Government's reform package hangs in the balance

The fate of the government's fiscal reform package hangs in the balance after a second coalition deputy said he might not support it. Civic Democratic Party deputy Vlastimil Tlusty on Wednesday unexpectedly backed out of the coalition agreement he had earlier praised, saying that new calculations suggested the proposed cuts in tax rebate were too high and would in fact increase the tax burden for many people. That, he said, ran counter to the party's policy line and would not get his backing. Mr Tlusty's stand is crucial to the outcome of next week's vote in the lower house.

Vlastimil Tlusty, photo: CTK

Vlastimil Tlusty's unexpected U-turn on Wednesday night has thrown a huge spanner in the works of the governing coalition. The government has staked its future on the proposed reform package. Given its slim majority in the lower house, it cannot afford to lose the backing of two of its deputies. What has made a compromise so difficult is that for some the reforms are too radical, while for others not enough by far. Christian Democrat Deputy Ludvik Hovorka was the first who refused to support the reforms because he does not agree with the introduction of medical fees. Now, Vlastimil Tlusty feels that the proposed reforms should go further and, above all, respect his party's promise on lowering taxes.

"Calculations made by the finance ministry suggest that the cuts in the tax rebate are so steep that even with a projected tax rate of 12.5 percent in 2009 many people would actually be shouldering a heavier tax burden. That is not what the finance minister promised in Parliament or what the reforms aimed to achieve."

Ales Michl

Mr Tlusty says that if this is not put right, the governing coalition will not be able to count on his vote. I spoke to economic analyst Ales Michl to find out whether the rebel MP had a valid point.

"The answer to that question depends on how you define your vision of reform. If the aim is to reduce taxation in the Czech Republic then Mr. Tlusty is right. If the aim is to stabilize the budget deficit then Mr. Tlusty is wrong - so it is up to your definition."

What about the claim of the opposition that this reform will lower the living standard of 90 percent of Czechs - do you agree with that?

"I am convinced that there will be no significant change in people's living standards, no significant change in economic growth either. The overall taxation would remain approximately the same -there should be no change in the actual tax burden because on the one hand there is a reduction in income tax, on the other hand there is a VAT hike."

Some economic analysts say that the reforms do not go far enough, that they are not ambitious enough - do you agree with that?

"Absolutely. As it is the government still recons with a 100 billion crown deficit in spending in 2010 and that is a big risk for the economy. So I would say that this reform will stabilize the country but I would not call it a real reform."

Photo: European Commission

Assuming the government were to push through what you would call a real reform could the public withstand the shock?

"Absolutely, because right now our GDP growth is the highest in the country's history and the conditions for reform are the best ever -so why not lower our budget deficit? Doing that would improve the living standard of all citizens in the long term."

The prime minister has heard this line of argument from his own party colleagues and counters that within a governing coalition one must make concessions and that this is merely the first step of a broader reform plan. However even that first step is now uncertain. The government has until next Tuesday to convince either of the "rebels" to let the reforms pass. A no-vote from both would shoot down not just the reform package but the whole governing coalition.