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Czech finance minister queries Green Deal implementation

Alena Schillerová, the Czech Republic's deputy prime minister and finance minister, talks to James King about global trade tensions, the implementation of the country's controversial digital tax, and the impact if the EU's Green Deal.
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Alena Schillerová

Alena Schillerová

The Czech Republic boasts an enviable economic dashboard, characterised by strong growth rates, low levels of public debt and abundant fiscal headroom. This healthy position owes much to the fundamentals underpinning the economy. It also points to sound macroeconomic management on the part of the authorities. Alena Schillerová, the Czech Republic’s finance minister since December 2017, and its deputy prime minister since April 2019, has been integral to this success. Under her watch, government debt has decreased while the primary fiscal balance has remained positive.

The growth outlook for the Czech economy appears to be relatively stable, even if export growth is anticipated to be somewhat subdued. “We expect our gross domestic product to grow by about 2% per annum between 2020 and 2023. This growth should be driven by private demand, though investment expenditures and government consumption are also forecast to make a positive contribution. The growth of exports should remain sluggish in 2020 but it should gain some momentum from 2021 onwards, as global economic growth moderately recovers,” says Ms Schillerová.

Nevertheless, the coming years may present the externally oriented Czech economy with a fresh set of challenges, as the shifting sands of geopolitics begin to take their toll on the economic fortunes of the wider central and eastern Europe region and beyond. Trade tensions, in particular, represent a notable threat to the Czech Republic’s economic trajectory.  

“The economy faces a range of risks, mainly on the downside and external in nature. They include trade tensions between the US and China and potentially also between the US and the EU, the form of relationship that will exist between the UK and the EU after the Brexit transition period, weaker-than-expected growth in trade partners’ countries, especially in Germany, or geopolitical tensions in the [Middle East and north Africa],” says Ms Schillerová.

Digital tax 

Feeding into concerns around global trade tensions, the government submitted a digital services tax bill to the country’s Chamber of Deputies of the Parliament of the Czech Republic in 2019. The proposal would see a 7% tax rate levied on companies that boast a global turnover of €750m or more, and a turnover of about €4m in the domestic market. With similar proposals from other European states drawing the ire of the US government, it remains a contentious issue, even if the rationale is clear.

“This is a compensatory tax aimed at entities that do business on the Czech market, but do not pay the income taxes here in the corresponding amount. Its aim is not to target specific foreign corporations, but to rectify the current unevenness when certain entities achieve significant profits in the Czech Republic but their tax payments are [much] lower than those of companies operating in traditional sectors,” says Ms Schillerová.

Ms Schillerová notes that under existing corporate income tax rules, only companies with a physical presence in the country are subject to appropriate taxation. “Therefore, if a company resides abroad and does business in the Czech Republic, it does not pay taxes here in the adequate amount. But if we didn’t have solid infrastructure or a working legal system in our country, such a company would have barely made any money here,” she adds. 

The proposed digital tax is still in the legislative process and is therefore subject to change. As it stands, however, it will be applied to three specific areas of service, including the placement of targeted advertising in digital interfaces, the utilisation of a multilateral digital interface, and the sale of user data. Nevertheless, Ms Schillerová notes that this unilateral digital tax would be bettered by the introduction of coordinated, multilateral action, an outcome that has so far eluded both the EU and the Organisation for Economic Co-operation and Development (OECD) member states.

“Despite the fact that our government has drafted its own digital tax proposal, it still prefers for an effective solution to be found at a global level. The current proposal reacts to the fact that so far no agreement has been found among the EU and OECD states regarding their joint action. We therefore consider it to be a temporary solution. The temporary nature of the tax is enshrined directly in the proposal, with 2024 being the last tax period. Once a solution is found at the OECD level, we are ready to repeal the national legislation,” says Ms Schillerová.

Green Deal impact 

Meanwhile, the unveiling of the European Commission’s (EC's) Green Deal, in order to transform the continent into a carbon-neutral region by 2050, will also have significant implications for the Czech Republic’s economy. The EC's proposal includes securing €1000bn of sustainable investments over the next decade, through a mixture of public and private funding, while a dedicated instrument known as the Just Transition Mechanism (JTM) will be established to support member states most affected by the shift to green energy. 

“I welcome the European Green Deal and fully acknowledge the need to tackle climate change. The European Green Deal contains a lot of interesting ideas and I look forward to discussing, in the EU fora, concrete proposals to be made by the EC,” says Ms Schillerová.

Nevertheless, Ms Schillerová notes that any drive towards a carbon-neutral EU must be executed in a disciplined way. “For me as minister of finance, it is crucial to make sure that we approach the climate issues in a financially and economically sensible way. The European Green Deal represents a challenge not only for the public sector but also for the private sector. We will have to discuss how to mobilise resources and also how to adequately set the whole legislative and regulatory framework.”

Based on its current energy mix, the Czech Republic will be one of the EU member states most impacted by the Green Deal’s proposed initiatives. According to data from the OECD, the country’s 2017 total primary energy supply was comprised of 35% coal, 21% oil and 17% nuclear and 16% natural gas. The remainder was made up of solar, wind, geothermal, biofuel and waste sources. “It is highly important to ensure that the transition to climate neutrality is technologically neutral and that the right of the member states to choose their energy mix – including the use of the nuclear energy – is respected,” says Ms Schillerová.

Funding threat 

Meanwhile, the Green Deal’s JTM will be based, in part, on the use of some of the EU’s cohesion policy budget, along with other sources of financing. As a consequence, member states that receive cohesion policy funding, and that have a high degree of fossil fuels in their energy supply, could ultimately face changes to their EU funding mix. 

“The transition to a green/climate-neutral economy will be a long and costly process. It is therefore extremely important that the transition is done in a fair way, with long-term support, in order not to overload the regions and member states that historically suffer the highest environmental burden. The EC proposal for JTM is thus a first step, which I welcome, though I am afraid the financing needs will be in multiples of the resources this EC plan [is likely to] mobilise,” says Ms Schillerová.

Based on the EC’s calculations, Ms Schillerová notes that the figure stemming from the JTM to the Czech Republic would be in the region of €7.7bn. Accordingly, she believes that it will not fully compensate for the corresponding decrease in the Czech Republic’s Cohesion Policy allocation as well as for other less developed EU member states. 

“The Cohesion Policy funding is primarily aimed at supporting the convergence of the less developed countries and their poorer regions, so the substantial decrease of this resource, together with much stricter rules [on its allocation], risk complicating and even hampering this process,” says Ms Schillerová

“Furthermore, the Just Transition Fund, which represents one of the pillars of the JTM, [will have to be] supplemented by Cohesion Policy funds, which might have to be done at the expense of other regions and other priorities, regardless of how important they are for the Czech Republic. Therefore, I do not see the JTM proposal as a suitable and adequate instrument reflecting the adjustments or decrease in Cohesion Policy funds.”

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