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September 23, 2020

Europe

EUROPE: CEE PULSE

BY Andrius Tursa

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( 4 mins)

The Czech Republic is tightening restrictions and debating new economic support measures amid surging Covid-19 cases. In Poland, the three governing parties are deciding the fate of the United Right coalition. Romania’s parliament adopted a controversial 40% pension increase, which poses major risks to the country’s public finances; however, the decision can still be revoked by the country’s constitutional court. Finally, Russia’s draft 2021-2023 budget suggests fiscal consolidation through notable spending cuts and tax hikes.

Czech Republic

The epidemiological situation is rapidly deteriorating, and the country now has among the highest rates of new Covid-19 infections per capita in Europe. This prompted the resignation of the health minister Adam Vojtech earlier this week, while the Prime Minister Andrej Babis publicly apologized for the excessive easing of restrictions during the summer. The new health minister Roman Prymula (Independent) immediately moved to restrict opening hours of bars/restaurants until 10pm and limit public gatherings as of 24 September. Most universities are shifting back to distance learning. However, regional and senate (first round) elections remain scheduled for 2-3 October. In the meantime, the government is debating a new furlough scheme for employers based on the German “Kurzarbeit” model, which would replace the existing scheme at the start of November. A proposal to reduce the personal income tax is also on the table.

Poland

The ruling Law and Justice (PiS) party and its two junior coalition partners Agreement and Solidarity are continuing tense negotiations on their future cooperation after the divisive vote on the animal protection rights bill last week exacerbated cracks in the ruling camp. Decisions on this issue are expected later this week, although further delays are possible. Since the breakup of the United Right coalition would leave all parties worse off, there is greater interest in bridging their disagreements. The rumored entry of the PiS leader Jaroslaw Kaczynski into the reshuffled cabinet could help mitigate internal tensions.

Another potentially divisive issue that the ruling coalition might face in the near future is the proposed closure of six coal mines, as the country seeks to gradually reduce its reliance on coal-fired electricity generation. The move has already triggered protests from the mining trade unions, which is an important electoral base for the United Right camp.

Romania

Yesterday, 22 September, the opposition-controlled parliament passed controversial amendments to the 2020 budget that introduce a 40% (instead of 14%) pension increase starting this month. With this move, the opposition Social Democratic Party (PSD) aims to win greater voter support ahead of the 27 September local vote and the 6 December general election. However, such a steep spending increase would be a major blow to the country’s fragile public finances. According to Prime Minister Ludovic Orban (National Liberal Party, PNL), the state has no fiscal space to accommodate additional spending as the 2020 budget deficit is already set at 6.7%. The central bank estimates that the 40% pension hike would lift the 2021 budget deficit into the double-digit zone. As a result, the ruling PNL will challenge the amendments in the Constitutional Court. If the court consider the amendments in line with the constitution, President Klaus Iohannis may only temporarily halt the enactment of the legislation. Moreover, any future government would have limited chances in repealing the pension hikes as the country’s top court has previously ruled such austerity moves as unconstitutional.

Russia

The draft 2021-2023 federal budget approved by the government on 16 September suggests fiscal consolidation in the coming three years through notable spending cuts and tax hikes. This is in line with Moscow’s fiscally conservative policies pursued since the introduction of Western sanctions in 2014 due to conflict in Ukraine. The draft budget foresees a 10% spending cut across the board (with the exception of some “protected items”), suspension of salary indexing for civil servants in 2021, and a 5% cut in military spending. To boost revenue, the government plans to increase the personal income tax rate for high-earners, and to impose a new levy on interests from deposits over RUB 1mn as well as tax dividends leaving Russia starting 2021. Moreover, significant tax increases are foreseen for the extractive, fertilizer and oil and gas industries. According to Prime Minister Mikhail Mishustin, the budget prioritizes the implementation of long-term national projects and the state’s social obligations. The State Duma is expected to begin consideration of the budget on 1 October. One signpost to watch is whether suggestions by the head of the parliamentary audit chamber Alexei Kudrin to accelerate the pace of privatization of large state-owned companies to generate additional revenue gain any wider traction.

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