Czech Prime Minister Petr Fiala defended his cabinet against accusations of being responsible for the country’s high rate of inflation during a televised debate yesterday. Opposition leader and former Prime Minister Andrej Babis pointed to the government’s decision last year not to set price caps on electricity for producers as the cause of inflation. However, both leaders agreed on the decision to abolish the super gross wage, despite concerns from some economists about its inflationary effects.

Fiala attributed the current high inflation rate, which reached 12.7% year-on-year in April, to three factors: increased government spending during the COVID-19 pandemic, the energy crisis, and rising margins in the production chain from agriculture to retail. He emphasized that the government is implementing anti-inflationary measures and called on Babis to reduce margins in Agrofert, Babis’s large conglomerate in the agricultural and food sectors.

In response, Babis accused the government of being comfortable with high inflation as it helps generate more revenue for the state budget. He criticized the government’s planned package of tax increases, stating that it further burdens the people who are already affected by inflation.

Both leaders expressed agreement on the abolition of the super gross wage, which they believed provided additional income to the citizens. Fiala acknowledged that this year’s budget deficit is not developing favorably but expressed optimism that the approved deficit of CZK 295 billion for the whole year could still be met. He cited expected revenues from the windfall tax, a dividend from the CEZ state-controlled energy utility, and European funds as factors that could positively impact the budget.

However, the budget deficit reached CZK 271.4 billion in May, the highest for the first five months of the year since the country’s founding in 1993. Faced with this negative trend, Finance Minister Zbynek Stanjura plans to propose savings of around CZK 20 billion in the second half of the year.

Fiala explained that the rapid growth of the deficit is attributed to increased social benefits and pensions, assistance for dealing with high energy prices, and the rising costs of servicing the national debt. He reiterated that the true state of the budget will only become clear during the summer when revenues from windfall taxes, dividends, and European funds are received. If necessary, the government is prepared to implement savings measures later in the year.

Babis challenged Fiala regarding aid for refugees and weapons in Ukraine, to which Fiala responded that the total aid to Ukraine amounts to tens of billions of Czech crowns, with CZK 30-40 billion expected by the end of the year. Fiala emphasized that a portion of the funds goes towards supporting Czech citizens, municipalities, and regions involved in assisting refugees.

The debate shed light on the differing perspectives of the two political leaders regarding the causes of inflation and the measures needed to address the budget deficit. It also highlighted the ongoing challenges faced by the Czech government in managing the economy amidst rising inflation and the need for fiscal prudence.

Article by Prague Forum