* Lower house approves plan to cut deficit
* Agreement removes threat of PM's resignation
* Taxes, savings should narrow deficit to 5.2 pct/GDP
(Adds approval, market reaction, analyst)
By Jan Korselt
PRAGUE, Sept 25 (Reuters) - The lower house of the Czech
parliament approved a $4 billion package of tax hikes and
spending cuts on Friday, cutting next year's expected budget
deficit and removing a threat by the prime minister to resign.
The measures may arrest the fast deterioration of the budget
after the central European economy slumped into recession, buoy
investor confidence and avoid what the government had warned
would be a similar meltdown to Hungary's last year.
After days of tense talks, main left and right-wing parties
voted 163 to 26 in favour of the measures aimed at cutting the
fiscal gap to 5.2 percent of gross domestic product from a
forecast 7.5 percent.
The vote gave wide backing to Prime Minister Jan Fischer's
interim cabinet which will lead the country until an election in
mid-2010. A court ruled against plans for polls this autumn.
Fischer, a non-partisan statistician who had threatened to
quit if the plan was rejected or significantly watered down,
thanked the lower house and said the measures were tough but
necessary.
"This will hurt next year, so it does not hurt us even more
in the years to follow," he told lawmakers after the vote.
The Czech budget dropped into deep deficit this year as the
export-dependent economy stumbled following years of strong
growth, underlining the need for a budget overhaul.
But despite a large deficit, the Czechs still have lower
debt than most countries in western and central Europe, at
around 40 percent of gross domestic product.
The country has an 'A' rating from Standard and Poor's, on a
par with euro zone member Slovakia and above Poland and Hungary.
The plan still needs to be approved by the upper house, the
Senate, but it is expected to sail through. The government will
incorporate the changes into the 2010 budget draft which it must
complete by Sept. 30.
POSITIVE, BUT ONLY FIRST STEP
The crown firmed after the deal and stood at 25.175 to the
euro <EURCZK=> by 1055 GMT, up 0.15 percent on the day.
"It is a first step only," said Jaromir Sindel, Citibank's
chief economist in Prague. "I expect the final deficit will be
somewhat larger... as I think deputies will approve some changes
during the year."
"But it is much better than a deficit of 230 billion
(crowns). The supply of bonds will be lower, so it is positive
for bonds," he said.
The 10-year government bond was quoted with a yield of
5.015/4.948 percent, down one basis point from Thursday.
The government proposed raising taxes by 50 billion crowns
and cutting spending by about 25 billion, but those savings were
lowered during the lower house's debate, mainly around demands
from the leftist Social Democrats to remove savings on welfare.
Finance Minister Eduard Janota said that even after the
changes, the package would cut the budget gap to 162.8 billion
crowns, only slightly over his plan for a 155.3 billion gap.
The package will raise taxes for top earners and lift taxes
on cigarettes, alcohol and petrol as well as value-added tax
applied on all goods and services. It will cut salaries in the
public sector -- including politicians' pay -- by four percent.
(Reporting by Jan Korselt; Writing by Jan Lopatka; Editing by
Louise Ireland)
