2016, the GDP had increased another 2.6% – and will be doing at least as well in 2017. Wages are rising; people are better off and not afraid to spend their money. The unemployment rate in the Czech Republic was the lowest across the EU in 2016 at 3.8% as of November 2016, and should remain so in 2017.

We want to take advantage of this positive development of the Czech economy and efficient measures against tax evasion to raise living standards in our country and to simplify paying taxes for ordinary citizens.

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