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Czech Republic Plans Higher Taxes, Spending Cuts to Curb Gap

Feb. 27 (Bloomberg) -- The Czech Finance Ministry proposed a package of temporary tax increases and spending cuts to meet its targets for budget-deficit reductions after the economy slid into recession.

The government will freeze as much as 23.6 billion koruna ($1.3 billion) in spending this year and discuss laws to save 42.2 billion koruna next year and 84.4 billion koruna in 2014, Finance Minister Miroslav Kalousek told reporters today.

A stagnating economy means that new austerity measures are needed to cut the fiscal gap to the planned 3.5 percent of gross domestic product this year, 2.9 percent in 2013 and 1.9 percent in 2014, from 3.7 percent last year, according to Kalousek. Czech GDP shrank 0.3 percent in the fourth quarter, after a quarterly contraction by 0.1 percent in the previous three months, the statistics office in Prague said on Feb. 15.

“We don’t get to choose whether to do it or not,” Kalousek said in Prague. “We can only choose whether we want to do it now in this way, or at some later time under much more dramatic circumstances.”

The government may increase the personal-income tax to 16 percent next year from 15 percent, and levy a 31 percent tax on top earnings that would be raised to 32 percent in 2014 and 2015, Kalousek said. He also proposed to freeze or slow increases in pensions between 2013 and 2015, scrap some social benefits and lower administration costs. Goods and services with a 14 percent value-added tax should be taxed at the main 20 percent rate except books, newspapers and medicines, he said.

‘Bold’

The electricity tax would be doubled and the government may raise about 2 billion koruna with a new carbon tax on heating oil and coal, the minister said. The ministry also proposes to lower deductible items for the self-employed.

“That would be quite a bold fiscal adjustment,” Raffaella Tenconi, a London-based economist at Bank of America Corp., said today in response to e-mailed questions from Bloomberg. “It confirms Czechs are the safe haven in the region. The risk is that tight fiscal measures and a relatively strong currency are big hurdles to growth, amid an already weak global recovery.”

The outlook for the country’s economic growth this year is “flat” as euro-area debt crisis hurts demand for Czech exports, Masanori Yoshida, head of the International Monetary Fund’s mission, told a separate press conference today in Prague. While Czech GDP may grow about 2 percent next year, risks to this scenario “are tilted to the downside,” he said. The measures still must be debated by the Cabinet.

The koruna strengthened for a third day, gaining 0.2 percent to 24.970 per euro by 5:23 p.m. in Prague.

To contact the reporter on this story: Krystof Chamonikolas in Prague at kchamonikola@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net

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