Budget Strategy for 1993

For the first time, the budget for 1993 was prepared as a budget for the independent Czech Republic. In the process of its preparation, some 1992 data for the Czech Republic was additionally considered in order to enable a comparison with the 1993 budget. Of course, the actual merit of conducting the comparison of some data was questionable not only because the economy was engaged in a transformation process but the budget itself had undergone substantial changes.

These changes also marked the 'value' of available statistical data.

In spite of a rather mild budget deficit in 1992, the Czech Republic entered 1993 with a debt that did not follow from concurrent budget management. The Czech budget 'inherited' a proportionate part of the federal budget deficit which was 9.5 billion CSK. The other part of the inherited deficit originated from the Czech Republic's obligation which followed from the consolidation of the balance of the Czechoslovakian State Bank.

The 1993 budget development was primarily influenced by the tax reform introduced in January. The changes represented a fundamental transformation of the tax system: almost all taxes were altered in some manner. The tax reform also caused a shift of the funding for health care, social care, and unemployment benefits to no longer flow directly from the budget but to be financed by special funds. Three such funds were founded - Social Care Fund, Health Care Fund, and Fund for Employment. Throughout 1993, two of these funds - Social Care Fund and Employment Fund - were still operated within the budget due to special contributions paid by employers and employees. The Health Care Fund was the only one separated from the state budget that year (see Table 4.7). The state budget Table 4.7 The Overall Budget of the Czech Republic (bln. CSK)

Estimates adjusted for budget structure in 1993.

Source: Czech Ministry of Finance.

continued to be involved in this Fund through contributions on behalf of people who were not employed for various reasons (women looking after small children, pensioners, jobless people, soldiers, and so on).

The estimated nominal GDP of the Czech Republic was 738.3 billion CSK in 1992 and 870.0 billion CSK by 1993. The share of budget revenue in GDP should decrease from 50.0% to 48.1%. This decrease is due to the decline of the overall tax burden. The decrease in local budgets' revenues for 1993 was due to the fact that these had received additional revenues in 1992 (see Table 4.7).

Revenue losses were partially compensated with receipts from privatization and other additional revenues connected with new functions (for example, for the establishment of trade agencies). Local budgets received the yield from state bonds for state housing under construction.

The composition of revenue and expenditure also changed (see Table 4.8).

Apart from the impacts of the tax reform and the establishment of the Health Care Table 4.8 Structure of Budget Revenue and Expenditure (bln. CSK)

1992' share 1993 share

'

Only a limited number of people were obliged to pay these contributions in 1992.

Source: Czech Ministry of Finance.

Budget Reform in Czechoslovakia and Czech Republic 8 3 Fund, a local budget reform was also introduced. Local budget revenues consisted of the yield from property tax and individual income tax, administrative and local fees, and revenue from sale and lease of local property. Earmarked subsidies included: a contribution to state administration functions carried by local governments, a compensation for local governments' social benefits, as well as specific subsidies to ensure a standard level of education and health care services throughout the country. The reasoning for general subsidies was to equalize outstanding differences in local government revenue across the country and the differences between 1992 and 1993. Local governments were obliged to utilize bank credit and bond issues.

Table 4.8 depicts the structure of budget revenue and expenditure in 1992 and 1993 - before and after the cessation of the existence of the former Czechoslovakia. Despite efforts to make the statistics fully comparable, some discrepancies still exist; the general interpretation, though, remains unaffected. The tax reform brought about an increase in the share of indirect tax due to the introduction of value-added tax (VAT). The new VAT, based on rates of 5% and 23%, extended the tax base. Apart from VAT, excise taxes on fuel, tobacco products, spirits, beer, and wine were included among the indirect taxes, too.

Simultaneously, there was a decrease in the corporate income tax rate which was considered to aid corporate sector development. The reduction was also in response to the previously high tax burden on enterprises. The decrease in the share of individual income tax in total tax revenue was linked to the establishment of the Health Care Fund. Until 1992 contributions for health care were a part of the individual income tax as well as part of the corporate taxes.

Within budget expenditures, there was a further increase of transfers to households reflecting the social security benefit adjustment for inflation, amplification of the social safety net, an expected increase in unemployment, and still other aspects. Pensions and other social security benefits represent, by far, the most significant item within the group of transfers to citizens (60.3% and 21.8%

respectively).

The decline in the share of transfers to enterprises corresponded to the continuing process of limiting state paternalism and the concurrent progress in privatization. On the other hand, growing outlays for private sector support were involved in these transfers: among others, these included subsidies to Ceskomoravskii ziiruEni a rozvojovii banka (The Czech-Moravian Guarantee and Development Bank) and Exportni, garanEni a pojiSrovaci spoleEnost (The Institution for Export, Guarantees and Insurance). The primary objective of these two institutions was to provide the private sector with credit under more positive conditions than granted by other financial institutions, as well as to guarantee and insure credit for export.

Current public sector expenditures increased in the 1993 budget. The reason has already been mentioned - the most dynamic item was the outlay connected with the establishment of the Health Care Fund. The outlays for education were increased as well, but to a lesser extent. A part of this increase might be explained by the new system of financing health and social care in which organizations providing educational services will pay contributions to these funds for the first time in 1993. Finally, the Czech government's willingness to accept a proportionate part of the former federal government loans (in 1992 partly financed by federal financial assets) caused a direct increase of government loans.