Miroslav Kalousek is not a man to rest on his laurels. After a year overseeing strong economic growth (6.5% in 2007), the Czech finance minister has his sights on the long term, aiming for the economist utopia that is inflation neutral, low unemployment optimal growth.
In a way, the Czech economy has been victim of its own success. Strong economic expansion has fuelled annual inflation, which was at 6.5% in August, and strengthened the currency, damaging exports and tightening labour markets.
But in response, Kalousek has pursued wide-ranging structural reforms and fiscal consolidation to boost productivity and the country’s long-term growth potential. Reform fatigue has plagued much of central and eastern Europe, yet Kalousek pushed tirelessly ahead in January with a fiscal reform programme, the hallmarks of which include a flat tax on personal income and lower corporate taxes offset with value added tax increases and excise duties.
The package is likely to cement the former communist nation’s reputation among foreign investors and raise government revenues, according to Gillian Edgeworth, European economist at Deutsche Bank. “The reduction in corporate taxes is a good thing since it helps to boost competitiveness and attract investment,” she says.
Despite calls for higher spending on public services and annual inflation that is eroding real incomes, Kalousek has battled to lower the public debt by tightening the wage bill and lowering spending through healthcare reforms. The former civil servant is on course to lower the structural deficit to 1.5% of GDP in 2010 and to 1% of GDP by 2012 – consistent with the Maastricht criteria for eurozone convergence.
Kalousek claims he has shored up popular support for these restrictive measures by selling the message that “we do so in order to be responsible towards the future generations, and not to leave debt for them as our legacy,” he tells Emerging Markets. He also argues lower government spending will increase private-sector job creation and stabilize prices to boost real incomes. “I made efforts to coordinate the government’s fiscal policy with the central bank’s monetary policy. Curbing its own spending is the best thing the government can do in this particular sphere [reducing inflation].”
Rapid appreciation of the currency, the koruna, against the euro this year has undermined exports, with losses estimated at around Kc80 billion in the first quarter of the year, while several textile plants have been forced to close down. Kalousek worries currency appreciation is outpacing productivity and blames “speculative investments on foreign exchange markets”. In an astute political move, the minister has seized upon currency volatility to bolster public and political support for euro adoption.
As the economy has grown in a country with an old labour force, the number of unfilled job vacancies has also shot up. As a result, Kalousek has smoothed the process of recruiting overseas workers to increase structural employment and offset this year’s fiscal adjustment. In the long term, he aims to make the labour market more flexible by easing business regulation and lowering corporate taxes further.
But still, he regrets that progress has so far been limited: “Such changes are very unpopular politically, and thus difficult to put through,” he says.