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Czechs vow to meet deficit limit for euro next year

The Czech Republic pledged to bring the public-budget deficit below the threshold needed for euro- adoption by 2008, a year earlier than it planned recently.

The Cabinet approved an updated Convergence Plan that calls for a gap of 3% of gross domestic product next year, narrower than the 4% expected for 2007. November's version of the document, which outlines deficit-paring plans and steps that must be taken, foresaw a 3.5% shortfall in 2008. The two-month-old Cabinet aims to overhaul the country's tax, welfare, health-care and pension systems to cut back on spending and meet commitments to the European Union, which it joined in 2004. The deadlocked June elections foiled efforts to reverse a ballooning trend in spending, forcing the nation to drop 2010 as the euro-adoption date, without setting a new one. The Convergence Program „has been drafted in a way that allows 2012 to be a realistic date for adopting the euro,” Finance Minister Miroslav Kalousek said. The government has no official target for the switchover at present. The koruna was at 28.22 per euro by 2:19 p.m. in Prague, compared with 28.17 on March 9.

East European members are struggling with excessive budget deficits or accelerating inflation, making it hard to comply with rules for accepting Europe's single currency. The budget shortfall must be less than 3% of GDP starting from at least two years before a country can drop its national currency.
The Czechs want to bring the gap to 2.6% of GDP in 2009, less than 3% planned before, and to 2.3% of GDP in 2010. All goals are in line with the coalition agreement signed in December. This year's gap between spending and revenue, at 4% of GDP, will exceed the earlier commitment for 3.3% of GDP, which will probably spark criticism from the European Commission, the government said. This year's gap between spending and revenue, at 4% of GDP, will exceed the earlier commitment for 3.3% of GDP. By breaching the program goals, the country risks being deprived of its portion of aid flowing from the EU Cohesion Fund.

„We expect very justified criticism” from the European Commission for breaching the original goal for this year, Kalousek said. There's no threat of any sanctions if the government manages to persuade the EU it is serious about its plans to overhaul spending, he said. The three ruling parties, led by Prime Minister Mirek Topolanek's Civic Democratic Party, plan to reveal a complex of changes to the economy at the turn of March and April. As the government must rely on two opposition lawmakers for majority support in parliament, it's uncertain whether the Cabinet will be able to win sufficient support for its measures. The coalition plans to unify the income tax rate between 17% and 19% and abolish the dividend, inheritance and capital-gain taxes, according to the government agenda. Patients should pay fees for drug prescription, doctor appointments and hospital stays beginning next year to limit abuse and waste in the health-care system. A cap on social security payments should be introduced while sick-leave payments for the first three days of illness should be eliminated while the retirement age will be raised to 65 years.

Labor and Social Affairs Minister Petr Necas warned last week that without any measures, the budget deficit next year would swell to 150 billion koruna ($7 billion) to 180 billion koruna, compared with 91.3 billion koruna approved for 2007. The shortfall last year probably reached 3.5% of GDP, according to the Finance Ministry's estimate, well below the 3.8% target. (Bloomberg)