RPT-Czech Finance Minister proposes record budget gap

(Repeats story published late on Sunday)

By Jan Lopatka

PRAGUE, Sept 24 (Reuters) - The Czech Finance Ministry is proposing 2007 budget with a 119 billion crown ($5.36 billion) shortfall, Finance Minister Vlastimil Tlusty said on Sunday.

The deficit is the country's biggest-ever and will most likely prevent its joining the euro currency system in 2010.

The draft, to be discussed by the government on Monday, would put the overall public sector deficit at 4 percent of gross domestic product, far above the 3.3 percent target it set in its euro convergence programme.

The new right-wing government has already acknowledged that euro entry would be delayed, a situation seen across central Europe as governments fail to keep the lid on spending, despite strong economic growth.

The gap, up from this year's projected 74.4 billion crowns, is rising mostly due to new social spending adopted by parliament ahead of of an election last June.

"This is basically a budget of the previous government," Tlusty, a member of the right wing Civic Democrat party, said. "The high deficit is the result of pre-election populism of both the government and parliament."

Most parties contributed to the hand-outs.

The fate of the budget is unclear because the government does not have a majority in the lower house and is likely to lose a confidence vote due on Oct. 4.

It would continue on as caretaker government after losing the vote while political parties search for a way out of a stalemate produced by the June election, which gave the centre- right and left-wing parties exactly the same number of seats in parliament.

The leftist Social Democrats, who led the previous cabinet, said they would not support any deficit above 100 billion crowns.

A provisional budget, limiting the government's discretionary spending at the level of the previous year, will come into force if no budget is approved by Jan. 1.

CEZ FOR SALE

Tlusty said the draft budget was based on an 88 billion crown deficit plan devised by former Finance Minister Bohuslav Sobotka. The difference is 31 billion crowns in privatisation revenues that Tlusty took out.

But he said he would propose on Monday that the government sell roughly 16 percent of power producer CEZ <CEZPsp.PR> gradually in small pieces through the stock market. Part of the revenue, the 31 billion, would be used to lower the deficit.

The market values 16 percent in CEZ at $3.23 billion.

The budget also expects parliament to adopt laws now under debate that would delay some spending and raise cigarette taxes. If the laws are not approved, the budget gap will rise another 27 billion crowns.

Deputy Finance Minister Eduard Janota said that, if the laws are approved, they are expected to cut the overall public sector gap to 4 percent of GDP from the 4.6 percent previously forecast by the ministry.

But there is a question mark over the cigarette tax increase, which Tlusty has said should be lower than envisaged in the draft law now before parliament. The Civic Democrats have also said they would propose a cut to the fuel tax.

Tlusty said he had not changed any of the macroeconomic forecast built into the budget from the draft prepared by the Social Democrats. The Finance Ministry said GDP growth would be 5 percent in its July quarterly forecast.

((Reporting by Jan Lopatka; editing by Andre Grenon; prague.newsroom@reuters.com; Reuters Messaging: alan.crosby.reuters.com@reuters.net; +420 224 190 477)) ($1=22.22 Czech Crown)

Keywords: ECONOMY CZECH BUDGET