UPDATE 2-Czechs aim to curb fiscal gap with an eye on euro

...

By Marek Petrus

KOLODEJE, Czech Republic, March 7 (Reuters) - The Czech government is determined to overhaul spending and taxes to slash a yawning budget deficit and get back on track towards euro adoption, Finance Minister Miroslav Kalousek said on Wednesday.

Kalousek said he would have a package of spending and tax reforms ready to tackle the deficit by early April, seeking to bring it into line with the euro zone ceiling of 3 percent of GDP in 2008 from estimated 4 percent this year.

"Despite the very burdensome situation ... the 3 percent deficit goal and tax reforms are feasible, but only at the cost of very ambitious measures which the government is determined to carry out," he told reporters after a regular cabinet meeting at a state chateau on the outskirts of the capital Prague.

He said he plans to propose cuts to personal and corporate taxes and changes to the value-added tax rate from 2008. But he gave no specifics on any planned spending or tax reductions.

The three-party government, which won a parliamentary vote of confidence in January, pledged to keep reducing the fiscal gap beyond 2008 to put public finances on a firmer footing.

Private sector economists and central bank policymakers alike say a wide fiscal shortfall is the key impediment to both sustainable growth and timely adoption of the euro currency.

"The economy has done well and helped fund the deficit but there is a risk of a budget blow-out once growth slows, so the earlier the government agrees the reforms the better," said Miroslav Plojhar, chief economist at Citibank in Prague.

However, any deficit-cutting plans will face stiff opposition from leftist parties in parliament, where the government controls just 100 out of 200 seats.

2012 OR LATER?

Government officials have warned the deficit could swell to 150 billion crowns ($7 billion) next year -- or 4.4 percent of GDP -- unless the government reins in an explosive growth in social spending.

Deputy Prime Minister Petr Necas said on Wednesday the deficit could reach 180 billion crowns if various social spending and pension indexations are also taken into account.

Social spending leapt by more than 2 percent of GDP this year due to increases in a number of benefits pushed through parliament before a June election.

The worsening budget deficit forced the abandonment of the original 2010 euro adoption plan late last year. The country has yet to set a new target. The government will discuss a adoption plan on March 12.

Kalousek said the government would stop short of announcing any target date, though he would like to see the date set as part of an update to the country's euro zone accession strategy due in August.

"I would personally like to have a euro adoption target date set, but if I am in the minority (within cabinet), it won't be set (in the euro strategy plan)," Kalousek said. He said reforms he would be proposing have an eye on making 2012 a realistic euro adoption date.

But growing scepticism at the central bank (CNB) about early euro adoption increases the likelihood that no specific target date will be set and that adoption will be later than 2012, analysts have said.

((For an ANALYSIS on the shift in mood at the central bank about euro zone entry, click on [ID:nL07389575]))

((Writing by Marek Petrus and Alan Crosby; prague.newsroom@reuters.com; Reuters Messaging: alan.crosby.reuters.com@reuters.net; +420 224 190 477; editing by Ian Jones))

Keywords: CZECH FINANCES/REFORMS