Czech PM insists government can push new tax hikes through

By bne IntelliNews August 20, 2012

Tim Gosling in Prague -

Prime Minister Petr Necas insisted on August 17 that the governing coalition will manage to push its latest round of austerity measures past the objections of the opposition controlled senate, despite his administration's need to rely on the support of independents.

The upper house blocked the government's latest set of tax hikes on August 16. The bill aims to raise VAT and income tax to the tune of CZK25.5bn (€1bn) - around 0.7% of GDP - in 2013, according to Bloomberg, the latest in a series of harsh moves that has seen Czech borrowing costs drop to record lows recently, but that some - including some government deputies - say are holding back growth. The country recorded a third quarter of contraction in a row between April and June, it was revealed last week.

The bills now go back to the lower house of parliament, which can override the vetoes with a simple majority. A vote is likely on September 4. However, bruised and battered by at least two severe government crises in 2012, Necas' three-party coalition now has just 100 seats in the 200-seat chamber. That leaves the government needing the support of independents.

"I have as many votes as I need," the prime minister said, according to Hospodarske Noviny. "As long as everyone acts responsibly, then I am certain that my government will push through raising value-added tax, as well as church restitution."

Necas repeated the macho posturing that he displayed earlier in the year when the coalition faced threats from previous junior party VVV, and claimed again that he's ready to go to the polls early if he is not able to rely on a majority vote to push through the fiscal consolidation plans. However, with the main centre-right parties - Necas' ODS and Top 09 - faced with almost certain defeat to the opposition Social Democrats should an election take place soon, the PM has plumped for discretion over valor so far this year, and is unlikely to take any rash action this time either.

Calling the vote "a real test of coalition integrity," Jaromir Sindel at Citigroup points out that the stakes are high for the coalition, but suggests that it has little choice but to go forwards despite recent pledges from the government to pull back on austerity. "Refusal of the stabilization package could result in a coalition break up," he warns, before pointing out: "The worse-than-expected GDP contraction of 1.2% [year on year in the second quarter], probably on the back of weak private consumption, highlights doubts about the 1 pp hike in VAT to 15% and 21% in January 2013. However, we think there is insufficient time to modify the consolidation package and therefore the law will likely be approved later this year. Nevertheless, this highlights the necessity of the government to focus on the expenditure side again, even as some MPs, particularly from ODS, have problems with further increases in taxes."

Reflecting that position, Necas clearly feels he has little choice but to continue to talk a tough game. Claiming that the bill will help rebalance the budget by CZK18bn - a lower estimate than the previous calculations, points out Bloomberg - the PM told Lidove Noviny, that backing off the tax hikes "would be a step going beyond the boundary of political and economic silliness, and bordering on ... idiocy".

Still, even Necas now admits that the government's continued fiscal consolidation is helping to pull the country into recession to some extent, before insisting that the consumer is the major culprit. "It is mainly what I would call the lousy economic mood, which is seen in lower household consumption, in the rise in deposits."

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