The Czech Republic will lower personal income tax next year as the government expects the move to help the economy recover from the coronavirus-induced recession.
The parliament approved the change proposed by billionaire Prime Minister Andrej Babis on Friday. He wants to broaden state stimulus beyond current measures like paying salaries of furloughed workers and subsidizing small businesses. Critics say he’s using budget handouts to boost his popularity before next year’s elections.
The Czechs have increased state spending and allowed the deficit to swell to a record to soften the pandemic’s economic impact. Babis is counting on the tax cut, which he said will last two years, to boost household income and increase consumption as the crisis limits room for pay hikes.
The Finance Ministry estimates that the change, which introduces a lower bracket of 15% and a 23% rate for top earners, will curb state income by about 80 billion koruna ($3.6 billion) next year. It says the net budget impact will be smaller because of the increased consumption it should spark.
Finance Minister Alena Schillerova, nominated by Babis, defended the proposal by saying it will leave more money in the pockets of 4.5 million people.
“With this, we will support the economy when it needs it the most,” she said during the debate.
The bigger shortfall will boost borrowing, but years of economic boom and undershooting of deficit targets have made the country one of the least indebted European Union members relative to the size of the economy.
The plan has drawn a rare pushback from central bank Governor Jiri Rusnok, while analysts criticized the tax cut as infective because most of extra cash will go to top earners who are more likely to save it than spend it.
“This reform is expensive,” said Jan Bures, the chief economist at Prague-based brokerage Patria Finance. “But the problem isn’t the high public-finance deficit in itself, but rather the low efficiency of state expenditure.”