UPDATE 2-Czech FinMin warns against higher 2007 budget gap

(Releads with FinMin warning on deficit, quotes from parties)

By Petra Vodstrcilova

PRAGUE, Dec 12 (Reuters) - Extra spending proposed by the lower house of parliament threatens to boost the Czech 2007 central state budget deficit by at least 6.4 billion crowns ($303.5 million), Finance Minister Vlastimil Tlusty said on Tuesday.

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.

"This budget... will probably today, and tomorrow at the latest, be approved in the third reading," Tlusty, a member of the outgoing rightist minority cabinet, said before a final vote, scheduled for Wednesday morning.

"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 (additions to the law)," Tlusty told a news conference.

Markets, as well as many parliamentary deputies, expect the budget to eventually 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 Social Democrats' 74 deputies voting with the 81 Civic Democrats constitute a comfortable majority in the 200-member house and this 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 passes the 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 riders calling for extra spending worth nearly 20 billion crowns on various 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 out of these 20 billion crowns would mean diverting money away from pensions and other spending mandated by law and approving the changes would leave a hole in the budget.

The budget includes an expected 31 billion crowns in revenue from the planned sale of a small stake in power firm CEZ <CEZPsp.PR>, and its gap would widen if the sale were to stall.

The parliament has been split evenly between leftist and centre-right parties since a June election, all but crippling policymaking in the fast-growing European Union member country.

The ruling Civic Democrats of Prime Minister Mirek Topolanek have been at odds with the opposition leftist Social Democrats on the scope of reforms needed to curb a deepening budget gap, which forced Czechs to abandon their 2010 euro adoption target.

The half-year-old political crisis has left the country without a credible strategy for reforming public finances.

How to cut the deficit is a key issue in talks between the Civic and Social Democrats on forming a three-party coalition government, which would replace the current administration which lost a confidence vote in October. ((Writing by Marek Petrus and Jan Lopatka, editing by Gerrard Raven; 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