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November 24, 2020

Europe

CZECH REPUBLIC: Weakened by the pandemic, Babis faces challenging 2021

BY Andrius Tursa

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  • The Covid-19 pandemic has eroded public support for the ruling Action of Dissatisfied Citizens (ANO) and parties supporting the government.
  • The proposed tax breaks in the 2021 budget could boost domestic consumption in the near-term but heighten fiscal challenges in the longer-term.
  • The risk of political instability will rise once the pandemic recedes and the 2021 general election approaches.

Following a notable drop in new Covid-19 infections as well as lower hospitalization and death rates over the past two weeks, the government started a gradual easing of restrictions as of yesterday, 23 November. This entails slightly longer operating hours for essential retailers, a shorter night-time curfew, larger public gatherings, and the resumption of school activity for some. If this positive trend continues, a more substantial relaxation could be expected starting next Monday, 30 November.

This would be a much needed respite for the government led by Prime Minister Andrej Babis (ANO), which has been forced to cope with anti-lockdown protests while facing accusations that it mishandled the second wave of the pandemic that has led to the replacement of two health ministers in the past three months. The pandemic has also eroded public support for the government with the ruling ANO now polling at around 28% or five percentage points lower than last spring. ANO’s junior coalition partner, the Czech Social Democratic Party (CSSD), as well as the Communist Party of Bohemia and Moravia (KSCM) – which informally supports the government – are both polling below the 5% threshold to win seats in parliament. A poor performance in the recent regional and senate elections reaffirmed their weakness ahead of the October 2021 general vote.

While the 2021 poll is still months away, the opposition parties have already started positioning themselves to challenge the incumbent. In October, three center-right opposition parties – Civic Democratic Party (ODS), TOP09, as well as the Christian and Democratic Union – Czechoslovak People’s Party (KDU-CSL) – signed a cooperation agreement for the 2021 poll. The liberal Czech Pirate Party is starting similar talks with the Mayors and Independents (STAN). Such alliances will heighten competition for the ruling ANO in the upcoming poll.

In the context of the pandemic and rising electoral pressures, both the ruling and opposition parties are pushing for tax cuts in the draft 2021 budget. Babis (ANO) has proposed to reduce the personal income tax rate for most employees from 23% to 15% as well as lower the base for the tax. This would increase the income of an employee earning an average salary by around CZK 1,736 (or EUR 66). Meanwhile, the opposition parties are advancing another tax break in the budget, which would raise deductible tax allowance for employees by 37% or around CZK 9300 (EUR 355). While both proposals would undoubtedly be welcomed by voters and could boost domestic consumption in the near-term, their adoption would cut budget revenue by around CZK 130bn (EUR 5bn) or slightly more than 2% of GDP per year and lead to an elevated structural budget deficit in the long-term, according to the National Fiscal Council. Negotiations over next year’s budget will continue in the coming weeks; the final adoption in parliament is expected in mid-December.

From a political standpoint, the 2021 budget process will test the level of unity within Babis’s coalition government. So far, the CSSD has refused to back the tax cuts proposed by Babis due to their potential fiscal impact. The KSCM is also reluctant to support the budget unless ANO reallocates a portion of defense funding to fight the pandemic. These tensions suggest that the CSSD and KSCM might be tempted to reassess the political dividends (or lack thereof) of backing the Babis government once the pandemic recedes and the 2021 vote approaches. In such a case, the Babis cabinet could be replaced by a caretaker government until the new poll is held.

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