Czech PM Necas wins confidence vote, passes tax hikes

PRAGUE Wed Nov 7, 2012 11:06am EST

Czech Republic's Prime Minister and Chairman of the Civic Democratic Party (ODS) Petr Necas gives a speech during the party's congress in Brno November 4, 2012. REUTERS/Petr Josek

Czech Republic's Prime Minister and Chairman of the Civic Democratic Party (ODS) Petr Necas gives a speech during the party's congress in Brno November 4, 2012.

Credit: Reuters/Petr Josek

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PRAGUE (Reuters) - Czech Prime Minister Petr Necas won a confidence vote in parliament and pushed through tax rises on Wednesday after quelling a rebellion that threatened to bring down his center-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 Necas's two-year rule because it 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 standing 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 center-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 amount 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.

Necas will face further tests of his strength.

"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.

The cabinet will also try to override a veto from the opposition-controlled upper house of its flagship bill to return confiscated church property worth billions of dollars.

It must also contend with a presidential veto of an implementation bill for the government's long-planned pension reform that will introduce private savings accounts to which people can divert a percentage of social tax payments.

Both of those bills - crucial parts of the cabinet's agenda - could come up for a vote as early as Wednesday.

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.

(Writing by Jana Mlcochova and Jason Hovet; Editing by Pravin Char and Andrew Osborn)

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