UPDATE 2-Czechs meet EU fiscal rule in 2006, outlook bleak

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By Marek Petrus

PRAGUE, April 2 (Reuters) - The Czech Republic said on Monday that the 2006 budget deficit was smaller than first thought and was below the EU's three percent of GDP limit, but analysts said it was likely to widen in 2007.

The Statistical Bureau said the 2006 budget shortfall was revised to 2.95 percent of gross domestic product (GDP) from a previous estimate of 3.5 percent after it received preliminary government data and applied "expert guesses".

The news came hours before the cabinet was due to convene at 1530 GMT to discuss measures aimed at cutting spending and revamping taxes to cut the deficit back towards 3 percent of GDP next year from 4 percent projected for 2007.

The 2006 fiscal gap narrowed from 3.53 percent of GDP in 2005, below the EU's ceiling, which is also one of the fiscal criteria for adoption of the euro currency.

Analysts said revenues from record growth of 6 percent helped keep a lid on the deficit, but warned the economy was slowing and the government could no longer rely on strong growth to boost receipts.

Economists and central bankers have long called the deficit-ridden public finances the biggest obstacle to timely euro adoption and sustainable economic growth, urging the government to curb an increasingly costly welfare state.

"The deficit remained close to 3 percent of GDP at the peak of the economic cycle," said Pavel Sobisek, analyst at UniCredit.

"Moreover, the gradual phasing in of last-year's legal amendments in the welfare system is set to revert the fiscal balance back to a deterioration in 2007," he added.

'TOO EARLY TO CHEER'

A highly controversial social spending package approved by parliament before last year's elections boosted social transfers by an equivalent of 1.1 percent of GDP this year, forcing the country to give up on aspirations to adopt the euro in 2010.

It has yet to set a new target date for adoption.

The budget already showed tentative signs of a worsening, with January-March budget figures showing the cumulative surplus declined by 4.5 billion crowns ($214.8 million) over a year ago. Czech budget tends to incur deficits as the year progresses.

Still, the 2006 result means the country escapes the EU's excessive deficit procedures which prescribe a gradual deficit reduction to a member state with a bigger than 3 percent gap and could eventually lead to a halt of funding from EU's funds.

But ING analyst Vojtech Benda warned it was "too early to cheer" the 2006 result as numbers might be revised further. He recalled that the 2005 deficit was boosted by one percentage point to 3.6 percent of GDP between April and October 2006.

A Finance Ministry official who asked not to be named told Reuters the bulk of last year's improvement came from the central budget, whose deficit shrunk by the equivalent of half a percentage point of GDP versus the ministry's earlier estimate.

The official added a worsening in municipal finances offset better results at health insurers.

The revised numbers were part of a report, the so-called notification, on public debt and deficit levels which each European Union member state submits to Brussels twice a year.

- Details on revision to past budget data....[ID:nL0220601] - Table on January-March budget balance.....[ID:nPRA001228] - FACTBOX on government's fiscal plans......[ID:nL26523666]

($1=20.95 Czech Crown)

Keywords: CZECH ECONOMY/DEFICIT