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UPDATE 2-Czech lawmakers back biggest-ever $5.9 bln tax cut, boosting debt

* Lawmakers approve biggest-ever tax cut worth $5.9 billion

* Prime Minister Andrej Babis overrides junior coalition party

* Analysts say the move shuts off possible monetary easing (Adds budget council, impact on central bank)

PRAGUE, Nov 20 (Reuters) - Czech lawmakers approved the biggest ever income tax cut on Friday, doubling down on Prime Minister Andrej Babis’s already ambitious plan to revive the coronavirus-hit economy, despite criticism that the changes will open a hole in public budgets for years.

The lower house approved a total of 130 billion crowns ($5.86 billion) - equivalent to over 2% of gross domestic product - in annual cuts to personal income tax and other taxes after a debate that lasted from Thursday until 2 am on Friday.

The main part was a 79 billion crown reduction of personal income taxes by slashing the main rate to 15% from 20.1%, which Babis had pushed against the will of his own coalition partners who have argued it mainly benefited top earners.

Babis and Finance Minister Alena Schillerova have argued the country’s low debt level - at 36.9% of GDP in the third quarter - provided room for stimulus for an economy expected to fall around 7% this year.

The lower house also slashed the flat write-off on personal income taxes proposed by the opposition, raising the overall package significantly.

Schillerova said the package would raise the central state budget gap by about 90 billion crowns, with the rest of the impact affecting local and regional administrations. The central state budget gap was already planned at 320 billion crowns before the tax changes.

Schillerova said that the lost revenue would not be compensated by spending cuts.

“I am no David Copperfield. I will cut spending the same way I do every year, but I won’t find tens of billions (of crowns) there,” she said.

The country’s budget advisory body, the Czech Fiscal Council, said the cut was “the biggest tax intervention in the Czech Republic’s history” and would raise debt to 44% of GDP next year.

ING chief economist Jakub Seidler said the fiscal stimulus would boost inflation and close the room for any potential interest rates cuts.

The Finance Ministry forecast the public sector deficit to dip to 4.9% of GDP next year from 6.4% this year, before the tax changes.

The junior ruling party, the Social Democrats, voted against the package. It was approved with votes from Babis’s ANO party and centre-right, far-right and far-left opposition parties.

The bill now heads to the upper house, the Senate, which may suggest amendments and send it back for a re-vote. ($1 = 22.1730 Czech crowns) (Reporting by Jason Hovet, Jan Lopatka and Robert Muller; editing by Jason Neely & Simon Cameron-Moore)

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