Czech Lawmakers Approve Tax Increases Needed to Cut Budget Gap

The Czech lower house of parliament approved a bill raising taxes, a key part of Premier Petr Necas’ effort to cut the budget deficit that helped bring borrowing costs to a record low.

The 95-90 vote today was a test of the government’s stability as it rules with the support of lawmakers who left a former coalition party. Necas said failure to approve the law would mean early elections. The draft will probably be rejected in the upper house of parliament, controlled by the opposition Social Democrats, who oppose the changes. Necas will then be forced to mobilize his parliamentary votes again to overturn the veto.

“It is the current government’s primary task to lower the deficit because uncontrollable growth in state debt, accompanied by an increase in debt servicing costs, could pull the Czech economy into a serious recession,” the Cabinet said in the draft.

As governments fall in Europe in a wave of protests against austerity measures, Necas’s two-year-old administration is raising the sales tax, cutting operating spending and curbing pensions growth, with the aim of narrowing the public deficit below the European Union’s ceiling of 3 percent of economic output.

Government yields fell to a record low today, curbing the premium over German bunds to a five-month low. Czech bonds are rated at the fifth-highest level, A1, by Moody’s Investors Service, four steps above Italy and five above Spain.

Tax Increase

Under the approved bill, sales-tax rates will rise by one percentage point to 15 percent and 21 percent from 2013, the second increase in as many years. The new legislation also introduces a 7 percent tax for personal income of more than 4 times the average monthly salary. It will also abolish the ceiling for compulsory health-insurance payments, securing additional budget income.

The new measures should boost budget revenue by 25.5 billion koruna ($1.2 billion) next year and 33 billion koruna in 2014, according to the bill.

Necas is trimming the public-finance deficit even though the Czech economy fell into a recession after households responded to the worsening economic outlook by cutting spending. The plan has triggered protests from trade unions, which staged anti-government rallies and have threatened to call a nationwide strike.

The deficit cuts have helped lower Czech borrowing costs. The yield on the country’s Eurobond maturing in 2021 fell to an all-time low of 2.71 percent today, while the koruna has gained 1.3 percent against the euro this week, according to data compiled by Bloomberg.

The Cabinet wants to narrow the public-finance deficit, the fiscal yardstick for assessing an EU member’s readiness to adopt the euro, to 2.9 percent of economic output in 2013 from the targeted 3 percent this year and compared with 3.1 percent in 2011.

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