Bloomberg News

Czech Premier Wins Confidence as Tax Revolt Weakens Cabinet

November 07, 2012

Czech Premier Petr Necas won a confidence vote tied to an unpopular tax increase after suppressing a revolt among his lawmakers that weakened the government as it pursues budget cuts.

The lower house approved a bill containing 22 billion koruna ($1.1 billion) of measures to reduce the budget deficit to less than the European Union limit next year. Necas mustered backing of 101 lawmakers in today’s vote that was tied to a confidence motion. A group of ruling lawmakers, who had opposed some tax increases in the plan, stepped aside to allow for the approval of the bill in the 200-seat chamber.

With the country facing the prospects of the longest recession on record, Necas is trying to avoid the fate of European leaders who were ousted as they pushed austerity measures that stunted economies from Romania to Spain. The premier, who credits previous cuts with helping to reduce borrowing costs, is likely to meet more difficulties with his austerity measures as a defection of one rebelling lawmaker pushed the government into a minority.

“Horse trading is to become a feature of any important vote in parliament,” Otilia Simkova, an analyst at Eurasia Group in London who had predicted the government to survive the confidence vote, said in an e-mail. “This bodes poorly for government’s ability to implement any key legislation in the future as well as its overall stability.

Record-Low Yields

The yield on five-year koruna bonds fell two basis points, or 0.02 percentage point, to a record-low 0.72 percent today, according to generic data compiled by Bloomberg. The central bank cut its benchmark interest rate to near zero on Nov. 1, responding to falling household consumption that has caused the economy to shrink the last three quarters and tamed inflation.

The government needs a simple majority to push through bills in the lower house and may seek backing from a group of lawmakers who were formerly in ruling parties. Necas will probably endure more resistance from the Senate in which the opposition holds a majority and vowed to reject the latest fiscal package.

With 99 lower-house mandates, the ruling coalition lacks the 101 votes in the 200-seat chamber to override a veto by the Senate or President Vaclav Klaus. Klaus, an economist who founded Necas’s party two decades ago after the fall of communism, has criticized the tax bill as hurting growth.

Six Rebels

Six of Necas’s lawmakers joined the opposition on Sept. 5 to reject the bill, which includes raising sales-tax rates and a new levy for high earners.

One of the deputies has since left Necas’s party, while three gave up their parliamentary mandates today before the vote.

‘‘All in all, while the risk of an early general election has eased, it has not disappeared,” Jaromir Sindel, an economist at Citigroup Inc. in Prague, said in an e-mail today.

At a party convention last weekend, Necas defeated a last- minute contestant from the group of deputies who reject tax increases to remain the chairman of the Civic Democrats, or ODS.

The new package will maintain investor confidence by cutting the fiscal deficit to within the EU’s limit of 3 percent of gross domestic product next year, Necas says.

The Cabinet has cut investment, raised the sales tax and curbed spending on public wages. The budget shortfall narrowed to 3.3 percent of GDP last year from 4.8 percent in 2010. The Finance Ministry estimates it at 3.2 percent this year.

To contact the reporter on this story: Peter Laca in Prague at placa@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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