UPDATE 1-Austria trims 2012 budget gap view, sees AAA safe

Wed Oct 19, 2011 6:09am EDT

Related Topics

* Draft budget targets deficit of 3.2 pct of GDP

* Debt as percentage of GDP set to rise

* Finance minister says spending plan to maintain AAA rating (Adds quotes and background)

By Michael Shields

VIENNA, Oct 19 (Reuters) - Austria's 2012 budget deficit is set to narrow more than expected to 3.2 percent of gross domestic product (GDP) despite a sharp economic slowdown, undergirding the country's AAA debt rating, Finance Minister Maria Fekter said.

Higher revenue from sales, income and corporate taxes is set to counter increased spending on key areas such as education, research and energy conservation as well as higher debt servicing costs, she told parliament on Wednesday.

The draft spending plan saw the deficit as defined by the European Union's Maastricht criteria beating the previous 2012 target of 3.3 percent and the 3.9 percent goal for 2011.

Higher-than-expected tax revenue amid an export-driven economic boom earlier this year means the 2011 shortfall is now expected to be around 3.6 percent, she said, down from 4.6 percent in 2010.

The budget assumes economic growth will slow to just 0.8 percent in 2012, as forecast by the WIFO economic research institute last month.

"We assume we can keep the AAA rating with this stabilisation budget and we expect that our (borrowing) spreads will not rise further," she told reporters earlier, referring to the premium over benchmark Germany that Austria has to pay.

The spread for 10-year debt was little changed at around 102 basis points by 0940 GMT.

Fekter said Austria, one of six euro zone countries still possessing a top-notch debt rating, would balance the need to consolidate public finances against the country's overall economic interests.

"We have decided not to slam on the brakes on the deficit because that locks the wheels of the economy, but rather to reduce the deficits continuously," she said.

"Reducing the deficit has priority, but we also are keeping an eye on jobs and the economy."

EURO ZONE PRESSURE

She was speaking after Moody's cut Spain's sovereign debt rating by two notches, citing the country's vulnerability to the euro zone debt crisis and piling pressure on EU leaders to act decisively at a summit this weekend.

Fekter's earlier hopes that the 2012 deficit could get under the 3 percent Maastricht ceiling were dashed by downgrades in growth forecasts by research institutes on which Vienna relies. The gap is supposed to hit 2 percent by 2015.

Public-sector debt is set to rise to 74.6 percent of GDP in 2012 from an envisaged 73.6 percent this year but fall short of the government's previous forecast of 75.0 percent, she said.

The debt rate is supposed to start declining after a peak of 75.5 percent in 2013.

Austria set aside 15 billion euros ($20.5 billion) during the financial crisis for recapitalising troubled banks -- of which 6 billion remains in reserve. Funds deployed this way are reflected in national debt but not the budget.

When banks repay capital, it reduces the national debt but repayments have been on hold as regulators encourage banks to preserve as much capital as possible to withstand potential shocks to the financial system.

Officials said public-sector data included some debt at state railways OeBB but not at motorways administration ASFINAG or KA Finanz, the bad bank split off from nationalised lender Kommunalkredit.

($1 = 0.731 Euros) (Reporting by Michael Shields; editing by Stephen Nisbet)

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