RPT-Czech govt approves reform package but faces battle

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By Marek Petrus and Jan Lopatka

PRAGUE, April 3 (Reuters) - The Czech cabinet has approved a plan to revamp spending and cut a fiscal gap while slashing corporate and personal income tax rates, but faces an uphill battle to push it through parliament where it lacks a majority.

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.

Under the plan, a single, unified personal tax rate of 15 percent would be created instead of the current rates which range from 12 to 32 percent, depending on income levels.

In addition the corporate tax rate would ease gradually to 19 percent in 2010 from the current 24 percent. Capital gains and dividend taxes would not be touched for the time being.

The cuts would come against a rise in the preferential rate of value added tax (VAT) to 9 percent from 5 percent. The preferential rate applies to essential living items such as basic foodstuffs and medicine.

In presenting the plan, approved at a late night cabinet meeting on Monday, rightist Prime Minister Mirek Topolanek said the aim is to cut the fiscal deficit to 2.3 percent of GDP in 2010, from 4 percent expected this year.

"This plan is a necessary pre-condition for forming a decent budget for the next year... Not only it is necessary, it is also approvable (in parliament)," Topolanek told a business conference where the plan was unveiled to the public.

Analysts lauded the reforms saying they are a step in the right direction toward lowering the fiscal gap and joining the euro zone, but said the real question is whether the government can push them through parliament where it holds 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.

Topolanek must also bring on board MPs such as former Finance Minister Vlastimil Tlusty, a member of the prime minister's rightist Civic Democratic Party. Tlusty said he would have to examine the changes more closely, but was very disappointed with the plan at first glance.

The cabinet has pledged to either push through the reform agenda or resign.

The crown traded slightly firmer at 27.965 per euro at 1435 GMT from 28.01 earlier and the debt market also showed little reaction to the widely-anticipated government approval of the reform package.

Surging social programmes have dented the country's public finances, forcing the government 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. The plan showed savings of 9.2 billion in sickness benefits and 8.5 billion in social spending next year, compared with spending seen under current laws. The tax changes should bring 9 billion in extra cash in 2008.

"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 taxpayers like utility CEZ , phone group Telefonica O2 CR and lender Komercni Banka .

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

($1=20.95 Czech Crown)

Keywords: CZECH REFORMS/