UPDATE 1-Czechs approve 2007 budget, set CZK 91.3 bln gap

(Updates with quotes, background, comments on CEZ stake sale)

By Jan Korselt

PRAGUE, Oct 26 (Reuters) - The Czech 2007 draft budget passed its first parliamentary reading on Thursday, fixing its annual deficit at 91.3 billion crowns ($4.05 billion) as proposed by the minority government.

The rightist government of Civic Democrats controls just 81 seats in the 200-member lower house but they won the vote after the leftist Social Democrats gave a last minute pledge to support the draft, though only in the first reading for now.

As a result, it was easily passed with 155 deputies of the 179 present voting in favour.

The state budget is the biggest part of the overall fiscal balance, which targets a deficit to 4 percent of GDP in 2007, above the euro zone's 3 percent threshold, because of burgeoning welfare spending.

"We believe the approval is, in general, market positive," said Pavel Sobisek, analyst at Bank Austria. The crown held about quarter of a percent firmer against the euro and debt yields remained slightly lower on the day after the news.

The budget needs to pass two more readings to receive final approval, but as the first vote fixed revenue and spending figures, deputies can now only suggest changes within the approved limits in subsequent parliamentary deliberations.

The deficit target is slightly lower than this year's forecast budget shortfall of more than 100 billion crowns.

But it falls short of any fundamental reforms economists say are needed to prepare for euro entry, which the government said late on Wednesday would be delayed beyond the original 2010 target date mainly because public finances have not been much reformed.

The cabinet of Prime Minister Mirek Topolanek remains in power as a caretaker administration after losing a confidence vote earlier this month in the lower house, where right and left parties have the same number of seats as each other.

CEZ SALE POINT OF CONTENTION

The draft budget counts on the sale of a small stake in state-controlled utility CEZ <CEZPsp.PR> but the Social Democrats, the biggest opposition group in the house, have stuck to their guns and said they still opposed the plan.

The Civic Democrat government wants to possibly float about a 7 percent stake in CEZ to raise up to 31 billion crowns ($1.39 billion) for road construction without boosting the deficit.

Finance Minister Vlastimil Tlusty said after the vote that the government will stick to the CEZ stake sale plan, but may offer fewer shares if extra revenue for the budget is found elsewhere to appease the leftists.

"We have promised we will be negotiating with the Social Democrats about the most suitable sale of these shares," Tlusty told reporters.

Social Democrat Vice-Chairman Bohuslav Sobotka told the house the leftist party was keeping its options open on whether it would help the government approve the budget in the final vote. He demanded various structural changes to the draft.

If no budget is approved by Jan. 1, public finances will have to follow a provisional budget, limiting the government's discretionary spending at the level of the previous year but allowing for an increase in previously approved social handouts.

((For FACTBOX on budget forecasts and the process and timeline of approving a budget draft, double click on [ID:nL16534799]))

((Writing by Marek Petrus; Editing by Gerrard Raven; Reuters Messaging: rm://marek.petrus.reuters.com@reuters.net; e-mail: prague.newsroom@reuters.com or marek.petrus@reuters.com; Tel: +420 224 190 477)) ($1=22.38 Czech Crown)

Keywords: ECONOMY CZECH BUDGET