Central Bank Chief Slams Czech Tax Cut as Boosting Budget Risks

The Czech central bank chief expressed rare public criticism of the country’s political leadership, saying the plan to cut personal taxes will increase pressure on a budget that’s already hurting from the fallout of the coronavirus pandemic.

Governor Jiri Rusnok said on Sunday that this year’s record fiscal shortfall is natural as the government is trying to mitigate the impact of the lockdown. But he warned that cutting taxes will create a long-lasting hole in state finances.

Billionaire Prime Minister Andrej Babis on Fridayannounced a cut in personal income tax, which is expected to curb budget revenue by about 74 billion koruna ($3.4 billion). The plan would broaden the stimulus, which included measures such as paying parts of salaries of furloughed workers, bonuses to medical staff and subsidizing commercial rents.

Speaking on public TV on Sunday, Rusnok questioned the government’s expectation that lower taxes will increase consumption and said that a large number of people will use the extra cash to boost savings.

“The thing that troubles me about it is the fiscal imbalance,” Rusnok said. “Handing out 74 billion at the time when we know that our budgets are stretched, and will remain stretched in the future — that in my view is quite a hazard.”

Read more: Virus Helps Czech Billionaire Leader Go on a Spending Spree

The ruling coalition also agreed on Friday to pay a pension bonus of 5,000 koruna in December to compensate retirees for rising living costs. That will boost this year’s budget spending by about 15 billion koruna.

Critics say the special payment, which will go to about 3 million people in the country of 10.7 million, is a handout to increase the ruling parties’ popularity before the 2021 elections. Babis has rejected any connection with elections.

Rusnok said the pension bonus appeared related to “the political cycle,” though he considers the one-off payment to be less worrying from the fiscal perspective than the tax cut.

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