Czech Premier Pledges Deficit Cuts After Election Defeat

Czech Premier Petr Necas pledged to continue deficit cuts that helped reduce borrowing costs after a defeat in regional elections threaten to weaken him as the leader of the coalition government and his party.

Necas’s Civic Democratic Party won in one of the 13 regions in an Oct. 12-13 vote, with the main opposition party, the Social Democrats, winning in nine regions, according to the Czech Statistics Office. The Communist Party won in two regions, its best result since the Velvet Revolution overthrew the communist regime two decades ago.

The government, which lost its parliamentary majority in April following personnel and budget rows, is struggling to push through a bill including tax increases as a group of ruling- party lawmakers opposes the plan. With the country in a recession since the last quarter of 2011, Necas will also face a challenge in the Civic Democrats’ party election next month.

“We aren’t a group of blind and deaf people, and we are reflecting on the atmosphere now,” Necas said in a debate on Czech state television yesterday. “But the key parameters of our agenda, which means the focus on lowering indebtedness and lowering the public-finance deficit, will stay. That’s the reason for the existence of this government.”

The government is trying to avoid the fate of European administrations that lost power in a wave of protests against austerity measures that contributed to recessions in economies from Romania to Spain instead of tackling the euro area’s debt crisis as envisaged.

Necas’s Measures

Necas credits previous austerity measures with helping reduce borrowing costs and says the new package, which includes higher sales taxes and a new levy on the highest incomes, will maintain investor confidence by cutting the fiscal deficit to less than the European Union’s limit of 3 percent of economic output next year.

The yield on the five-year koruna bonds fell to a record low of 1.054 percent as of 1:55 p.m. in Prague today, according to generic data compiled by Bloomberg. Czech domestic bonds are influenced by the central bank’s record-low interest rates as falling household consumption caused economic contraction in the past three quarters and tamed inflation.

Necas staked his government’s survival on the plan by linking it to a vote of confidence by the end of the year.

Early Elections

The election defeat of the Civic Democrats “will continue to keep pressure on the party and we do not exclude the possibility of a coalition break-up,” Jaromir Sindel, an economist at Citigroup Inc. in Prague, said in an e-mail. “Thus, we see a possibility of an early general election” in the first half of next year, Sindel said.

The two-year-old Cabinet has cut investment, raised the sales tax and curbed spending on public wages. The budget shortfall narrowed to 3.1 percent of gross domestic product last year from 4.8 percent in 2010 and the Finance Ministry estimates it at 3.2 percent of GDP this year.

Necas on Sept. 5 failed to secure enough votes in the lower house of Parliament to push through a bill that included the tax increases. Six Civic Democratic Party lawmakers joined the opposition to reject budget measures, saying they are against a plan to boost revenue with higher taxes.

Opposition Gains

The Social Democrats may also regain the majority in the upper house of parliament they held until defections in August. Twenty-three of its candidates advanced to the face-off round of elections for 27 Senate mandates.

Necas’s party will have 10 candidates in the second round of vote on Oct. 19-20. The Social Democrats had 38 seats before the ballot, of which five terms end now. The Civic Democrats held 24 Senate mandates, with 13 ending now.

The Civic Democrats’ election result will “cause strong tensions inside the party, no matter how much Petr Necas tries to play it down,” said Jiri Pehe, the director of New York University in Prague and a political analyst who two years ago forecast the break-up of the original three-party coalition before the end of its term in 2014. “The rebels will feel stronger in their battle with Necas and the government.”

To contact the reporter on this story: Peter Laca in Prague at placa@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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