Slovak opposition-tax changes may delay euro entry

BRATISLAVA, Sept 29 (Reuters) - Former Finance Minister Ivan Miklos slammed the government's approved tax changes on Friday, saying they will raise inflation pressures and fuel economic overheating, which could derail plans to adopt the euro in 2009.

Miklos, a top reformist in ex-Prime Minister Mikulas Dzurinda's cabinet and now an opposition deputy, said the approved tax-changes will create an imbalance in the system, cut state income and open up room for tax evasion.

"The government decision (on taxes) does not solve a dilemma between the commitment to enter the euro zone and promises to boost spending. On the contrary, it seems the deficit has deepened," Miklos told a news conference.

The leftist government approved tax changes to open room to fulfil an election promise to boost welfare funding to help those hard hit by reforms enacted by Miklos and Dzurinda.

However, Finance Minister Jan Pociatek said the 2007 state budget draft will still meet the approved public gap of 3.0 percent of GDP, keeping Slovaks on track to meet the criterion for planned euro entry in 2009.

"Inflation might be a problem. The economy is growing very fast, it's on the edge of its potential growth, that means additional funds pumped into the economy could trigger overheating and bring on higher inflation," Miklos said.

"The changes worsen the functioning of the tax system, and effects for other areas are even worse," Miklos added.

Slovak real GDP growth accelerated to 6.7 percent year-on- year in the second quarter from 6.3 percent in the first quarter, maintaining one of the fastest rates in Europe.

Rising inflation risks have prompted the central bank to tighten monetary conditions by 175 basis points so far this year -- including a surprise 25 point hike on Tuesday -- putting the key two-week repo rate at 4.75 percent.

The central bank sees annual inflation, using the European Union measure, at 3.9 percent at the end of 2006, well above its year-end target of 2.5 percent. It expects to meet Maastricht criteria in 2008 and join the euro zone the following year.

Fico' leftist party Smer won a June 17 election on promises of increasing social spending and the leftist coalition he created has since been trying to wring funds from the tax system to make more cash available for the poor.

The 2007 state budget outline must be submitted to the parliament by the October 15.

((Reporting by Martin Santa, Editing by Chris Pizzey; tel. +421 2 5341 8402, email martin.santa@reuters.com; RM martin.santa.reuters.com@reuters.net))

Keywords: ECONOMY SLOVAKIA TAXES