RPT-Czech FinMin warns MPs against extra spending

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By Petra Vodstrcilova

Czech Finance Minister Vlastimil Tlusty warned parliament on Tuesday not to approve extra spending measures that could bloat the 2007 central state budget deficit by at least 6.4 billion crowns ($303.5 million).

Markets, as well as many parliamentary deputies, expect the budget to pass as both ruling Civic Democrats and the main opposition Social Democrats contributed to the draft and want to avoid entering a restrictive provisional budget regime.

The central government budget, the biggest part of public finances, targets a deficit of 91.3 billion crowns ($4.33 billion), which translates into a gap of 4 percent of gross domestic product (GDP) in the country's overall fiscal balance.

But Tlusty said on Tuesday a raft of amendments tagged on to the law -- proposed by deputies from both sides of the floor -- threaten to widen the gap, putting the Czechs further behind as they try to meet debt rules required before adopting the euro.

"The outstanding question is whether the deficit will see a 91 billion deficit as proposed, or whether the approved draft will, in reality, have a bigger deficit swelled by parliamentary riders," Tlusty told a news conference ahead of the budget vote, expected on Wednesday.

The Social Democrats together with Civic Democrats have a comfortable majority in the 200-member house which has already helped push the budget through in the first reading.

Social Democrat shadow finance minister, Bohuslav Sobotka, told Reuters the party would be "very likely" to support the budget in the final vote if the house passed recommendations by the budget committee, tied to the riders presented by deputies.

EATING INTO RESERVE

Tlusty, however, warned against approving some of the extra items which could swell the overall deficit towards or even above the record shortfall of 109 billion crowns seen in 2003.

Deputies lodged almost 400 amendments calling for extra spending worth nearly 20 billion crowns on projects like roads and sports fields in their constituencies, eating into a budget reserve and expenditure on debt servicing and health insurance.

Tlusty said at least 6.4 billion crowns of that total would mean diverting money away from pensions and other spending mandated by law and leave a hole in the budget.

Another budget risk is if a planned sale of a small stake in power firm CEZ stalls. In that case, budget expenditure would need to rise by 31 billion crowns to fund road and other investment projects.

Analysts said a political deadlock that has prevented the formation of a majority government has hurt the chances of fiscal reforms and pushed euro adoption beyond the previous target of 2010.

Cutting the deficit has been a key issue in talks between the Civic Democrats and Social Democrats on forming a three-party coalition along with the Christian Democrats.

"The current distribution of political forces in parliament does not provide much of a chance to implement public finance reforms that would push the deficit below the limit (for euro adoption) in a sustainable way," said HVB Bank analyst Pavel Sobisek. ((Writing by Alan Crosby and Jan Lopatka, editing by Mike Peacock; prague.newsroom@reuters.com; Reuters Messaging: jan.lopatka.reuters.com@reuters.net; +420-224 190 474)) ($1=21.09 Czech Crown)

Keywords: CZECH BUDGET/TLUSTY

[PRAGUE/Reuters/Finance.cz]