UPDATE 2-Czech lawmakers approve government's tax, budget bills

* Approvals boost PM Necas, cabinet's position

* Tax hike key for 2013 budget

* President opposes new taxes, may send bill back for new

vote

(Adds budget approval)

PRAGUE, Dec 19 (Reuters) - The Czech government won backing

in the lower house of parliament on Wednesday for a package of

tax hikes to help it cut the 2013 budget deficit within European

Union rules.

The package, approved for a second time to override a Senate

rejection, is critical to Prime Minister Petr Necas's drive to

bring the country's budget gap within the EU ceiling of 3

percent of gross domestic product next year.

Lawmakers voted 102-88 to pass the tax hikes on Wednesday.

The chamber later approved next year's budget by 100-86. Both

bills still need the signature of President Vaclav Klaus, who

has criticised the hikes and may still veto the unpopular law.

While the centre-right government's austerity drive since

taking power in 2010 has helped drive bond yields to record

lows, public outcry over its plans has hammered its popularity.

Necas's ruling Civic Democrat party has now fallen even

behind the far left Communist Party, which ruled former

Czechoslovakia before the fall of the Iron Curtain in 1989.

The approach has also drawn criticism from economists who

say the pursuit of austerity has helped plunge the country into

its longest economic contraction in 15 years.

A Klaus veto of the tax hikes or budget would send them back

to the house for a final vote. The government parties would

probably be able to overturn this, but may struggle to hold a

new vote before Jan. 1 when the tax hikes should take effect.

"I'm glad that the budget policy of this government received

its support in the lower house," Necas said. "I'm convinced that

the president, through his experience as a (former) prime

minister and finance minister, knows what is at stake."

Having seen his parliamentary majority dwindle to 98 of 200

seats after a row over the tax hikes that nearly led to the

government's collapse last month, Necas had to depend on support

from like-minded independent deputies to push the bills through.

The measures include raising the country's two value added

tax rates by one percentage point each to 15 and 21 percent and

tacking on an extra 7 percent income tax for those making more

than 100,000 crowns ($5,200) a month.

The hikes are designed to raise 22 billion crowns and narrow

the 2013 fiscal deficit to 2.9 percent of GDP, versus a forecast

5 percent this year that includes a one-off 1.5 percentage point

hit from a church restitution bill.

TAX DISPUTE

Klaus founded Necas's Civic Democrats and still wields

influence in the party, even though he holds no formal position.

But he has repeatedly clashed with the party's leaders. He

repeated criticism of the tax hikes on Sunday, saying higher

taxes did not always translate into higher revenue and that the

government had calculated wrong.

That criticism has been born out with budget revenue data

following a similar tax hike at the start of this year that

raised the lower rate of VAT to 14 percent, from 10 percent.

After the hike, end-November VAT revenue was up 3.9 percent

from a year earlier, far below the 15.5 percent rise the

government had hoped it would bring, a shortfall that pressures

the overall budget balance.

The Finance Ministry has blamed the fall on consumers

becoming defensive over the euro zone crisis, although many

Czechs say they are more worried about falling wages, job cuts

and tax hikes -- all factors at least partially fuelled by the

government's austerity drive.

Klaus, who will leave office in March, has yet to say

whether he will sign the law, although some analysts have said

he would not likely try to play "spoiler". If he does not sign

or veto the bill within 15 days, it will automatically pass into

law.

($1 = 19.0611 Czech crowns)

(Reporting by Robert Mueller; Writing by Michael Winfrey and

Jason Hovet; Editing by Ruth Pitchford)

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