UPDATE 1-Czech c.bank chief says govt reforms first step

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The Czech government's tax and spending reforms would help stabilise the budget in the short run, but fall short of ensuring its long-term sustainability, central bank (CNB) Governor Zdenek Tuma said on Tuesday.

The right-of-centre government approved the reform proposals last week. It has 100 seats in the 200-seat lower house, so any internal dissent may prove fatal for the plan, which cuts the country's fiscal gap toward a limit set by the European Union.

"It is the first step in the right direction, but it really is a first step which helps stabilise public budgets in the short term. However it does not guarantee sustainability of public finances over the longer horizon," Tuma told a seminar on the reforms in the Senate.

The package mildly cuts benefits and other spending and rebalances taxes mainly in favour of richer Czechs, which has prompted sharp criticism by the leftist opposition and even some deputies within the ruling coalition.

The government aims to lower the general government -- or public budget -- deficit to 3.2 percent of gross domestic product (GDP) in 2008, from 4.0 percent forecast this year. EU fiscal rules call for a gap of no more than 3 percent of GDP.

The main features of the reforms are unification of all personal income tax rates at 15 percent, a move that would help top-paid employees, a corporate tax rate cut, higher sales tax on basic items such as food, and tougher conditions for welfare.

The coalition has said it will seek early elections if the parliament rejects the reforms in votes seen over the summer. A path to early polls is complicated under Czech law and no election would happen until next year.

[PRAGUE/Reuters/Finance.cz]