UPDATE 3-Czech govt pushes fiscal reform, stakes future

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By Jan Lopatka

The Czech government approved on Wednesday tax and spending reforms aimed to cut the budget deficit, warning a divided parliament to approve the draft or risk early elections.

The central European country has enjoyed record economic growth since it joined the European Union in 2004, but bloated social spending has boosted budget gaps and postponed plans to adopt the euro currency until 2012 or later.

The package mildly cuts benefits and other spending and rebalances taxes mainly in favour of richer Czechs, which has prompted sharp criticism by the leftist opposition and even some deputies within the ruling coalition.

The government has 100 seats in the 200-seat lower house, so any internal dissent may prove fatal for the plan, which aims to cut the budget deficit to 2.3 percent of gross domestic product in 2010 from 4 percent seen this year.

"The government voted unanimously for the law on stabilising public finances," rightist Prime Minister Mirek Topolanek told a news conference, adding his three-party coalition had resolved any internal problems over the matter.

The coalition has said it will seek early elections if the parliament rejects the reforms in votes seen over the summer. A path to early polls is complicated under Czech law and no election would happen until next year.

"The coalition does not have enough votes in the lower house, so it must produce a model that will be politically acceptable for the (leftist opposition) defectors," said Pavel Sobisek, chief economist at HVB bank in Prague.

"(But) I see the chance (of it being approved in parliament) to be above 50 percent... They (the defectors), if they have any political realism, understand something needs to be done and they can have a good feeling that they contributed to that."

CROSSING THE FLOOR

The main features of the reforms are unification of all personal income tax rates at 15 percent, a move that would help top-paid employees, a corporate tax rate cut, higher sales tax on basic items such as food, and tougher conditions for welfare.

The Czechs are among the richer new EU member states, with GDP per head at 74 percent of the EU average, and they have relatively small differences between top and minimum incomes.

Topolanek's party rival Vlastimil Tlusty has argued for more radical tax cuts and reiterated on Wednesday that he would not vote for the government package unless it was altered.

Several deputies for a junior coalition partner, the centrist Christian Democrats, have also protested against instituting universal fees for doctor visits.

Political analyst Vladimira Dvorakova said that the fate of the reform was still wide open due to dissent of some coalition MPs, but the government was likely to win the support of two rebellious opposition deputies who backed it in a January confidence vote.

Economic analysts said the reform would have a slightly pro-growth and inflationary impact, which would add arguments in favour of tighter monetary policy.

President Vaclav Klaus said on Czech public television that the reforms were a step in the right direction, though less deep than he would have liked. Klaus added that if the reforms are approved by parliament, he would sign them into law.

(For a FACTBOX with key proposed changes, click on [ID:nL23359860])

[PRAGUE/Reuters/Finance.cz]