UPDATE 1-Czech FinMin sees 2007 fiscal gap at 4.0 pct/GDP

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PRAGUE, April 23 (Reuters) - The Czech Republic expects to post a fiscal deficit of 4.0 percent of gross domestic product (GDP) this year, in line with earlier projections, the Finance Ministry said on Monday.

The gap hit 2.9 percent in 2006, but is expected to swell this year because of surging social transfers, lagging tax collection and a tapping of reserve funds.

The ministry said the actual public sector deficit would be 138.4 billion crowns ($6.71 billion) this year, compared to 94.5 billion in 2006. It added that total public sector indebtedness would reach 1,074.2 billion crowns, or 31 percent of GDP.

The EU member country has yet to set a new plan for joining the bloc's single currency zone after abandoning an earlier 2010 target date due to the fiscal gap's widening beyond the EU's ceiling of 3 percent of GDP.

Finance Minister Miroslav Kalousek has said the government found public finances in a much bleaker state than it had expected following the increase in benefits worth over 1 percent of GDP approved shortly before last year's general election.

It has proposed a tax and spending overhaul to stabilise public finances despite controlling exactly half the seats in the parliament, which has fed market jitters that the cabinet would collapse and the deficit swell if its plans fall through.

The fiscal revamp -- raising sales tax, cutting income taxes and curbing an increasingly costly welfare state -- aims to bring the deficit to 3 percent of GDP in 2008, to 2.6 percent in 2009 and 2.3 percent in 2010.