The governor of the Czech National Bank (CNB) Jiri Rusnok has criticised the government’s decision to abolish the so-called "super gross" wage, thus lowering income tax for low and medium income groups, as it is expected to leave a CZK74bn gap (€2.83bn) in the budget in 2020. The government should instead focus on mitigating the impacts of the coronavirus (COVID-19) crisis, he said.

The governing parties agreed on Friday to abolish the super-gross wage and introduce two brackets with rates of 15% and 23% respectively. A 23% tax would be levied on income over CZK139,000 a month, while those earning less than that will pay a 15% tax, instead of 20% at present.

The super gross wage, which has been the base for calculating employee income tax since 2008, is the sum of an employee’s gross wage plus social and health insurance premiums.

The reintroduction of a progressive tax will lead to savings in the order of hundreds to thousands of crowns per month for most employees, PWC tax expert Tomas Hunal told local daily Hospodarske noviny, adding that it will lead to an increase in the tax burden for people who have other types of income.

The government says the tax reform was part of its agenda and will encourage consumer spending and help rev up the economy, but the CNB governor disputes that.

Speaking on state television on Sunday, Rusnok questioned the government’s expectation that lower taxes will increase consumption and said that many people will use the extra cash to boost savings.

He also warned that that cutting taxes will create a long-lasting hole in state finances. The budget deficit by the end of July rose to an all-time high of CZK205bn, compared to CZK9.5bn a year earlier.

In June, the Czech government decided to increase the deficit target to CZK500bn from CZK40bn due to the additional expenditures relating to the coronavirus crisis. This year the deficit could reach a record 9% of the GDP.

Rising financing needs of the budget also pushed up the Czech national debt to its highest level since 1993. State debt grew by CZK516bn in the January-June period to CZK2.16 trillion. 

The government also agreed on Friday to pay a pension bonus of CZK5,000 in December to compensate some 3mn retirees for rising living costs. The measure will boost this year’s budget spending by about CZK15bn. The government denied that the handout of the bonus is any way connected to the 2021 October elections.