UPDATE 2-Czech govt approves reform package but faces battle

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By Marek Petrus

PRAGUE, April 3 (Reuters) - The Czech cabinet approved plans to revamp spending and taxes to cut the budget deficit next year, but analysts were wary on Tuesday over the fate of fiscal reforms due to the government's weak position in parliament.

The right-of-centre government wants to boost state coffers with a rise in sales tax, partly offset by a cut in income taxes, and to curb an increasingly costly welfare state in the biggest public finance overhaul in more than a decade.

Prime Minister Mirek Topolanek and some of his ministers will give details of the plans at 4 p.m. (1400 GMT) but analysts said the real question is whether the government can push them through parliament where it holds exactly half the seats.

"The government's intentions to reverse the worsening fiscal trend are welcome of course. Albeit the question of how it all is likely to get passed in the lower house still remains," said Silja Sepping, central European economist at Lehman Brothers.

"The options of either relying on opposition votes or a few renegade opposition deputies are not conducive for implementing a fundamental fiscal reform, unfortunately," she added. The government won a confidence vote in January with the help of two opposition defectors who have however been reluctant to commit themselves to supporting its fiscal plans.

"It is about lowering direct taxes, halting the explosion of social expenditure and reforms of the social and tax systems," Deputy Prime Minister Petr Necas said.

The cabinet has pledged to either push through the reform agenda aimed at cutting the 2008 fiscal deficit toward 3 percent of gross domestic product (GDP) from the 4 percent projected this year, or resign, leading to early national elections.

The crown held steady at 27.97 per euro by 0915 GMT and the debt market also showed little reaction to the widely-anticipated government approval of the reform package.

BOON FOR STOCKS

Surging social programmes have dented the country's public finances, forcing it to give up on earlier aspirations to adopt the euro in 2010. It has yet to set a new target date.

Highly controversial welfare legislation approved before the 2006 election boosted social transfers by 36.2 billion crowns this year, and by 49.3 billion or 1.3 percent of GDP in 2008.

The government now wants to take back some of this increase, and has proposed about 23 billion crowns ($1.10 billion) worth of cuts in spending next year, mainly through a reduction in welfare benefits and sickness insurance.

It has also considered lifting the preferential rate of value added tax to 9 percent from 5 and floated the idea of cancelling the progressive personal income tax brackets and unifying tax at 15 percent, but with a broadened base.

It has also been mulling cutting corporate tax gradually to 19 percent in 2010 from 24 percent.

"It is certainly a step in the right direction to shift the tax burden from direct towards indirect taxes. But there is certainly more room for expenditure cuts," said Viktor Kotlan, chief economist at Ceska Sporitelna in Prague.

Analysts said a corporate tax cut would be a boon for heavy tax-payers like utility CEZ , phone group Telefonica O2 CR and lender Komercni Banka .

The Prague bourse's blue-chip PX index was up 0.4 percent by 0915 GMT, lagging gains in other regional markets.

- FACTBOX on proposals floated by officials.....[ID:nL03553262]

($1=20.95 Czech Crown)

Keywords: CZECH REFORMS/