Czech parliament set to confirm new government in vote

PRAGUE (Reuters) - The new center-right Czech government looks certain to win a confidence vote in the lower house, clearing an early hurdle as it seeks to push tough budget cuts and reforms through parliament.

Lawmakers opened debate on the three-party coalition on Tuesday, but a vote that had been expected in the evening was now not likely to come before Wednesday.

The government aims to deliver on an election promise to slash spending and improve a fiscal position analysts say is already among the best in central Europe.

That has made Czech government bonds and the crown safe havens in a volatile region.

Standard & Poor's ratings agency raised its outlook for the European Union member to positive on Tuesday, reflecting what it said was the likelihood of an upgrade in the next two years if the new government implemented its fiscal plans.

But the coalition must balance a 10 percent cut to the public wage bill and lower welfare benefits with an unemployment rate of 8.7 percent and worries that belt tightening may stifle an export-led recovery that has largely bypassed consumers.

The right-of-center Civic Democrats, the conservative TOP09 and centrist Public Affairs have the largest majority of any government since the creation of the Czech Republic in 1993 after winning 118 seats in the 200-member lower house in May.

While the coalition has run into a minor dispute over which ministries will face the largest budget cuts, analysts say Prime Minister Petr Necas' government will easily win the vote, a constitutional requirement to stay in power.

Charles University political analyst Petr Just said a situation where coalition partners were so close on issues while holding a strong majority was exceptional in Czech politics, but added coalition cracks would remain a reality.

"These cracks will always appear," Just said. "(But) none of the three parties want the government to be crowded out by the (opposition) Social Democrats or the need for early elections."

BELT TIGHTENING

Clawing its way out of a 4.0 percent economic contraction last year, the government expects 2010 growth of 1.6 percent.

The next major task will be drawing up a 2011 budget, in which the coalition aims to cut the fiscal deficit to 4.6 percent of gross domestic product from 5.3 percent this year.

The government aims to hit the EU's 3 percent fiscal deficit ceiling by 2013, while keeping in check an overall public debt burden of around 38 percent of GDP -- about half the EU average.

Standard & Poor's said the country's political commitment to fiscal measures, including plans to tackle financing of a pension system whose debt is set to grow with an aging population, was "significantly higher than in the past."

"The positive outlook reflects the likelihood of an upgrade if the government legislates social security reform that lessens aging-related expenditure pressures," S&P said.

Prague's cost cutting contrasts with other countries in central Europe. In Poland, tough reforms are likely to be put off until after an election next year while the new Hungarian government, defying the IMF and the EU, is looking to soften next year's budget goal.

The government's commitment to austerity has been partly behind the crown's rise to 21-month peaks against the euro this month, while the benchmark 9-year bond yield has dropped to a lifetime low.

(additional reporting by Jan Korselt; editing by Paul Taylor)