PRAGUE (Reuters) – The Czech parliament’s lower house gave initial backing on Friday to the centre-right government’s package of spending cuts and tax hikes aimed at cutting the budget deficit in the next two years.

The country’s public sector deficit has soared in recent years amid spending during the coronavirus pandemic, subsidies to shield the public from soaring energy prices last year and high inflation that has triggered a fast rise in pensions.

Finance Minister Zbynek Stanjura said after the vote that the government also had to react because of rising debt servicing costs, along with military spending that has been raised by law to 2% of gross domestic product from 2024.

“We admitted openly that state finances are not in good shape and that we have to continue the trend lowering the deficit,” he told a press conference.

The government’s package aims to cut spending by 151 billion crowns ($7.13 billion) over 2024-2025.

The package will now go to parliamentary committees for debate and potential fine-tuning that will test the unity of the five-party ruling coalition, whose leaders have said that no watering down of measures would be allowed.

Final approval in the lower house is expected in September.

The package includes hikes in the corporate tax rate, higher taxation of high-earning employees and real estate. More than half of the total reduction is to come from cuts in state subsidies, which are yet to be determined, as well as operating costs and salaries.

The central bank has cited loose fiscal policy as one reason for inflation, which only dipped last month to single digits for the first time since January 2022.

The government says the package will cut the public sector deficit to 1.8% of GDP next year, from 3.5% this year.

That figure has since been thrown in doubt by approval of a plan to draw a loan from the European Union’s post-COVID recovery funds, which will raise deficits.

The 2023 budget deficits soared at its fastest-ever pace in January to May before a reduction in June to 215.4 billion crowns. The full-year plan sees a gap of 295 billion.

The Finance Ministry has said it expected income from windfall taxes imposed on energy firms and banks, as well as dividends from state-controlled electricity producer CEZ, to help the budget in the second half of the year. ($1 = 21.1790 Czech crowns)

(Reporting by Jan Lopatka; Editing by Alex Richardson)

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