UPDATE 1-Czech govt approves reform package but faces battle

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PRAGUE, April 3 (Reuters) - The Czech cabinet approved a package of reforms late on Monday aimed at cutting public spending and revamping taxes in order to narrow the budget deficit next year, a government spokesman said.

Ministers had previously said they would make details of the final approved reform package public on Tuesday. Leading government policymakers are due to speak at a business forum at 4 p.m. (1400 GMT).

The government has sought to boost state coffers with a rise in sales tax, to be partly offset by a cut in income taxes, and curb an increasingly costly welfare state.

"It is about lowering direct taxes, halting the explosion of social expenditure and reforms of the social and tax systems," Deputy Prime Minister Petr Necas was quoted as saying in media.

The right-of-centre coalition government of conservative Prime Minister Mirek Topolanek wants to cut the fiscal deficit toward 3 percent of gross domestic product (GDP) from the 4 percent expected this year.

"The proposals encompass the basic parameters of public budgets development until 2010 so that the Czech Republic escapes a debt trap and sets out on the road towards sustainable public budgets in the long-run," Finance Minister Miroslav Kalousek told public Czech TV.

Surging social programmes have dented the country's public finances, forcing it to give up on earlier aspirations to adopt the euro in 2010. It has yet to set a new target date.

Highly controversial welfare legislation approved before the 2006 election boosted social transfers by 36.2 billion crowns, or 1.1 percent of GDP, this year, and by 49.3 billion or 1.3 percent of GDP in 2008.

The cabinet will face a tough battle to push its plans through the lower house of parliament, where it holds just 100 out of 200 seats.

Markets have been concerned that the parliamentary deadlock between ruling centre-right parties and the opposition leftists produced by last year's inconclusive elections would cripple the government's ability to enact its reform proposals.

The government has planned about 23 billion crowns ($1.10 billion) worth of cuts in spending next year, mainly through a reduction in welfare benefits and sickness insurance.

It has floated an idea to cancel the progressive personal income tax brackets with 32 percent as the top rate and unify tax at a lower, 15 percent level, albeit from a broadened base.

It has been mulling cutting corporate tax gradually to 19 percent in 2010 from 24 percent.

It has also considered lifting the preferential rate of value added tax -- levied on foodstuffs and other selected goods and services -- to 9 percent from 5, while holding the base rate at 19 percent.