Czech PM gambles future on tax hike vote

PRAGUE Tue Sep 4, 2012 9:56am EDT

Czech Prime Minister Petr Necas smiles during a news conference at the government headquarters in Prague April 18, 2012. REUTERS/David W Cerny

Czech Prime Minister Petr Necas smiles during a news conference at the government headquarters in Prague April 18, 2012.

Credit: Reuters/David W Cerny

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PRAGUE (Reuters) - Czech Prime Minister Petr Necas staked his government's future on winning parliamentary approval for tax hikes, highlighting a policy conflict that pits his drive to cut the budget deficit against opponents who say he is strangling the economy.

Necas, who heads a center-right coalition, faces a rebellion from a handful of lawmakers in his own party who say raising taxes would merely extend a recession that has dragged on since late 2011.

If the lower parliamentary house rejected the 1-1.4 billion euro-per-year hike in value-added, personal income and other taxes in a vote this week, Necas would resubmit the bill and link it to his government's future, Finance Minister Miroslav Kalousek said on Tuesday.

"In case (the tax hike) is rejected, we will submit an identical text and the government will tie a vote of confidence to it," Kalousek told reporters, confirming earlier reports.

Necas, a Catholic plasma physicist, won a 2010 election after warning Czechs they could go the way of Greece if they failed to tighten their belts. He has won plaudits from investors and presided over record low borrowing costs.

But his policies have also driving consumer confidence among the traditionally thrifty Czechs to its worst levels in more than a decade, extending the recession.

The government has insisted on the budget cuts, saying savings on debt servicing and long-term benefits from stemming debt growth outweigh immediate pain.

PRESIDENT BACKS REBELS

Necas's coalition has only 100 lawmakers in the 200-seat lower house and has to rely on a small number of independents to push through laws.

One lawmaker from Necas's Civic Democrats told Reuters that four of the party's deputies had said they would not back the tax hikes, which would make it tough for the prime minister Necas to win the vote this week.

Any new legislative proposal, tied to a confidence motion, could take several weeks or months to get to a vote.

The government's term ends in mid-2014. If Necas falls, an early election is a possibility under the constitution but not an automatic option. A new cabinet could in theory be formed.

The rebels within the Civic Democrat faction have been supported by President Vaclav Klaus, who urged parliament on Monday to reject the tax hikes.

Klaus, who said the hikes would hurt the economy, joined forces with backbenchers to help bring down former prime minister Mirek Topolanek's government in 2009, and some say this could be a similar case.

Jindrich Sidlo, a commentator at daily Hospodarske Noviny, said the rebellion could be part of plan to remove Necas as party leader at a congress in November and appoint a new center-right cabinet.

Finance Minister Kalousek agreed.

"This is not about taxes or program, this is an internal battle within the Civic Democratic Party," Kalousek, deputy chairman of the conservative TOP09 party, junior partner in Necas's coalition, said on Czech television.

Necas has made no comment.

Stung by public anger over austerity and a string of corruption scandals, support for Necas's party has fallen. A poll in June showed it would win just 20 percent if a vote were held now, far behind the opposition Social Democrats at 31 percent.

The government plans to narrow the budget gap slightly to 100 billion crowns ($5.08 billion) next year, the lowest since the start of the economic crisis, with the help of spending cuts and tax hikes to balance out rising welfare costs.

A draft of the budget showed on Tuesday the target is below this year's planned gap of 105 billion crowns and in line with the cabinet's aim of cutting the deficit to 2.9 percent of gross domestic product next year from 3.1 percent in 2012.

The crown currency was unmoved by the political ructions, holding at around 24.85 to the euro, and there was no reaction in the bond market, with 10-year yields at 2.315 percent.

(Additional reporting by Jason Hovet, Writing by Jan Lopatka; Editing by John Stonestreet)

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