Czech PM wins fight for tax cut package

From the Financial Times today:

Czech PM wins fight for tax cut package

By Katka Krosnar in Prague

Published: August 22 2007 02:14 | Last updated: August 22 2007 02:14

The Czech parliament on Tuesday approved a public finance reform package that would cut corporate tax to 21 per cent next year.

Under the reforms proposed by the centre-right coalition government of Mirek Topolanek, prime minister, the corporate income tax rate will fall from 24 per cent to 21 per cent next year, then by a further 1 percentage point in 2009 and 2010.

A simplified individual income tax rate of 15 per cent is to be introduced next year, falling to 12.5 per cent in 2009.

The backing for the reform package, albeit by a slim two-vote majority, was a big victory for Mr Topolanek who faced a backlash by rebel MPs from his own Civic Democrats party led by Vlastimil Tlusty, the former finance minister. Mr Tlusty had threatened to vote against the bill, arguing it would make many families worse off.

Mr Topolanek had earlier warned that the ruling coalition would collapse if the package was rejected and the government would be unable to prepare a budget with a deficit of less than 3 per cent of GDP, a key criterion for euro adoption. But some analysts said on Tuesday the reforms did not go far enough to rein in public expenditure as the Czech Republic faces a 3.9 per cent public finance deficit this year.

Under the reforms, social benefits including sick pay, long-term unemployment benefit, one-off new baby payments and child benefit would be cut, while the VAT rate for food and medicine would be raised from 5 per cent to 9 per cent. Fees for consulting doctors would also be introduced.

“The vast majority of steps in this bill are positive and will not worsen the situation for people,” Mr Topolanek insisted on Tuesday.

With GDP growth of 6.4 per cent last year and the finance ministry forecasting 5.8 per cent this year, analysts say now is the time to implement wider-reaching spending cuts.

“These reforms will not dramatically improve the public deficit. There is no reason to cut taxes right now and the government is not tackling the key problem of huge social spending,” said Vadimir Pikora, an analyst with Next Finance.

Ales Michl, an analyst at Raiffeissenbank, said: “These watery reforms lack vision and ambition and do nothing to solve the deficit. The government should be seriously cutting public expenditure particularly in state orders, the health sector and social benefits.”

Pavel Sobisek, an economist at HVB, said that without the reforms euro adoption would be impossible in 2012.

The bill must now be approved by the Senate, where the ruling parties have a majority, and then by President Vaclav Klaus.