RPT-Czech parliament approves tax, social revamp

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By Jan Lopatka

The Czech lower house of parliament approved on Tuesday a tax overhaul and welfare cuts, the key piece in the centre-right cabinet's drive to cut the budget deficit and boost growth.

The lower house, where the coalition government has just 100 out of 200 seats, voted to introduce a flat tax for all personal income and compensate for the revenue drop by higher sales tax and a cut in health and social benefits.

The country's cabinet is struggling to narrow a budget gap that has risen above the EU's limit of 3 percent of gross domestic product despite strong economic expansion, and pushed euro adoption years beyond the original target of 2010.

Prime Minister Mirek Topolanek had said he would seek an early election if the reform vote failed, and the outcome of the vote was shrouded in doubt over the past days due to dissent from several backbenchers.

But his promise to consider another tax cut in 2009 brought all but one government deputy into line, and the plan was approved 101-99 with the help of two opposition rebels who have backed the cabinet in several key votes since it took power in January.

"I am not the one who is cheering after a victory ... I am trying to look forward," Topolanek said after the vote.

"I am already contemplating medium-term steps which will follow this (budget) stabilisation stage ... be it the first stage of pension reforms, or healthcare reforms."

Months of wrangling over the bill within the three-party coalition and Topolanek's right-wing Civic Democrats (ODS) showed how the cabinet is vulnerable to any dissent, and the victory on Tuesday likely brings only a temporary relief.

Analysts said a tougher approach was needed on expenditure at a time when the economy is growing by over 6 percent.

"The changes approved today are a small step in the right direction," said Tomas Sedlacek, chief strategist at bank CSOB.

"However, the original praiseworthy intention of the government to target deficit cuts, undergo deep social reforms and simplify taxes got significantly out of focus."

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 cabinet has not set a new euro entry date, and Finance Minister Miroslav Kalousek said on Tuesday he may stop trying to convince the sceptical government to make 2012 the target.

ONE PERSONAL TAX RATE

Following tax cuts in a number of new EU member states, the package unifies current personal income tax brackets of 12 to 32 percent at a single rate of 15 percent, although from a wider base. The tax rate will drop further to 12.5 percent from 2009.

The changes will help top earners and, thanks to more deductibles, lower incomes as well. The middle class will feel little effect on the salary side, but may see costs rise through increased sales tax.

The package also cuts benefits to parents, sick pay and other social handouts, and raises sales tax on food and other basic items as well as energy and cigarettes.

The corporate tax will fall to 21 percent next year from 24 percent, and eventually to 19 percent in 2010.

The crown currency edged up after the vote to 27.64 to the euro but soon dropped back to 27.68. (For a FACTBOX detailing the reforms, click on [ID:nL21731283)

(Additional reporting by Marek Petrus)

Keywords: CZECH POLITICS/REFORMS

[PRAGUE/Reuters/Finance.cz]