UPDATE 2-Czech fiscal reform clears first hurdle

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By Jan Korselt and Jan Lopatka

PRAGUE, June 7 (Reuters) - The Czech government's fiscal reform package cleared an initial vote in the lower house of parliament on Thursday but the centre-right administration still faces an uphill battle to turn the draft into law.

The vote is only a partial victory for the government because some members of the ruling coalition have warned they would vote against the bill in the final reading due by September unless their amendments are included.

The government said it would try to provoke an early election if the reforms, also needed to qualify the central European EU member for euro adoption, are not approved.

The result remains open because the government has just 100 seats in the 200-seat lower house. The package narrowly won the Thursday vote thanks to support from two defectors from the leftist opposition Social Democrats.

Prime Minister Mirek Topolanek warned that rejection of the reforms would eventually lead to an economic meltdown, and in the shorter term could halt funding from the European Union.

"Gradually the public finances would fall apart," he told the chamber. "First there will be no money for investments, then for welfare, healthcare and pensions. Nobody wants that."

The government aims to cut the deficit to around 3 percent of GDP in 2008 and, along with further measures to be introduced later, to 2.3 percent in 2010 from 4 percent seen this year.

The package cuts social and discretionary spending and rebalances taxes mainly in favour of top earners, by raising the sales tax on food and other basic items and by unifying all personal income tax brackets at a single rate of 15 percent.

It will also make people pay for visits to doctors, and gradually cut the corporate tax to 19 percent from 24 percent.

WRANGLING AHEAD

4CAST analyst Lauren van Biljon said the vote on Thursday was only the opening shot of the battle.

"The second round will be where amendments to the reforms are proposed and discussed and every deputy and his dog seems to have something to add or take away," she said in a report.

Social Democrat leader Jiri Paroubek reiterated his party rejected the plan because it only helped the rich.

"This proposal is a path toward a fall in people's living standards," he said. "This is a reform for Rolls-Royces, caviar and champagne and those who buy these goods."

The Czech Republic, a European Union member since 2004, has enjoyed strong economic growth -- 6.4 percent last year -- but has failed to put its budgets on a sustainable path.

The poor outlook for budget gaps has derailed plans to adopt the euro currency in 2010. The government has formally abandoned that target and has not set a new one.

Finance Minister Miroslav Kalousek of the junior coalition member, the Christian Democrats, has been advocating a 2012 entry but Topolanek's Civic Democrats have so far steered clear of endorsing any new fixed date.

The European Union's rules call for a long-term balance in public budgets and a maximum deficit of 3 percent of GDP.

Topolanek said the reform package was only a first step to stabilise the budget. Further tax changes and a reform of the pension system must follow, he said.

(For a FACTOBX with details of the reforms click on [nL07797331]) ($1=21.01 Czech Crown)

Keywords: CZECH REFORMS/