RPT-Czech cbank head: Growth robust, budget cuts needed

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PRAGUE, March 29 (Reuters) - The Czech economy has sustained a robust pace of growth but the government needs to cut budget spending to put public finances on a firm footing, central bank (CNB) Governor Zdenek Tuma said on Thursday.

Tuma made the remarks on a morning talk show on public Czech Television just a few hours before he was due to convene the CNB's policy board for a monthly review of interest rates.

Markets expect the main policy rate to hold at 2.50 percent, the lowest level in the European Union, following 75 basis points of tightening between October 2005 and September 2006.

"The Czech economy grew by more than 6 percent last year and while we expect there could be some slowdown this year, we still see economic growth as robust," Tuma told TV.

"Besides that, what is very favourable, we have had low and stable inflation over the long-term and today we rank to countries with low inflation."

In its quarterly forecast unveiled in January, the CNB saw economic growth easing to an annual rate of about 5.3 percent after record expansion of 6.1 percent in both 2005 and 2006.

Inflation ran at 1.5 percent in February, below the CNB's tolerance range of one percentage point either side of a 3 percent inflation goal.

Tuma welcomed the government's plan to revamp taxes, social transfers and other expenditure to squeeze the fiscal gap towards the EU's ceiling of 3 percent of gross domestic product (GDP) in 2008 from 4 percent forecast this year.

But he said government policymakers could no longer rely on strong growth boosting state coffers and helping keep the budget gap in check and they needed to focus on cutting spending to achieve the desired deficit reduction.

"At the given moment, it cannot be counted on higher revenue, so there should primarily be a reduction in expenditure," said the governor. "It is up to the government to choose a structure which it considers desirable and tenable."

Tuma said the fiscal measures, which the government is due to discuss at a meeting on Monday, needed to at least partly take back a rise in spending approved before the 2006 election.

The pre-election decisions by parliament boosted social transfers by an equivalent of 1.1 percent of GDP this year, denting public finances and forcing the country to give up on earlier aspirations to adopt the euro in 2010.

Tuma re-iterated his earlier statement that no new target date was on the table at the moment.