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Czech government plans to cut tax, welfare to fix public finances

The Czech centre-right coalition intends to overhaul the tax system and cut various welfare benefits in order to curb troubled public finances, cabinet ministers said on Tuesday.

„This is an inevitable premise so we could draft a decent budget for the next year, so we could stop the expansion of spending,” Prime Minister Mirek Topolanek said. The Czech budget deficit, fuelled by government spending, is expected to exceed the threshold of 3% of GDP set by the Maastricht criteria by 0.5%, or reach in total some 120 billion koruny (€4.2 billion) in 2007. The reform package, the government says, would reduce the deficit to 3%, or some 100 billion koruny (€3.5 billion) as soon as next year. To reach this goal the cabinet intends to overhaul tax and welfare systems. It plans to push through a flat income tax rate of 15% for individuals and raise the lower of the two value added tax (VAT) rates from 5% to 9%.

Food now comes with a 5% VAT and would be more expensive, under the proposed reform. Cabinet members claim all taxpayers would save on income tax. The government also plans to cut the corporate income tax from 24% to 19% by 2010. In welfare, the government plans to save by, among other things, coming down on sick leave, removing child benefits from the rich and overhauling the system of parental benefits. The package, which will test the weak government has been already criticized by both the right and the left as either too shallow or too harsh.

Topolanek said that he expects such criticism. But the package reflects its chances to pass in a narrowly-divided lower house of parliament, he said. The cabinet, which can at most count on a tight majority in parliament's lower house thanks to two renegade opposition deputies, has yet to find support for its package in parliament. International institutions such as the World Bank have urged the former communist Central European countries to continue economic reforms to keep their booming economies on the growth track. However, the new EU members, often described as undergoing accession blues, have responded slowly to further belt-tightening reforms to curb spiraling public spending. (