Czech PM under threat after failed vote to hike taxes

PRAGUE Wed Sep 5, 2012 2:17pm EDT

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PRAGUE (Reuters) - The lower house of the Czech parliament rejected on Wednesday the centre-right government's plan to raise sales and income taxes, threatening the fate of Prime Minister Petr Necas who insists the hikes are necessary to cut the budget deficit.

Necas has pushed through several rounds of austerity measures even as the central European country's economy dropped into recession last year, and plans to put the failed tax bill to another vote which will be tied to a confidence motion.

The plan fell through in the lower house on Wednesday by a 94-101 vote after Necas lost the support of a handful of his own lawmakers who said the latest tax hikes go against the grit of right-wing policies.

Necas said he was open to discussions with the rebels but he saw little room for changes, and said he was confident the original bill would go through.

"This is the first time we were not able to push through a government proposal. I firmly believe responsibility will prevail and this was a unique occurrence," he told reporters.

"The government's key task is consolidation of public sector finances, everything is subordinate to that and I as prime minister do not mean to give in on that."

The two-year-old government plans to immediately resubmit the bill, proposing a 1 billion-1.4 billion euro ($1.26 billion-$1.76 billion) per-year hike in value-added, personal income and other taxes.

The government plans to narrow the budget gap to 2.9 percent of gross domestic product next year from an expected 3.1 percent in 2012. The tax hikes next year are worth 0.7 percent of GDP.

Necas, a political veteran and plasma physicist by training, 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 debt costs.

But his policies have also driven consumer confidence among the traditionally thrifty Czechs to its lowest levels in more than a decade, extending the recession. Gross domestic product dropped by 1.2 percent year-on-year in the second quarter, lagging growth in neighbors like Poland and Slovakia.

Regardless of the fight over taxes, the lower house approved on Wednesday a plan to slow down the growth in pensions in the next three years, another austerity measure.

WHO WILL BLINK IN POWER STRUGGLE

Necas's coalition has shrunk to 100 votes in the 200-seat lower house and, even under ideal circumstances, he needs the backing of independents to push through legislation.

The rebels, backed by President Vaclav Klaus, reject the planned one percentage point VAT hike, saying it would strangle an economy that needs stimulus rather than more austerity. Many private sector analysts share that view.

"It is in stark contrast with our election programme," said deputy Ivan Fuksa. "I believe we will reach some compromise in upcoming debates and the legislative process, because we want an agreement and not the fall of the cabinet."

But changes to the bill may be difficult because it is the product of tough coalition talks with Necas's coalition partners, the conservative TOP09 and the liberal LIDEM party who want no alterations.

Commentators have painted the revolt as a clash within Necas's Civic Democrats ahead of a party congress in November.

The rebels had previously supported the tax package, which sailed through the lower house earlier this year but was sent back by the Senate, dominated by left-wing opposition.

"Taxes are the last thing...this is a game where the balance of power is being tested. There will be big pressure for concessions ahead of the congress, pressure on the prime minister," said political analyst Vladimira Dvorakova.

If Necas's government fell, it could be replaced by another administration -- which some analysts say may be the aim of the rebels -- or parliament could vote to hold early elections.

There is however little appetite for early polls among the government parties, including the rebellious group, given the sharp drop in their popularity caused by two years of austerity measures and a string of graft scandals. 1 = 0.7935 euros)

(Additonal reporting by Jiri Skacel, writing by Jan Lopatka; Editing by Michael Roddy)

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