UPDATE 2-Czech govt approves 2008 budget draft, sees lower gap

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By Jan Lopatka

PRAGUE, Sept 19 (Reuters) - The Czech government approved the 2008 central state budget draft on Wednesday, a key part of its aim to lower the overall public sector deficit to 2.95 percent of gross domestic product next year.

The budget sees a 70.8 billion crown ($3.60 billion) central government deficit, down from 91.3 billion crowns this year, due to higher tax revenues, welfare cuts and transfers from the European Union.

"We managed to keep the budget deficit below the level of 3 percent of GDP," Finance Minister Miroslav Kalousek told a news conference, adding the government rejected demands by individual ministries for an extra 56 billion crowns.

High deficits have forced the Czechs to abandon their 2010 euro adoption target, and are now looking at 2012 and beyond as the earliest possible entry dates.

The government has just 100 seats in the 200-seat lower house of parliament, but has been supported in key votes by two leftist deputies who have left the opposition ranks and sit as independents. A vote on the budget is expected in December.

The overall public sector gap, which includes the state budget, regional budgets, health insurance and a number of off-budget funds, is seen at around 4 percent this year. The government aims to cut it to 2.3 percent in 2010.

TAX AND WELFARE REFORM

The 2008 draft is based on tax and spending changes the government pushed through the lower house of parliament last month. The upper house is expected to approve the fiscal package easily in a session starting later on Wednesday.

The package hikes the sales tax, and cuts welfare, corporate taxes and personal income taxes -- the latter mainly in a way benefiting the rich.

Politicians from most parties joined forces before a general election last year, approving welfare spending increases worth dozens of billions of crowns, which deepened the budget gap despite 6 percent economic growth.

Kalousek said the 2008 budget foresaw a 46 billion crown net transfer from EU funds, which will go into various development projects such as road building, a government priority.

"I expect we will receive more than double the amount we contribute," he said.

The crown currency was unchanged at 27.66 to the euro after the news, down from 27.500 late on Tuesday and all-time high of 27.385 seen on Monday.