The Czech government's tax and social reform package aimed at cutting the fiscal deficit cleared the first out of three readings in the lower house of parliament on Thursday.
The chamber narrowly rejected motions to kill the series of changes to taxes and social benefits, and voted to debate the draft further thanks to support from two defectors from the leftist opposition Social Democrats.
The vote is only a partial victory for the government because some members of the centre-right coalition have warned they would vote against the package in the final reading due by September unless their amendments are included.
The government said it would try to provoke an early election if the reforms are not approved. The result is open because the government has just 100 seats in the 200-seat lower house. Prime Minister Mirek Topolanek warned that rejection of the reforms would eventually lead to an economic meltdown, and in the shorter term could halt funding from the European Union.
"Gradually the public finances would fall apart," he told the chamber. "First there will be no money for investments, then for welfare, healthcare and pensions. Nobody wants that." The reform package mildly cuts social and discretionary spending and rebalances taxes mainly in favour of companies and top earners. It will also make people pay for visits to doctors.
It aims to cut the deficit to 3.2 percent of GDP in 2008 and, along with further measures to be intorduced later, to 2.3 percent in 2010 from 4 percent seen this year. Social Democrat leader Jiri Paroubek reiterated his party rejected the plan because it only helped the rich.
The Czech Republic, a European Union member since 2004, has enjoyed strong economic growth - 6.4 percent last year - but has failed to put its budgets on a sustainable path. The poor outlook for budget gaps has derailed plans to adopt the euro currency in 2010. The government has formally abandoned that target and has not set a new one.
Finance Minister Miroslav Kalousek of the junior coalition member, the Christian Democrats, has been advocating a 2012 entry but Topolanek's Civic Democrats have so far steered clear of endorsing any new fixed date. The European Union's rules call for a long-term balance in public budgets and a maximum deficit of 3 percent of GDP.