UPDATE 2-Draft 2007 budget keeps Slovaks on euro path

(Adds confirmation, analysts, crown)

By Martin Santa

BRATISLAVA, Oct 10 (Reuters) - Slovakia's proposed 2007 state budget draft, to be approved by the government this week, keeps the country on track to adopt the euro in 2009 despite increased social spending.

The daily Hospodarske Noviny, which obtained a leaked copy of the draft, reported the central government budget for 2007 will post a deficit of 32.2 billion crowns ($1.09 billion), of 2.94 percent of gross domestic product (GDP).

According to the draft, the central government deficit puts the overall 2007 public sector deficit at 52.6 billion crowns next year -- also 2.9 percent of GDP -- keeping the country under the 3.0 percent limit set by the Maastricht Criteria for euro zone entry.

Slovakia is currently in the euro zone waiting room -- ERM-2 -- and plans to adopt the single currency in 2009.

A spokesman for the finance ministry would only confirm the public sector gap target. The government is due to approve the draft budget at a meeting on Wednesday, and present it to parliament by Oct. 15.

Analysts have been worried that Prime Minister Robert Fico's leftist cabinet would not be able to balance the euro-entry pledge with its pre-election promises to boost welfare spending.

Fico, who won a June election on promises to alter the business-friendly reforms introduced by the previous cabinet of Mikulas Dzurinda, promised an array of social programmes for poorer Slovaks, higher pensions and a tax cut on selected goods.

"The spending target is fine, the problem is what the structure of the budget will look like"," said Juraj Valachy, an analyst at Tatra Banka.

"So far we regard this optimistically. This set-up allows the government meet the Maastricht criterion, but the coming years will be a problem as the government needs to save to help keep the deficit lower."

According to the daily, the public sector deficit figure includes the impact of pension reforms, which should shrink to 1.1 percent of GDP next year from 1.3 percent this year.

The parliament, where Fico's coalition has 85 deputies in the 150-seat house, a comfortable majority, is expected to vote on the budget draft later this month.

The crown currency showed little reaction to the news, trading at 37.0 to the euro <EURSKK=> from 37.07 late on Monday.

"We see such a figure as largely neutral for the market. The market response would likely have been significantly stronger if the figure was higher than 3 percent of GDP," said Slovenska Sporitelna analyst Michal Musak. ((Reporting by Martin Santa, Writing by Alan Crosby; editing by Gerrard Raven; martin.santa@reuters.com; Reuters Messaging: martin.santa.reuters.com@reuters.net; +421-2 5341 8402))

($1=29.46 Slovak Crown)

Keywords: ECONOMY SLOVAKIA BUDGET