Wednesday February 10, 2010 06:54:18 AM GMT
PRAGUE, Feb 8 (Reuters) - The Czech Republic's caretaker cabinet approved a plan on Monday to cut the public sector deficit in the coming years so the country can adopt the euro by 2016 or 2017.
The plan follows a demand from Brussels for Prague to cut its wide fiscal gap to the EU-prescribed level of 3 percent of GDP by 2013 and comes ahead of a May general election in which parties have clashed over whether tightening belts or spending more is the best way to recover from the global economic crisis.
Finance Minister Eduard Janota said the programme * trimming the public sector gap to the required level in 2013 or in 2014, which he has said would allow for euro adoption three years later, after a stay in the ERM 2 currency grid.
But the report did not set an actual date for entry, and the plan may have limited relevance because the caretaker cabinet will be replaced by a government after a May general election and the new administration may take a different course.
"The government approved the convergence programme... in which it shows the willingness to consolidate the public finances and the state budget deficit," Prime Minister Jan Fischer told reporters.
The government will submit the report, part of the EU state's annual convergence programme, to Brussels by Feb 15.
The Czechs have no formal target for euro entry.
And in December, the government and the central bank agreed there was no point in setting a euro entry target date now as the economic crisis worsened the country's preparedness for the adoption. [ID:nLDE5BK1OC]
Fischer said the plan * "painful" savings of around 100 billion crowns ($5.23 billion) by 2013.
Janota had earlier said the plan included introduction of a new personal income tax rate for top earners with an income above 1.7 million crowns ($88,910) a year and extending temporary increase of sales and excise taxes and insurance for top earners approved for this year.
Other tax hikes and spending cuts will have to be implemented but Janota did not specify them, saying they would be up to the next government.
Economists say the Czech public finances are fine for now with the government debt seen only at 38.6 percent of GDP this year comfortably below the euro zone 60 percent threshold, while a 5.3 percent of GDP fiscal gap is smaller than most EU members.
But they still welcome measures to cut costs and push structural reforms, saying the budget is heavily burdened by mandatory spending, including pensions and welfare fees, and that inaction now could lead to a spiralling deficit and debt crisis later.
The main leftist party, the Social Democrats, leads opinion polls. It has pledged to hike taxes for the rich and maintain social benefits for pensions, maternity leave, and other items that have been slated for cuts and argue it will better shield those most affected by the crisis.
The second-place, right-of-centre Civic Democrats, who have seen their support fall, grudgingly admit the need to raise some taxes, mainly sales and excise ones, but say cuts to the benefit system are the best way to create sustainable growth.