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WRAPUP 1-Czechs see budget gap widening, Poles optimistic

Published 05/11/2009, 09:06 AM
Updated 05/11/2009, 09:16 AM
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* Czech PM: 2009, 2010 fiscal gaps to be near 5 pct/GDP

* Poland hopes for 3 pct/GDP gap in 2010, analysts sceptical

* Czech FinMin wants savings measures to limit gap

(Updates with Czech finance minister, Poland)

By Jana Mlcochova

PRAGUE, May 11 (Reuters) - Czech officials warned on Monday the public finance gap would overshoot EU-dictated limits this year and next but Poland's government said it could slash its deficit from similar levels, drawing scepticism from economists.

A protracted economic crisis has hit tax revenues across Europe, while measures to combat the downturn, along with rising welfare costs, have caused budget gaps to balloon far above the 3 percent of gross domestic product threshold for the euro zone.

New Czech Prime Minister Jan Fischer, who took power on Saturday, told Reuters the public sector deficit in 2010 could be close to 5 percent of GDP.

His finance minister, Eduard Janota, said he wanted to keep the gap in the range of 4.5 percent to 4.7 percent, although it was an ambitious target that required big spending cuts to prevent a jump to 6.7 percent.

"It is indeed an ambitious target, which in the view of a massive drop in tax revenues will require real saving measures in budget expenditures," Janota told a conference.

Polish Deputy Finance Minister Ludwik Kotecki said the country's general government deficit level, the largest part of total public finances, could drop to the euro zone entry target of 3 percent of GDP in 2010, from an estimated 4.6 percent this year, although his prediction carried caveats.

"It is possible to reduce the general government deficit to 3 percent in 2010, from 4.6 percent in 2009, but it is too early to say how the adjustment will look," Kotecki told Gazata Prawna daily. "We don't know what budget revenues nor growth will be."

Analysts said that goal was unrealistic.

"It will be very difficult to keep the deficit under 3 percent of GDP without very severe fiscal tightening," said Neil Shearing, economist at Capital Economics in London. He said he forecasts Poland's deficit at 5 percent in 2009 and 2010.

The European Union's executive Commission has forecast Poland's total fiscal shortfall would balloon even more to 6.6 percent this year and 7.3 percent in 2010, from 3.9 percent last year. Due to the overshoot, the Commission has started budgetary discipline measures against Warsaw.

EURO CRITERIA

With the exception of the ballooning deficit and the required two-year stint in the ERM-2 exchange rate mechanism, Czechs can meet the euro entry rules.

But they have set no euro entry date and the Fischer's interim administration has no ambition to rush the process.

The country's public sector deficit was only 1.5 percent of GDP in 2008, comfortably within the euro entry criteria.

Poland does not meet most of the criteria to be accepted into the euro zone. It has set 2012 as the target year for euro adoption but has since backed away due to market volatility.

Janota has said he wanted the Czech central state budget gap below 150 billion crowns ($7.32 billion) next year.

The central state budget is the main part of the public balance which also includes regional budgets, health insurance and state funds.

The government has stepped up its borrowing but yields have risen amid risk aversion surrounding central Europe and a deteriorating outlook for the economy which is seen contracting by 2.3 percent this year.

Janota also said the Czechs were not planning another euro-denominated bond issue before the end of the third quarter, as the country had sufficiently met its financing needs for now.

(Additional reporting by Martin Dokoupil and Jason Hovet; Editing by Mike Peacock and Andy Bruce)

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