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Czech Republic: Actively Support Business And Employment To Strengthen COVID-19 Recovery

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By Cyber Era Staff

After years of steady growth that lifted incomes and living standards, the Czech economy has been hit hard by the COVID-19 crisis and will only recover slowly. Once support to firms and workers has restored stability, the focus should be on stimulating investment and productivity growth and addressing other long-term challenges, according to a new OECD report.

The latest OECD Economic Survey of the Czech Republic says that with bankruptcies and job losses expected to rise, the government should stand ready to provide further support until a recovery is fully under way, then actively help those who have lost jobs to find new ones. Job retention schemes can then be gradually phased out. Finding ways to swiftly resolve bankruptcies, improve retraining for jobseekers, and bring more women into the labour market would help to restore productivity and growth. A key challenge will be to keep supporting viable firms and jobs while allowing for resource reallocation across sectors.

“This crisis has interrupted a period of strong economic growth in the Czech Republic and an impressive convergence towards average OECD income levels. After effectively containing the first wave, the country is now battling the consequences of a second wave. Uncertainty is high and growth will only resume slowly,” said OECD Secretary-General Angel Gurría, presenting the Survey at a virtual launch with Prime Minister Andrej Babiš. “The challenge now is to bring about a recovery that is inclusive, sustainable and resilient to future shocks.”

The Survey projects Czech GDP dropping 6.8 per cent in 2020 then recovering by 1.5 per cent in 2021 and 3.3 per cent in 2022, but GDP will stay below pre-crisis levels over the next two years.

Prior to the pandemic, the Czech economy was performing well as sound economic policies and openness to foreign direct investment and global value chains helped to lift productivity, employment, wages and living standards. Since joining the OECD in 1995, the Czech Republic has seen real GDP per capita rise by almost 90 per cent. The country has enjoyed some of the lowest levels of poverty, unemployment and income inequality of OECD countries, with an effective redistribution of income through taxes and transfers.

Yet, challenges to growth and well-being existed before the pandemic. Labour productivity, while improving, lags behind the OECD average. Firm innovation and investment in research and development are weak and some aspects of the business environment are burdensome, holding back entrepreneurship. The export-driven economy is also vulnerable to external shocks.

Low overall inequality masks large regional variations in income that have grown over time as some regions suffer disproportionately from declining, ageing or unskilled populations, or poor digital connectivity. The fact the Czech Republic has a highly fragmented subnational government, with more municipalities per head than any other OECD country, exacerbates the issue as it leads to inefficient and poorly funded local government services.

Czech workers retire earlier than the OECD average, and a rapidly ageing population will weigh on employment rates and growth over time while driving up age-related spending. Tax revenue relies heavily on contributions from labour, which is not good for job creation, and the self-employed enjoy tax advantages that result in low social security contributions and potential pension shortfalls. Generous cash benefits and limited childcare also discourage women with young children from returning to work.

Recommendations in the Survey include better targeting R&D support to young firms, reducing the cost, red tape and time required to start a business and promoting green investment. The Survey also suggests expanding the provision of childcare and progressively raising the retirement age in line with life expectancy gains.

On the tax front, the Survey recommends reducing tax advantages for the self-employed, and shifting more of the tax burden towards real estate, consumption and environment-related taxation. Raising taxes on carbon would help to decrease the economy’s reliance on coal and other fossil fuels, while improving quality of life by helping to reduce greenhouse emissions and air pollution.

Working with over 100 countries, the OECD is a global policy forum that promotes policies to improve the economic and social well-being of people around the world.

Tax revenues fell across the OECD for the first time in a decade during 2019, but a much larger decrease is expected in 2020 as the COVID-19 pandemic drives down economic activity and consumption tax revenues, according to new OECD research published today.

The 2020 edition of the OECD’s annual Revenue Statistics publication shows that the average tax-to-GDP ratio has fallen to 33.8 per cent in 2019, a decrease of 0.1 percentage points since 2018. This was due to decreases in 15 OECD countries that were larger, on average, than the increases in the 20 remaining countries for which 2019 data were available.

The COVID-19 crisis is likely to significantly hit tax revenues in 2020, particularly from consumption taxes, due to the sharp fall in economic activity and consumption following lockdowns and the forced closure of many businesses. Drawing on the lessons from the global financial crisis of 2008, new analysis in Revenue Statistics shows that increases in government consumption and in households’ consumption of essential goods will exacerbate this fall in the short- to medium-term.

“Since the global financial crisis of 2008, we have seen a consistent trend of increasing tax revenues in the OECD, which have decreased slightly in 2019 for the first time,” said Director of the OECD Centre for Tax Policy and Administration, Pascal Saint-Amans. “We expect to see much sharper decreases next year when the impact of COVID-19 starts to become more apparent. At some point, when the health crisis has passed and the economic recovery is underway, governments will need to reconsider whether their tax systems are up to the challenges of the post-pandemic environment.”

Revenue Statistics confirms the longstanding diversity in tax-to-GDP ratios among OECD countries, which remained the case in 2019, ranging from 16.5 per cent in Mexico to 46.3 per cent in Denmark. The largest fall was seen in Hungary (1.7 percentage point), partially due to a decrease in corporate income taxes following the removal of the compulsory tax advance supplement on business taxes. Other large decreases were seen in Iceland (1.1 p.p.), Belgium and Sweden (both 1.0 p.p.). Only one increase of over one percentage point was seen, in Denmark (2.0 p.p.), which overtook France as the country with the highest tax-to-GDP ratio.

The data show that corporate income taxes in the OECD have continued to increase, from 9.2 per cent of total tax revenues on average in 2014 to 10.0 per cent in 2018. However, this is still lower than the peak recorded share of corporate income taxes at 11.5 per cent of total tax revenues in 2007 and are expected to fall again as a result of the current crisis. In 2018, average revenues from taxes on goods and services declined in OECD countries: although revenues from VAT remained steady at 20.4 per cent of total tax revenues, excise tax revenues fell by 0.4 percentage points to 7.2 per cent.

Consumption Tax Trends highlights that standard VAT rates remained stable between 2017 and 2020, at a record high of 19.3 per cent` on average. Only one country increased its standard VAT rate (Japan, from 8 per cent to 10 per cent) in 2019, and no reductions were recorded until the COVID-19 outbreak in early 2020, when Germany and Ireland temporarily reduced their standard VAT rate as part of their economic stimulus packages (from 19 per cent to 16 per cent and from 23 per cent to 21 per cent, respectively). Many countries have also introduced a range of VAT measures to support businesses and the healthcare sector during the crisis, as detailed in a special section of Consumption Tax Trends.

With VAT rates at an all-time high, governments may need to explore base broadening options to restore VAT revenues after the crisis, according to the report. The surge in e-commerce following the COVID-19 outbreak has emphasised the importance of reform to ensure that VAT is properly applied to digital trade.

All OECD countries with a VAT have now implemented or committed to the OECD standards for collecting VAT on online sales of services and digital products. Many OECD countries are further expanding these e-commerce VAT regimes to include online sales of small parcels that are often imported from abroad by foreign electronic marketplaces and other digital vendors.

Working with over 100 countries, the OECD is a global policy forum that promotes policies to improve the economic and social well-being of people around the world.

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