February 18, 2011 / 2:46 PM / 9 years ago

UPDATE 2-Czech PM: pension plan near completion, budget-neutral

* PM says final agreement by early March

* Plan creates opt-out of current system

* VAT to be unified at higher rate

(Adds analyst, links, background)

By Robert Mueller and Jason Hovet

PRAGUE, Feb 18 (Reuters) - A pension reform plan agreed by the Czech centre-right coalition will be finalised by early March and will not increase the budget deficit, Prime Minister Petr Necas said on Friday.

While neighbouring Poland and Hungary are rolling back earlier pension reforms, the Czechs — the last central European nation to allow workers to shift some pension tax payments to privately-held savings accounts — are only starting a revamp.

The Czech Republic has a relatively strong fiscal position, but demographic trends make the country’s budget unsustainable in the long run.

Rating agencies have said successful reforms of the pension, health and social systems could lead to an upgrade of the sovereign, now rated A by Standard & Poor’s and A1 by Moody’s.

Necas told reporters on Friday that 90-95 percent of the pension overhaul outline had been agreed.

“The coalition has proven the main reason for its existence, meaning creating a reform government, a government of budget responsibility,” Necas said.

The parties agreed on Thursday that people could reduce their contributions to the state pay-as-you-go system — where social tax collected from working people is distributed to current pensioners — and divert a proportion of their pension contributions into private savings accounts.

Under the ‘opt-out’ reform, working-age people will be able to divert 3 percentage points from their social tax payment, at 28 percent, into individual savings accounts, matched by a contribution of at least 2 percentage points from their salary.

To help cover costs arising from the opt-out — which Finance Minister Miroslav Kalousek estimated at 20 billion crowns annually — the parties plan to unify value-added tax at the upper rate of 20 percent. Several food items will be kept at the lower level of 10 percent.

Other costs will come from a cut in social taxes paid by companies and tax cuts for families.

Labour Minister Jaromir Drabek said the value added tax hike should raise 58 billion crowns in revenue per year.

The Czech governing coalition holds 118 seats of 200 in the lower house, making passage of government plans fairly certain.

The opposition Social Democrats have argued against the tax rise, and have pledged to repeal it if they come to power. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For FACTBOX on planned reforms, click on [ID:nLDE71H1PS] For FACTBOX on political risks, click on [ID:nRISKCZ] For ANALYSIS on political situation, click on [ID:nLDE7040U1] For risks in Hungarian and Polish pensions [ID:nLDE71F1HE] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

LONG OVERDUE

Analysts have called for Czech pension reform for over a decade to counter the effects of population ageing, but weak governments in that time have been unable to tackle the issue.

The Czech pay-as-you-go system showed a 29 billion crown ($1.62 billion) deficit in 2010, about 0.8 percent of gross domestic product. Government studies have predicted that, without reform, the system would eventually generate deficits growing to around 4 percent of GDP every year.

Patria Finance chief economist David Marek said the plans for a diversion of 3 percentage points of the social tax looked too little to ensure long-term sustainability of the pension system, but was more politically acceptable.

“It would be reasonable to start with a small opt-out percentage and to gradually increase it,” he said.

The agreement on a voluntary opt-out is milder than original calls for a compulsory switch.

The centre-right Civic Democrats backed away from compulsory savings, partly because the effective renationalisation of $14 billion in private pension assets by Hungary’s government to cover public spending has raised uncertainty over policies of future administrations.

To the north, Poland is also planning to roll back some of its landmark pension reforms by reducing the contributions that flow into private accounts so it can raise budget revenues.

Additional reporting by Jan Lopatka, writing by Jason Hovet; Editing by John Stonestreet/Toby Chopra/Catherine Evans

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