State Budget Expenditure Developments Between 1990 and 1992

Regarding the budget expenditure, there was a relatively substantial decline in transfers to enterprises especially since 1991 (see Tables 4.4 and 4.5). The reduction of the non-investment part of those transfers was even more acute. In this sense, the state budget unambiguously played a restrictive role. This partly corresponded to the reduction of the tax burden on enterprises, even if the dynamics of both processes were incomparable. The taxation of profits was reduced between 1989 and 1992 by some 20 percentage points. Besides the reduction of transfers to enterprises, a change of their structure was initiated. Before 1990, there were no fixed rules for corporate taxes. The corporate tax system was a nontransparent mixture of 'aid' to troubled enterprises and expropriation of profits from profitable ones. Since 1990, this approach was gradually oriented toward specifically targeted projects, especially concerning conversion of the armament industry and the compensation for negative effects of price control in the remaining spheres with regulated prices (for instance, energy, urban transportation, and rents).

The most important element of transfers to households was represented by social security benefits. These included the compensation benefits for negative turnover tax removal. Initially, compensation was given in the form of general income support, while later only selected categories of households were eligible to receive benefits. Some adjustments of the pensions and other social benefits for inflation were made in connection with the price developments. A new social

Table 4.4 Budget Expenditure Development (bln. CSK)

Source: Czech Ministry of Finance.

Table 4.5 Budget Expenditure Development (in %) particularly excessive in Slovakia. Gradually, active employment policies (new job creation and re-training programs) with consequent budget expenditures became more important. Considerable amounts of budget funds were allocated to create an appropriate social security net in order to avoid a profuse decline of the living standard of low-income households.

The most important part of the budget expenditure on public consumption is represented by education and health care outlays. It is necessary to remember that these services were and still are financed mainly from the budget. The role of the private sector was and, in fact, still is only a marginal one.[l] Wholesale privatization of the health care system is expected only in 1994-5.

A part of the expenditure increase revealed in Table 4.4 is due to the price developments leading to an increase not only of material costs but also to an increase of wages which were traditionally low in these sectors. Generally, the

Budget Reform in Czechoslovakia and Czech Republic

expenditure increase allowed for only maintenance of the real level of these public services. There were many changes in the expenditure structure in state administration. The analyzed period was marked by shifts of power from the federal authorities to those in the republics, resulting in the establishment of new ministries on the republic level. New agencies were created in accordance with the reform and transformation strategy (anti-monopolistic agencies, labor offices, tax offices, and others).

A major decline of expenditure occurred in defense. It was mostly due to a change of the political climate in Europe. In 1990-1991, the obligatory military service was shortened from two years to 18 months. By the middle of 1991, the last Soviet troops left Czechoslovakian territory. On the other hand, a decline in military expenditure led to the decline in the demand for armament industry products and to the conversion of military industry. The conversion issue was especially difficult in Slovakia where military industries were and still are more concentrated than in the Czech Republic. In addition, many changes occurred in the expenditures for internal security. The security system started the long process of readjustment and the functions of the secret police were redefined. The internal security expenditure development was forced to respond to the increase in crime which followed the opening of the borders and the liberalization of the living conditions in Czechoslovakia.

As part of the expenditures, special attention should be paid to subsidies to agriculture. For several decades, there was a tradition of agricultural production in large productive entities legally defined as agricultural cooperatives (created by force in the 1950s) or, alternatively, as state farms in Czechoslovakia. Food prices were heavily subsidized and the final losses of the producers were compensated by the budget through a number of channels. Low prices of food stuffs unavoidably led to a relatively substantial over-production and waste in food consumption under the former regime. Since 1989 and especially after prices were freed in January 1991, food consumption actually declined and, consequently, the production also.

Naturally, this development had negative effects on producers. In addition, foreign trade liberalization led to an increase of imported food and food products.

The system of subsidies was shifted from a differentiated one to a system involving a more uniform approach for all producers. In 1991, two Market Intervention Funds were established in both the Czech and Slovak Republics, with a further one added at the federal level in 1992. Their main purpose was to stabilize prices of agricultural products. These Funds have made inte~entional purchases on domestic markets to guarantee prices of selected basic agricultural products to their producers and, on the other hand, they contribute to the stability of basic food prices for consumers by occasional sales of their accumulated stocks.

The Funds play a major role in foreign trade regulation and in eliminating monopolistic practices amongst food producers.