How to Boost the Budget

The budget threatens a giant deficit, and the Czech Republic is getting closer and closer to the edge of the economic abyss. The headlines suggest something really serious is going on. But politicians can't agree on a way out. The Social Democrats do not want to cut social expenses and benefits. The ODS disagrees with the cabinet's proposal to increase VAT. Economists, meanwhile, are holding their heads and warn that there won't be enough money to pay public servants' salaries and pensions.

There is one solution that everybody could agree on, but no one talks about it much. Two weeks ago, the United Kingdom signed an intergovernmental agreement with Liechtenstein that allows the latter to cancel agreements with British companies and individuals who are unable to prove the origins of the money they keep in the principality.

This is revolutionary. Until now, this small country's traditional financial benevolence made it easy to bank illegal money. Taxes were low, and there was zero transparency in the banking system.

The Finance Ministry has no hard data, but economists estimate that roughly CZK 23 billion flows out of the Czech Republic and into tax havens each year. A significant proportion of this ends up in Liechtenstein. An estimated 10,000 out of 300,000 local companies – usually the biggest ones – engage in this practice, and the number is growing. Not all of those paying taxes abroad are fraudsters, but some of them are certainly suspicious. The state is doing nothing to make money laundering difficult.

If the Czech Republic signed a similar deal with Liechtenstein, it could kill two birds with one stone. First, such an agreement would give money launderers less space to manoeuvre and bring the Czech Republic closer to less-corrupt western European standards. Second, the state would gain billions that it urgently needs to cover the enormous deficit.

Some might object that this money is small change in the total budget. But the Academy of Sciences, for example, has announced that CZK 1 billion could save Czech science from certain death. The key question is whether politicians will find inspiration in the British agreement. Taking into account the upcoming elections and the promises to fight corruption, there might be a small chance.