UPDATE 3-Czech PM Necas wins confidence vote, passes tax hikes

Wed Nov 7, 2012 6:00pm EST

Related Topics

* PM Necas crushes rebellion but coalition remains weak

* Necas pushes through tax package to cut deficit next year

* Wins vote to start pension reform

* More challenges lie ahead for Necas

By Robert Muller

PRAGUE, Nov 7 (Reuters) - Czech Prime Minister Petr Necas won a confidence vote in parliament and pushed through tax rises and pension reform on Wednesday after quelling a rebellion that threatened to bring down his centre-right government.

The lower house voted to raise value-added and income taxes in a move aimed at narrowing the budget deficit next year after a group of dissenting backbenchers in Necas's Civic Democratic Party dropped their opposition to the legislation.

The rebellion was the biggest challenge to his two-year rule and followed defections and coalition rifts that had steadily stripped his government of its majority in the 200-seat lower house.

His victory removes an immediate danger for the government but its weak position is likely to continue to complicate policymaking.

"This is one of the votes that confirms confidence in the government and allows it to set a state budget that respects a deficit below 3 percent of GDP and that also includes pro-growth measures," Necas said.

Tax hikes and spending cuts have pushed down borrowing costs to all-time lows but have weakened domestic demand and tipped the central European economy into a recession in late 2011.

Hit by a series of defections since the centre-right parties won the country's largest parliamentary majority in a May 2010 election the three-party coalition now holds only 99 seats.

The government's tax measures - which were tied to a confidence motion - were supported by 101 MPs, including a few independents, with 93 MPs voting against.

That was a good result for Necas who will need that support to overrule an expected veto from the opposition-controlled Senate.

FURTHER TESTS

Necas and his finance minister, Miroslav Kalousek from conservative party TOP09, have repeatedly said the government should quit if it can not push through its deficit-cutting plans.

The tax package, expected to generate 22 billion crowns ($1.11 billion) in new revenue, will allow the government to bring the total fiscal gap to below the European Union-prescribed 3 percent of economic output next year.

A failure in the vote would have added Necas, a 47-year-old trained physicist, to a long list of European heads of government from Greece to the Netherlands who have been toppled over austerity policies.

"The government has the worst behind it," said political analyst Josef Mlejnek. "But I think that this government really does not have legitimacy in the sense that it is a government which is a de facto minority because it has to raise support for every bill ad hoc among individual deputies."

The government will now submit a re-worked 2013 budget draft to factor in the tax hikes. The budget will use a reduced 0.7 percent economic growth forecast for next year, following a 1 percent contraction this year.

In another victory for Necas, the lower house also cleared the way for pension reform to get underway next year, giving its final approval to legislation that will allow change.

The vote will mean Czechs will in time be able to divert part of their social security payments to private pension accounts from state ones.

The chamber was also expected to vote overnight to return church property worth billions of dollars, confiscated by totalitarian communist rulers in the 1940s and 1950s.

The tax package approved on Wednesday includes a 1 percentage point increase in the country's two value added tax rates, to 15 percent and 21 percent. It also introduces an extra 7 percent tax for people earning more than 4,000 euros a month.

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