Czech PM fails to reach deal with rebels on tax rises

PRAGUE Tue Oct 23, 2012 8:39am EDT

Czech Republic's Prime Minister Petr Necas answers questions during a news conference at the party's headquarters in Prague April 23, 2012. REUTERS/David W Cerny

Czech Republic's Prime Minister Petr Necas answers questions during a news conference at the party's headquarters in Prague April 23, 2012.

Credit: Reuters/David W Cerny

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PRAGUE (Reuters) - Czech Prime Minister Petr Necas failed to win support on Tuesday from party rebels threatening to bring down his cabinet over an unpopular bill to raise taxes, raising the likelihood of an early election.

The Czech Republic has maintained investor confidence thanks to a relatively low debt load, but the center-right government has been weakened by internal dissent, the unpopularity of austerity measures, graft scandals and heavy losses in regional and upper house elections in the past two weeks.

The group of about six backbench rebels in Necas's Civic Democrats (ODS) oppose the government's plan to raise value-added and income taxes, which Necas says is necessary to cut the budget deficit below an EU-prescribed cap.

A meeting of ODS deputies including Necas failed to come up with any deal ahead of a parliamentary session later in the day. A final vote on the bill is possible as soon as Friday.

In an attempt to force the dissenters back into line, Necas has made the vote a confidence motion, meaning that if they abstain or vote against, his government is likely to fall midway through its four-year term.

The prime minister said he would hold more talks with the rebels but said there could be no deal if their real motivation, as suspected by many in the party, was to destroy him ahead of a party congress on Nov 2-4.

"If this is about the matter and not about a power shift in the ODS, we can agree and the cabinet will not fall," Necas said. "But if this is primarily an attempt to bring down the prime minister and ODS chairman ... we can hardly find an agreement."

The rebels have so far not blinked, saying tax hikes would anger voters. The bill would raise value-added tax rates by 1 percentage point to 15 and 21 percent next year and also raise income tax for top earners.

Necas said that as a compromise, he would propose to raise only the lower tax rate and the personal income tax, and only for one year. The rebels have said that would not be enough.

The cabinet's budget aims to cut the deficit to 2.9 percent of gross domestic product in 2013 from 3.2 percent this year.

But the draft anticipated approval of the tax hikes, and the lack of agreement there prompted the cabinet to propose taking the budget back from parliament for reworking.

Finance Minister Miroslav Kalousek of junior coalition party TOP09 said he would prepare a new budget within a month that would see more spending cuts to respect the deficit target.

MOOD SOURING

The mood in the ODS has been souring in recent days as the rebel group showed no signs of being ready to compromise.

"It is clear the main goal is to get Necas out," political analyst Vladimira Dvorakova said.

Necas, whose cabinet has been credited with trying clean up graft-prone public tenders and the judiciary, could try to put back the vote on the tax bill until after the congress, where he hopes to shore up his position.

But the 47-year old trained plasma physicist has been weakened by routs in regional and upper house elections in the past two weeks. An opinion poll indicated on Monday that support for the ODS has dropped to 16.5 percent, its worst in 15 years.

"The time is ripe for a new government, what this one is doing is bad, look at the tax hikes ... People are not spending, the situation of the socially weaker people is really bad," said pensioner Miroslav Horar, a former miner.

If the cabinet falls, parties could try to forge a new coalition. But Necas as well as TOP09, and the center-left opposition have all said that, if he loses the confidence motion, there must be an election.

Center-left opposition leader Bohuslav Sobotka, whose Social Democrats lead opinion polls by a wide margin, told Reuters in an interview that an election could take place in early 2013.

His party's policies include raising taxes for corporations and top earners, and raising the overall tax intake by about 3 percent of gross domestic product from the current 34.7 percent.

(Additional reporting by Jason Hovet; Editing by Jon Hemming)

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