RPT-Czech parliament OKs 2008 reform budget in 1st vote

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By Jan Korselt

The lower house of the Czech parliament gave an initial approval on Tuesday to a 2008 state budget draft that aims to bring the public finance deficit into line with European Union fiscal rules.

The vote, in the first of three readings, locked in a 70.8 billion crown ($3.70 billion) central government deficit target for next year.

The government, which has just 100 seats in the 200-seat lower house, secured 101 votes for the budget out of the 198 deputies present, showing it could still rely on at least one of the two opposition defectors that have kept it afloat in key votes.

The reduction in the central government deficit from this year's projected 81 billion shortfall would slash the overall public sector deficit to 2.95 percent of gross domestic product (GDP) next year from this year's 3.6 percent.

"We are trying to stop and reverse the trend (of growing debt)," Prime Minister Mirek Topolanek told parliament ahead of the vote.

"This is the main message for the public. The time of piling up debt is ending."

The improvement is based on reforms included in a package which cuts welfare spending, hikes sales tax, and cuts welfare, corporate taxes and personal income taxes and which won final parliamentary approval last month.

The package will slow rather than reverse the trend of growing debt in absolute terms, as the government will still run a budget deficit.

The 2008 budget will bring the deficit below the 3 percent threshold needed to join the euro zone, but the country does not plan to join until 2012 or later as it pursues reforms to the health, pension and social security systems. The leftist opposition voted against the budget, showing its disapproval of the introduction of a flat tax rate on all personal income and other measures that will take effect in January.

"This is an anti-social budget... the budget as well as the reform is an attack on family budgets of mainly pensioners and young families," said Social Democrat opposition leader Jiri Paroubek.

A final vote on the budget is expected in December.

The crown currency showed no reaction to the vote, trading at 27.17 to the euro , off Monday's all-time high at 27.12.

(For a FACTBOX on fiscal reforms, click on [ID:nL19504912]) ($1=19.12 Czech Crown)

Keywords: CZECH BUDGET/

[PRAGUE/Reuters/Finance.cz]