Czech house gives preliminary nod to tax hikes

PRAGUE (Reuters) - The Czech parliament has given an initial go-ahead to the government's new package of tax hikes aimed at keeping the budget gap below 3 percent next year despite a sharp slowdown in the economy.

The centre-right cabinet has won investor praise, shown in low debt yields, for its commitment to narrow deficits. But economists have also warned it not to overdo the tightening while the economy plunges into recession due to demand hit by tax hikes and spending cuts.

The vote late on Wednesday also showed Prime Minster Petr Necas has parliamentary backing for his fiscal policies despite a split in the ruling coalition last month that has narrowed his parliamentary strength to an uncertain majority.

In the first of three readings over the coming months, the lower house of parliament approved the plan to raise the two brackets of the value-added tax (VAT), the main tax revenue earner, by 1 percentage point to 15 and 21 percent.

Another part of the plan is to axe the ceiling on health insurance payments and introduce a new tax bracket for high wage earners.

The aim is to raise revenue by 105.7 billion crowns (3.31 billion pounds) in 2013-2015, as the cabinet plans to narrow the budget gap to 2.9 percent of gross domestic product next year from 3.0 percent expected this year, then to 1.9 percent in 2014 and 0.9 percent in 2015.

The package also includes a cut in write-offs for entrepreneurs, a hike in the real estate transfer tax and a higher tax on income transfers from tax havens.

The Czech economy shrank by 1.0 percent in the first quarter from the previous three months, according to preliminary data, and it is expected to suffer more as household spending is hit by a dip in real wages and a poor outlook for exports to the crisis-hit euro zone.

Central Bank Governor Miroslav Singer has spoken in favour of a rate cut, from the current all-time low of 0.75 percent, and Finance Minister Miroslav Kalousek said last weekend he would not make a "holy grail" out of the cabinet's aim to cut the deficit to zero if the economy suffered.

The lower house will send the bill to committees and a final vote is expected after summer recess.

(Reporting by Jan Lopatka and Robert Mueller; Editing by Alison Williams)