Prague has no money for large buildings. The city must be built by the state, the parties agree
“It is not possible for the city to go bankrupt every time it builds a large infrastructure building,” says Prague’s deputy for finance Pavel Vyhnánek (Praha sebo). In the past, Prague borrowed for large investments, either from the European Investment Bank or, for example, by issuing its own bonds. Not only the Blanka tunnel complex, which opened the city seven years ago, but also the consequences of the flood twenty years ago are still paying off. Prague has now borrowed a new lease on metro D and thus only exhausted its options for years to come.
The state must be involved
The much-needed city ring, which will cost upwards of tens of billions, is no longer an engineering, development or perhaps urban planning issue, but a supremely political one. Prague politicians rarely agree across parties that without an agreement with the government, the inner circle simply will not be created. “Prague needs a city ring because the traffic inside the city is constantly getting worse,” Tomáš Portlík said for the opposition ODS. “And if metro D is to be built next to it, then it is clear that the city budget cannot support both such large investments,” he said.
According to Ondřej Prokop from the opposition movement ANO, the ring road will be a vital traffic artery of national importance. “It is therefore right and logical that the state should participate financially in its construction. At least a significant part of the cost of it. The remaining funds can be secured with favorable loans,” believes Prokop. Abroad, states usually participate in metros and circuits, and with considerable sums.
Frozen negotiations
According to the words of its representatives, the government must give priority to the outer highway ring of Prague, which, unlike the inner one, is under the competence of the state. At the same time, not only motorists are waiting for the completion of the inner ring road, but also developers who are planning construction around the current north-south highway. Most of the projects count on calming down this thoroughfare and directing traffic along the ring road.
“I discussed co-financing from the state with the Ministry of Transport, Martin Kupka, and the Minister of Finance, Zbyňek Stanjura (both ODS – editor’s note). Both ministers admit funding from the state. But realistically, this will only be relevant under the next government,” said Mayor Zdeněk Hřib (Pirates). “I have also dealt with the state financing of the city circuit many times with former Prime Minister Andrej Babiš. He proposed the form of a PPP project, which, however, after calculations at the managing ministry and negotiations at the municipality, turned out to be an inappropriate form for such a building in an urban environment,” Hřib explained the course of the negotiations.
It is often heard from the mouths of government politicians that Prague has enough money, after all, it manages a budget as large as that of the Central Ministry. However, the city’s income is not built for such large investments, if the metropolis does not want to stop the further development of the city and continue to build schools, tram lines or even repair sidewalks. But the metropolis has only simple options to increase income.
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Seemingly rich Prague
Regions and municipalities in the Czech Republic are financed from redistributed taxes, which means that they receive a proportional share of the revenues from taxation of natural and legal persons and value added tax. It works on the principle of solidarity, so that, for example, Prague, which generates more than a quarter of the national GDP, does not swallow all the revenues and the poorer municipalities do not squander it. However, Prague, like Brno, Ostrava and Pilsen, is favored over other municipalities by an increased coefficient according to which incomes are recalculated. While as a region it receives the lowest share of money, as a municipality it has by far the most of all regional cities. Last year, Prague received around 70 billion crowns in tax revenue, Brno managed with 11 billion crowns in taxes.
When taking into account about a quarter of a million inhabitants who live in the city, but others do not have permanent residence here, and hundreds of thousands of people who commute to the city, the situation is not so rosy. The metropolis has to finance and other services for many more people than it receives tax money for. According to Vyhnánek, as a result, the city receives a population comparable to that of a regular municipality. Due to its good economic performance, however, unlike the others, it does not receive practically any European subsidies and has to invest from its own budget.
We don’t want people or companies
The Czech way of redistributing taxes has one more relatively big snag: cities have almost nothing to do with doing business in them. Municipalities are thus not motivated to attract new companies, to build factories or apartments for newly arrived residents, sometimes they even prevent it. Not only do the municipalities get nothing out of it, they have to bear the associated costs, such as the construction of infrastructure or schools. So, while in Germany, crowds of mayors are waiting for an investor, in the Czech Republic, often no one even picks up the phone.
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“The current system works in such a way that if all companies moved from the territory of the capital city of Prague to Brno, we would not directly notice it on the income side, and on the contrary, we would be relieved from the expense side,” says Vyhnánek. “But it should be exactly the opposite. Cities should be motivated to support entrepreneurship and should want entrepreneurs to settle in their territory, because they will get a direct profit from it,” added the deputy. In the aforementioned Germany, for example, municipalities profit greatly from the so-called trade tax.
Not even a whisper about property tax
The only tax that municipalities can set themselves is the real estate tax, which goes 100% into their budgets and is not distributed. It’s not too much money though. Last year, the state collected one billion crowns in taxes, while the real estate tax revenue amounted to 11.8 billion crowns, or about 1.2 percent. For comparison, the value added tax takes up 45 percent of the latest tax revenues.
However, the low property tax yield is not so much the result of the system as of political reluctance. With maximum use of the possibilities offered by the real estate tax, its total revenue could increase three times compared to the current state. But raising the relevant taxes has never been popular, and especially before an election. And as officials have been sighing for years, it is true that there are still some elections in the Czech Republic.
Where else to find money
In addition to real estate tax, Prague and its district can affect only one area – fees. For waste, use of public space, gambling, stay of tourists, sale of entrance ticket or for owning dogs. A big reservation is, for example, with the stay fee, which covers tourist accommodation in Prague establishments. This is now capped at fifty crowns per person per day. According to some policies, it would be ideal to abolish the ceiling, or to valorize the fee according to the development of inflation. By increasing the fee, which will not affect the money of its residents, Prague could collect an extra hundred million crowns every year.
Vyhnánek also launched an awareness campaign to motivate long-term residents of Prague from other cities to apply for permanent residence in the capital. For each resident, Prague receives approximately 40,000 crowns per year as part of redistributed taxes. If only half of the non-registered residents, i.e. around 120,000, transferred their permanent residence to Prague, Prague would receive an extra 4.5 billion crowns annually. In five years, maybe 35 new schools could be built with that kind of money.
However, real systemic changes cannot be achieved without a change in the preserved budget allocation, which would reflect not only the needs of Prague, but also other regions and cities. And here it matters whether Prague’s politicians can gain a strong position in negotiations with the government and not be put off by the usual: “And Prague always has enough money!”
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