Czech coalition's survival instincts take over

By bne IntelliNews April 11, 2012

Tim Gosling in Prague -

The Czech governing coalition appears to have pulled back from the brink of collapse, and has agreed new austerity measures in a bid to cut CZK42.4bn (€1.7bn) from the budget in 2013.

Ministers and advisers from the three parties in the government agreed on April 10 on a plan to cut the budget deficit to below 3% starting in 2013, an unnamed source told Reuters. The consensus offers a strong hint that the excited rhetoric of the past week has given way to survival instinct.

Party leaders are due to discuss ways to resolve the latest threat to the coalition on April 11 - a day later than the original deadline announced for an agreement to avoid collapsing the government and calling early elections. "I think there will be no [early] election, there is an agreement on savings measures," said the source.

On April 5, Prime Minister Petr Necas set a deadline of April 10 for the coalition to agree a way out of the huge spat that exploded last week. The PM announced his schedule a day after junior partner Public Affairs (VV) threatened to order its three ministers to resign unless Necas' ODS and Top 09 agreed to demands for a cabinet reshuffle and reassessment of the austerity drive.

Necas and Karel Schwarzenberg - foreign minister and leader of Top 09 - reacted with anger and insisted that the latest in a long line of VV threats was likely to be the last straw and would bring early elections. However, with the opposition Social Democrats set to win any election thanks to widespread anger over the government's tough austerity drive - not to mention a host of corruption scandals - the three quickly pulled their necks in to announce talks.

Necas spoke in an interview on April 8 of a 50-50 chance that the government would survive the crisis, but it's becoming clearer that pragmatism has won the day. Whilst the vicious personal clashes inside the coalition remain, the very real threat of losing office - and in VV's case it would probably mean losing its mandate to enter parliament with opinion polls suggesting it would struggle to cross the 5% threshold in a vote - appears set to overcome that antagonism yet again. That would see the three parties - who trade the basest insults on a regular basis - limp onwards, with the budgetary issues clearly the most important issue at stake.

ODS and Top 09 are pushing VV to sign up to measures to save CZK42.4bn next year, and twice as much in 2014, as they continue to press one of the most conservative fiscal policies in Europe. That policy has been widely praised by financial investors and the austerity-minded EU, but stiffly resisted by unions and a good chunk of the Czech population.

Reuters' source says the coalition parties reached an agreement to hike VAT by 1 percentage point in 2013, and to raise health insurance for high earners. Also under discussion was a new tax for high earners and a slowdown in the growth of pensions.

Erste Bank said in a note: "Effective as of 2013, pensions will be increased by less than in the past (the formula that links pensions to wages and inflation will be changed), personal income above CZK100,000/month will be taxed more and the VAT rates will be raised to 15% and 21%, respectively. This is a welcome outcome as 1) the government survived and 2) budget cuts will be implemented."

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