Mr Spidla has a slim two-vote majority

The government has proposed cutting spending, raising some indirect and personal taxes, lowering profit taxes, and closing many loopholes in an effort to reduce the state budget deficit to 4% of gross domestic product (GDP) by 2006.

This year, after strong increases in expenditure in the past few years, the deficit is likely to hit 7% - more than twice the level expected by the European Union (EU), which the Czech Republic is to join in 2004.

The tax reform has proved controversial: unions have reacted angrily to planned cutbacks, while critics on the right have argued that crucial fiscal reform is being dangerously postponed.

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Prime Minister Vladimir Spidla has staked his political career on tidying up the Czech Republic's messy public finances.

Since the mid-1990s, government spending has more than doubled, far outpacing sluggish growth in revenue.

His left-of-centre coalition is likely to win approval in the first reading of the finance bill, which begins on Tuesday and should result in a vote this week.

But the two subsequent readings promise to be highly controversial, as Mr Spidla only enjoys the support of 101 deputies in the 200-seat lower house of parliament.

A number of pro-government deputies have voted against Mr Spidla on previous occasions, and many have expressed disquiet about certain aspects of the bill.

A leftist faction within Mr Spidla's Social Democrat party, for example, has said it may revolt against plans to cut welfare spending.

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The business community, meanwhile, is watching the bill with mixed feelings.

The main tax reform in the bill is a sharp reduction of the Czech Republic's corporate taxes, currently by far the highest of any EU candidate country.

Mr Klaus wants to avoid tax hikes

The government plans to reduce profit tax from 31% to 24%, a rate roughly around the East European average, and lower than that prevailing in many parts of the EU.

But while the cut has been welcomed, accountants say the overall tax burden may only be slightly reduced, partly because various useful loopholes are being closed off.

Value-added tax, meanwhile, is being hiked, despite an attempt by right-wing President Vaclav Klaus to veto the move.

For telecoms services, for example, the VAT rate will rise from 5% to 22%.

And although Czech corporate taxes are falling, so they are in neighbouring economies: Poland and Slovakia are due to cut their rates to 19%.

Could try harder

More broadly, there are concerns on the right about the philosophy behind Mr Spidla's reforms.

Critics say the government is simply seeking ways to finance the status quo, rather than tackling the structural reforms needed permanently to improve the Czech Republic's fiscal position.

The Czech National Bank late last month attacked the government for focusing on "restrictive" spending cuts - freezing public-sector wages, for example - at the expense of structural changes to the economy.

"Restrictive measures are no guarantee that a reverse will not happen afterwards," said Oldrich Dedek, vice-governor of the Bank.

Keeping cool

The markets, meanwhile, remain calm.

"Investors are not yet very concerned about the size of the budget deficit," says Aziz Unan, head of research at Prague brokerage Wood & Co.

The pent-up appetite for investments - whether foreign direct investment or portfolio investment into financial markets - remains strong enough to override domestic considerations, says Mr Unan.

Although government bond yields are lower than those offered by the European Central Bank, for example, each auction is many times oversubscribed.

And government debt, although climbing, is not yet at dangerous levels.

"At worst, it will be something like 30% of GDP by the end of this year. I think most people would be comfortable with that," says Mr Unan.