* Budget vote reveals no will to save ahead of election
* Spending points to bigger gaps, trouble for euro entry
* Left-wing plan to hike taxes not enough
* Factbox on budget structure []
By Jan Lopatka and Jason Hovet
PRAGUE, Dec 10 (Reuters) - Extra 2010 budget spending pushed
through at the last minute by the main Czech leftist party shows
a lack of will to fix the country's deteriorating budget and
threatens to push euro entry further into the future.
The central European country of 10.5 million holds an
election in mid-2010 and the budget approved on Wednesday shows
savings are off the table for now and quite likely even further
down the road if the left leads the next cabinet, a highly
possible scenario according to opinion polls.
Deep budget shortfalls would mean not just more bonds and
borrowing but a longer path toward the 3 percent deficit ceiling
EU members must achieve to join the euro zone, currently mooted
for around 2015.
But of broader concern is that the leftist Social Democrats
are not showing the will to carry out vital structural reforms
already completed by some others in the EU's eastern wing.
"This is a bad signal for the future of Czech public
finances, because one part of the political spectrum clearly
declared that it has no intention to tighten the budget," KBC
bank said in a report.
Wednesday's measures will up spending on wages, farm
subsidies and social care, despite stark opposition from
conservatives and the country's popular interim cabinet led by
independent Prime Minister Jan Fischer.
The rise is worth 12 billion crowns ($685.3 million),
partially moved from other budget chapters, and is in itself not
big. But it tore down a painstakingly built cross-party
agreement to confront the financial crisis with fiscal probity.
An angry Fischer said the deficit would rise to 5.6-5.7
percent of gross domestic product next year from the planned 5.3
percent, after 6.6 percent this year.
"This showed to the markets that there can be no high
expectations regarding fiscal consolidation by the Czech left
should they win the summer 2010 elections," said Martin Lobotka,
analyst at Erste Bank's Ceska Sporitelna.
"(Such consolidation) is necessary if this country wants the
euro and does not want to take the path of Hungary or Greece.
The left still does not appreciate the gravity of large
deficits."
2011 DOUBTS
The Czechs, thanks to low debt, strong bank deposits and a
lack of household debt in foreign currencies, have avoided a
meltdown or the need to tap international aid in the crisis, as
was the case in Hungary, Romania and the Baltic Sea states.
But they have structural weaknesses that some of their
neighbours have already dealt with -- chiefly, a failure to
reform a pension system that if left alone would overwhelm
public finances.
The Social Democrats' move also pandered to public sector
workers, axing a 4 percent pay cut agreed by the government and
parliament earlier after teachers, firemen and policemen all
staged public protests to push for bigger wages.
The government had pushed through a $4 billion tax hikes and
spending cuts package to bring the deficit down next year. But
that was partially undone by the vote on Wednesday and the
package is also limited to 2010, posing a question over the 2011
budget that the new government will have to put together quickly
after an election expected in May.
The government sees budget gaps of 5.6 percent in 2011 and
5.5 percent in 2012. The European Commission will likely push
for smaller gaps, as it requires a deficit of 3 percent by 2013.
The Social Democrats say they will not cut public sector
wages but rather hike taxes for top earners and raise the
corporate tax by about 2 percentage points, and could also raise
the levy on tobacco and alcohol.
"We will cut the deficit below the 3 percent level by the
end of the election term (in 2014)," said Social Democrat Vice
Chairman Bohuslav Sobotka, a former finance minister. "We will
reduce the deficit to adopt the euro in 2015-2016."
Pavel Mertlik, a Social Democrat finance minister in
1999-2001 and chief economist at Raiffeisenbank in Prague, said
he was not worried by the 2010 spending because it would help
demand. But in the longer run, tax hikes would not be enough.
"Definitely not (enough) from a longer-term perspective;
cuts will be necessary," he said.
Finance Minister Eduard Janota, a veteran who has worked on
about 30 budgets and who had earlier pushed for more savings
measures in early 2010, threw in the towel on further cuts after
the Wednesday vote.
"If I (remain) in the post of minister, I am not making any
ambitions for the rest of this government's tenure," he said.
(Editing by Patrick Graham)
