(Adds analyst, background, updates currency)
By Jan Lopatka
PRAGUE, Jan 3 (Reuters) - The Czech Republic's fiscal deficit dropped far below forecasts and the European Union's ceiling last year as robust economic growth swelled state coffers, the Finance Ministry said on Thursday.
The central European country's deficit dropped to about 1.9 percent of gross domestic product (GDP) last year under the EU's ESA-95 fiscal rules, said Finance Minister Miroslav Kalousek.
The Finance Ministry had forecast a 3.4 percent gap in 2007 after a 2.9 percent shortfall in 2006.
Kalousek attributed the better result to higher than expected economic growth, which helped buoy tax collection, higher subsidies from the EU, and to savings on debt servicing and other items.
The economy is widely expected to have expanded at an annual rate topping 6 percent for the third year running in 2007.
Kalousek told a news conference he was hoping the government would also manage to keep the 2008 deficit below the annual target of 2.95 percent of GDP notified to Brussels, just a whisker below the EU's 3 percent cap.
"I am convinced that the budget for 2008, which is in line with the (euro) convergence criteria, will not only be fulfilled, but that we will manage to even lower the actual figure," said Kalousek.
However, he cautioned that economic growth would slow to just below 5 percent this year, limiting the scope for a positive budget surprise.
Kalousek said while the budget gap was lower than planned, it was still bad news to have any gap at a time when economic growth is peaking.
The centre-right Czech cabinet has dropped a plan to adopt the euro in 2010, in part due to unsustainable fiscal position.
It has set no new euro entry date, saying deep reforms of the pension, welfare, health and other sectors must come first.
AIM HIGHER, ANALYSTS SAY
Analysts agreed the government should be much more ambitious in cutting the shortfall.
"I do not understand why we do not target to have a balanced budget by 2010 given these results," said Raiffeisenbank analyst Ales Michl. "All it requires is the will to save."
The government aims to run a deficit of 2.3 percent in 2010, following a tax-rebalancing and welfare cuts introduced this year and further reforms planned for the coming years.
The market largely shrugged off the news, with dealers saying the crown drew support from dollar weakness rather than the upbeat fiscal numbers. The crown scaled two-week highs and traded at 26.185 per euro <EURCZK=> by 1440 GMT.
Kalousek said the central state budget deficit reached 66.4 billion crowns ($3.74 billion) last year, below the 91.3 billion plan approved by parliament and the ministry's latest forecasts of around 81 billion.
He said that under the ESA-95 standards, the 2007 central budget deficit totalled 40.4 billion crowns.
The difference was due to a net transfer of funds to a budget reserve, which does not enter the ESA-95 calculations, and stood at 98.8 billion crowns at the end of the year.
Analysts said the big reserve creation showed ministries had lots of free cash and the government could be much tougher in allocating them funds.
(For a TABLE with budget totals, click on []) (Writing by Marek Petrus and Jan Lopatka, editing by Mike Peacock) ((jan.lopatka@reuters.com; +420 224 190 477; Reuters Messaging: jan.lopatka.reuters.com@reuters.net))
($1=17.77 Czech Crown)
Keywords: CZECH BUDGET/
