Czech Parties to Seal Coalition as Stimulus Debate Looms

Czech parties signed an agreement to form a government that will face a dispute over whether to raise corporate taxes to finance increased state spending after a record-long recession.

Leaders of the Social Democrats, the ANO party and the Christian Democrats signed the deal in Prague today, ending negotiations following an Oct. 25-26 snap election. The Social Democrats nominated Chairman Bohuslav Sobotka as the country’s eighth prime minister in the past decade, while billionaire businessman Andrej Babis, the head of ANO, is poised to take the reins of the Finance Ministry.

The new government, which Sobotka predicts will take power by mid-January, will aim to end the policy paralysis triggered by the collapse of former Prime Minister Petr Necas’s cabinet in a spying and corruption scandal in June. Two-year-old ANO opposes the Social Democrats’ call for higher corporate taxes. Babis has said he sees a “tough debate” on the issue.

“It wasn’t easy to find a program consensus among the three parties,” Sobotka told journalists after the signing ceremony. “I’m very pleased that the program we put together is a realistic one. It gives hopes for a positive turnaround, hope for supporting economic growth and employment.”

The coalition, which will hold 111 votes in the 200-seat lower house of parliament, agreed to focus on supporting growth as the $196 billion economy struggles to rebound from a recession.

The three parties have pledged to keep the budget deficit below the European Union’s limit of 3 percent of economic output and agreed to keep taxes unchanged in 2014.

Special Levy

The coalition will discuss how to cover state spending for 2015 when preparing the next budget draft, leaving the option open for a special levy on selected industries, such as banks and utilities, if savings on the state’s operations aren’t enough.

“The probability that the government program will be fulfilled isn’t high,” Jiri Pehe, director of New York University in Prague, said in a Jan. 1 note on his website. “The coalition will be unstable, because it’s formed by two parties and one anti-political movement. There is a risk that the crisis of the basic institutions of the state and politics may continue.”

Investors have largely overlooked the nation’s history of political instability, including the recent months of coalition negotiations.

Investment Programs

The yield on the country’s 10-year government debt has averaged 3.8 percent over the past decade, compared with 5.6 percent for Poland, the EU’s largest post-communist economy, and 3.5 percent for higher-rated France. The Czech 10-year yield fell 4 basis points, or 0.04 percentage point, to 2.51 percent as of 4:50 p.m. in Prague.

The coalition will want to focus on state investment programs in fields such as infrastructure, according to the coalition document published on Dec. 13. The parties also pledged to boost pensions and subsidies for children, abolish most medical fees and stop diverting part of pension taxes into private retirement accounts.

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