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Czech Premier Petr Necas overcame a rebellion within his ruling coalition and unified the government behind a deficit-cutting agenda that has pushed bond yields to a record low.
The three parties in the 20-month-old government agreed today on spending cuts and revenue-boosting measures totaling 57 billion koruna ($3 billion) next year to narrow the fiscal deficit to within the European Union’s limit of 3 percent of economic output, Necas said. The deal was a condition for preserving the coalition, which had assembled the largest ruling majority since the country’s independence 19 years ago.
Investors have been attracted to Czech debt by government efforts to push through deficit-cutting measures. The fiscal agenda was endangered last week after Public Affairs, the smallest coalition party, threatened to quit unless the premier overhauls the Cabinet. Necas refused, warning that he’s willing to face snap elections.
“What I consider key is today’s agreement on acceptance of a concept of the state budget for 2013 and 2014, and the budget outlook for 2015,” Necas told reporters after the coalition leaders met. “This concept clearly embraces the government’s consolidation strategy, which includes the public-finance deficit of 2.9 percent of gross domestic product in 2013.”
Government measures to narrow the fiscal gap, including an increase in the value-added tax and an overhaul of the pension system, have helped curb the country’s funding costs. The yield on the Czech Eurobond maturing in 2021 fell to an all-time low of 3.353 percent on April 6, according to data compiled by Bloomberg. It rose to 3.390 percent today. The koruna weakened 0.6 percent to 24.862 per euro as of 6:37 p.m. in Prague.
Since taking power in 2010, the ruling coalition has repeatedly quarreled over personnel issues and measures to cut spending. The government averted a collapse in June 2011 in a dispute over the division of Cabinet posts that had prompted a similar ultimatum from Public Affairs.
The smallest government member has opposed some proposals presented by Finance Minister Miroslav Kalousek, a member of the TOP09 party. Education Minister Josef Dobes resigned in March in protest against a plan to cut his budget allocation.
The government plans to narrow the public finance deficit, the fiscal yardstick for assessing an EU member’s readiness to adopt the euro, to 1.9 percent of GDP in 2014, Necas said. To meet this target, the Cabinet must find savings and boost revenue by a combined 95 billion koruna that year, he said.
The key measures include an increase in the value-added tax rates by one percentage point to 15 percent and 21 percent, a special temporary tax for higher earners and cuts in the government’s operating spending.
Even with the squabbling, the coalition has pushed through measures to curb the deficit, including increases in VAT and the retirement age that the International Monetary Fund said may eliminate most of the shortfall in the pay-as-you-go pension system.
Public Affairs’ support in opinion polls has fallen the most among the three ruling parties since the elections. It wouldn’t reach the 5 percent threshold to enter parliament if elections were held now, according to a Feb. 22-March 2 poll by the Stem company. The margin of error was plus or minus 1.5 percentage points to 2.5 percentage points.
The opposition Social Democrats would win elections now, according to the Stem poll, which was conducted among 1,096 respondents and released March 9. Necas’s Civic Democrats, or ODS, and TOP09 wouldn’t get enough votes to create a majority government together, the poll showed.
Necas’s Civic Democrats and the TOP09 “called Public Affairs’ bluff,” Jiri Pehe, a political analyst and the director of New York University in Prague, said April 5 by phone, forecasting the coalition would remain intact.
The decline in popularity is a reason for the ruling parties to remain in the coalition as they would face a “severe defeat” in early elections, Pehe said.
The Czech Republic has a history of political infighting. It’s had two minority governments and two interim Cabinets in the past 14 years, stalling previous efforts to control the budget deficit. In 2009, Prime Minister Mirek Topolanek lost a no-confidence motion halfway through the country’s six-month term as EU president.
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