Business Czech Republic sees inequality increase as even IMF becomes worried at phenomenon

17-03-2014 15:40 | Chris Johnstone

In spite of paying lip service to the principle of equality, the Czech Republic has seen an increasing trend in recent years towards the rich getting richer at the expense of the rest. Tax systems have got more regressive with the scope for distributive spending reduced amid fiscal constraints. Now even the IMF is warning that increased inequality is not a good recipe for growth.

Illustrative photo: OmirOnia, stock.XCHNGIllustrative photo: OmirOnia, stock.XCHNG At first glance an International Monetary Fund (IMF) report advising countries on measures to reduce inequality seems about as a likely as an international vegetarian convention in Argentina.

But the institution that for long epitomised economic orthodoxy and the belief that growth with minimum government intervention could fix most problems appears to have had a pause for thought in recent years. The increasing inequality that often accompanied growth and recession in recent decades is now seen in a negative light not just in terms of the social and political stability, but even for the holy grail of growth itself.

Amid an increasing weight of academic analyses suggesting mildly redistributive government policies might encourage rather than damage growth, are the more obvious arguments that depriving education and advancement chances to large chunks of the population does not stand you in good stead for the future. It’s in this context that the IMF released its Fiscal Policy and Income Equality policy paper at the end of this year. The Czech Republic traditionally figures as one of the countries with the least inequality in Europe. But it has not escaped the general trend of greater inequality with the most common inequality measure, the Gini coefficient, rising from 20.7 in 1990 to 27.7 in 2005 and levelling out at slightly under that level by 2010.

The gap between rich and poor regions of the Czech Republic has also grown as well, a problem that contributes to reduced mobility because people with property in poorer areas will not be able to sell up and get anything near the equivalent in the capital. Whereas Prague was only 29 percent richer than the average region in 1990 it was a whopping 121 percent higher in 2007.

Traditionally, governments can tinker with the tax system and transfers of cash, for example higher family and social benefits or pension policies that take more from the rich and pay out more broadly, to achieve their aims.

But the overall picture of taxation in the Czech Republic over the last decade or so is a retreat from what is regarded as the more progressive tax of personal income and an increased stress on raising revenues by taxing goods and services.

Taxes on personal income accounted for 4.2 percent of Czech GDP 2007 but slipped to 3.7 percent by 2011, according to OECD figures. In the wake of the short lived flat tax policy of the right of centre Civic Democrats in 2008, taxes on personal incomes fell to a low of 3.5 percent in 2010. Partly through higher Value Added Tax, the proportion of taxes on goods and services has jumped from 10.7 percent pf GDP in 2008 to 11.0 percent in the following year and climbed to 11.9 percent by 2011.

Irrespective of the changes from centre-left to centre-right governments, the overall level of Czech tax was remarkably stable at 36.3 percent of GDP in 2004 and 35.5 percent eight years later in 2012, with a brief period in between at lower levels.

The recent IMF report has some interesting recommendations that probably represent both the palatable and distasteful for parts of the current Czech coalition government. These include greater means testing of child and family benefits so that they are focused on the target groups rather than spread out. Means testing is fairly limited in the Czech Republic compared with other European countries. It also recommends, increased emphasis of state spending on lower levels of education against higher, which often favour rich, and greater use of property taxes, which are relatively underused in the Czech Republic. As a general principle, the study also argues for progressive taxation of incomes, another point for the Czech Republic which has not fully rehabilitated progressive tax since the switch to flat tax in 2008.

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