Czech Prime Minister Petr Necas is seeking a confidence vote in his government after the ruling coalition failed to approve a plan to trim the budget deficit with higher taxes.
Necas, who lost his parliamentary majority in April amid personnel and budget rows, fell seven votes short of the 101 needed yesterday to override a veto by the Senate of a package of measures raising state revenue and cutting spending. The Cabinet approved the same bill today, linking its approval to a confidence vote in Necas’s administration and asking lawmakers to finish deliberations on the draft within three months.
“Without this package, it isn’t possible to approve state budget with public finance deficit below 3 percent of gross domestic product for next year,” Necas said after yesterday’s vote. “The Czech government has trust of international institutions and financial markets, and it will continue to conduct realistic budget policy based on its credibility.”
Necas is trying to avoid the fate of European leaders who lost power in a wave of protests against austerity measures aimed at tackling the euro area’s debt crisis while contributing to recessions in economies from Romania to Spain.
He credits previous austerity measures with helping reduce borrowing costs and says the new package, which includes higher sales taxes, a new levy on the highest incomes and slower pension growth, will maintain investor confidence by trimming the deficit to less than 3 percent of economic output next year.
The yield on the five-year Czech koruna bond, which fell to a record low of 1.145 percent on Aug. 30, climbed to 1.284 percent today, according to generic data compiled by Bloomberg.
The rejection of the “fiscal consolidation package could, in our view, represent a significant immediate risk for the stability of the government,” Jaromir Sindel, an economist at Citigroup Inc. in Prague, said yesterday before the vote.
Disputes over the budget measures are clouding the monetary-policy outlook as the central bank included the effects of the new package on the economy in its latest forecasts. The bank said fiscal austerity would continue to depress household spending and tame inflation, with the estimate from Aug. 2 assuming declining market interest rates in several quarters before a rebound in 2014.
The ruling coalition holds 100 mandates in the 200-seat lower house. Members of Necas’s Civic Democrats criticized the bill before the vote because it violated principles of the party that traditionally eschews tax increases. The measures are needed to cut the 2013 budget shortfall to below the European Union’s limit of 3 percent of economic output, according to Finance Minister Miroslav Kalousek, a deputy of the TOP09 party, another governing partner.
A potential coalition break-up shouldn’t be “an imminent large risk for Czech bonds,” as “the borrowing requirements of the central government are likely covered this year,” Sindel said.
The government sold the least debt this year at an auction yesterday as record-low yields and concern over Necas’s Cabinet hurt investor demand. The country raised 4.5 billion koruna ($229 million) selling notes maturing in six and 11 years, less than the maximum target of 6 billion koruna and the least since December 2011, data compiled by Bloomberg show. The yield on the 2018 debt fell to 1.48 percent, the lowest ever.
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.
The $215 billion economy shrank 0.2 percent in the second quarter from the previous three months, the third consecutive contraction, as households curbed spending in response to Europe’s worsening economy. The Czech Republic, which isn’t part of the 17-country euro region, relies on the 27-nation European Union to buy 80 percent of exports, including from companies such as carmaker Skoda Auto AS.
It may take several weeks before lawmakers will vote again on the tax changes and the bill will have to go through regular legislative process, including a vote in the opposition-controlled Senate.
Apart from the opposition Social Democrats, the plan to raise taxes has also been criticized by President Vaclav Klaus, an economist who founded Necas’s Civic Democratic Party, or ODS, after the collapse of communism two decades ago. Klaus said raising taxes during a recession would slow growth.