UPDATE 1-Czech govt secures backing for fiscal reforms

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By Jan Lopatka

The centre-right Czech government secured support for its fiscal reforms in a parliamentary vote next week when two opposition deputies said on Wednesday they would support the bill aimed at halting growing budget gaps.

The centre-right government wants to rebalance taxes and cut social benefits to narrow the new EU member's shortfall, which has ballooned despite fast economic growth and pushed the adoption of the euro into the next decade.

The cabinet holds just 100 seats in the 200-member lower house of parliament and has said it would seek an early election if its plan fails.

The two leftist deputies, who had earlier supported the government in key votes, signed off on an amended version of the plan agreed by the coalition on Tuesday after being offered additional sweeteners that will leave in place some benefits the government had earlier planned to axe.

"Deputies Milos Melcak and Michal Pohanka are ready to support this agreement and this compromise and vote for its adoption in the lower house," the two deputies said in a joint statement with Prime Minister Mirek Topolanek.

The lower house scheduled the next session on the reform bill for August 21, when a final vote may be held.

One coalition deputy has said he would not support the reform, but the backing of the two opposition deputies gives the government a one vote majority.

The bill must also be approved by the upper house, the Senate, but it should face no hurdles there because the right holds a strong majority in the chamber.

The government package cuts benefits to parents on leave, sickpay and other handouts, raises sales tax on food and other basic items and unifies all personal income tax brackets at 15 percent next year, from up to 32 percent now, although it also makes the tax applicable to a wider income base.

The income tax would be cut further to 12.5 percent from 2009. The corporate tax would fall to 21 percent next year from 24 percent, and eventually to 19 percent in 2010.

The government aims to cut the budget deficit to 3.2 percent of GDP in 2008 and, along with further measures to be introduced later, to 2.5 percent in 2010, from 4 percent seen this year.

The Finance Ministry did not provide any calculation on the impact of the additional tax cuts on the fiscal balance.

Finance Minister Miroslav Kalousek has repeatedly rejected to allow any changes that would lead to a deficit of more than 3 percent next year under national methodology, or 3.2 percent under the EU accounting rules.

Analysts have said the reforms are a step in the right direction but fall short of savings on the expenditure side. The government has promised more changes in the coming months, especially in the pension and healthcare sectors.

The leftist opposition rejects the reforms, saying they are designed to help the rich and deepen rather than narrow the public deficits.

Keywords: CZECH POLITICS/REFORMS

[PRAGUE/Reuters/Finance.cz]