UPDATE 2-Czechs up '06 budget gap fcast on lower tax revenue

(Writes through with new quotes, 2006 public deficit forecast)

By Petra Vodstrcilova and Marek Petrus

PRAGUE, Oct 11 (Reuters) - The Czech 2006 state budget deficit looks set to overshoot the original target by nearly one third because of a projected shortfall in revenues and higher than expected expenditures, the government said on Wednesday.

Vlastimil Tlusty, finance minister in the outgoing rightist cabinet, said the narrowly-defined central state budget deficit would shoot up to more than 100 billion crowns ($4.46 billion), above the 74.4 billion target approved by the parliament.

"The expected deficit in the state budget for this year can breach 100 billion crowns," Tlusty told journalists after a government meeting.

The figure is more than 3 percent of gross domestic product (GDP), according to Reuters calculations, and marks a further upward revision in the EU member's deficit forecast from about 90 billion crowns projected last week, bringing it close to a record 109 billion budget shortfall posted in 2003.

Tlusty said tax collection lagged, wrongfooting the ministry's expectations that robust economic growth would boost tax receipts by some 10 billion crowns above the budget plan.

"According to the current forecast, it cannot be expected that tax revenue targets would be exceed ... it should rather be expected that they would fall short of the plan by about 2.5 billion crowns," he said.

Frontloading a 15.2 billion crown guarantee payment to the central bank and higher-than-expected pension payments towards the year-end would boost expenditure, and with it the deficit, above the original target.

BOND SUPPLY

The deteriorating budget outlook and a political stalemate following an inconclusive election in June, have fanned market concerns that no deep fiscal reforms could be expected anytime soon to avoid a possible cut in the country's rating outlook.

"We see the political deadlock and potential budget problems having the greatest impact on long-dated bonds due to the resulting higher bond issuance in 2007," said Miroslav Plojhar, chief economist at Citibank in Prague.

The widening fiscal deficit has already forced the ministry to mull ways to hike this year's borrowing by 18.8 billion crowns, raising market jitters over the rising supply of paper.

Czechs and their central European neighbours are finding it hard to meet the stiff fiscal test needed to win euro adoption, since painful reforms are needed to trim social spending, which also many West European governments have been shy to undertake.

Separately, the finance ministry cut the forecast 2006 public finance deficit to 3.5 percent of GDP, below the euro convergence programme target of 3.8 percent but above the EU's threshold of 3 percent of GDP.

"Compared with this (convergence programme), better results are expected to be posted by local budgets and health insurers," the ministry said in a statement.

But it earlier signalled the deficit will widen to about 4 percent of GDP in 2007, mainly because of social handouts approved before the election. This would be above the target laid out in the programme mapping out the road to the euro zone.

The public finance -- or general government -- deficit includes the state budget as well as local budgets, health insurance sector and various off-budget funds. ((prague.newsroom@reuters.com; Reuters Messaging: alan.crosby.reuters.com@reuters.net; +420 224 190 477))

Keywords: ECONOMY CZECH BUDGET