UPDATE 3-Greece sets ambitious 2011 austerity budget goals

* Greece sets lower deficit goal in 2011 vs EU draft budget

* Next year’s budget gap seen at 7.0 percent of GDP

* This year’s deficit seen at 7.8 pct vs 8.1 pct target

(Adds finance minister’s statement)

By Lefteris Papadimas and George Georgiopoulos

ATHENS, Oct 4 (Reuters) - Greece on Monday pledged to cut next year’s budget deficit faster than agreed in a 110 billion euro IMF/EU bailout deal, vowing another year of tough austerity to exit a debt crisis.

The 2011 budget draft submitted to parliament foresees a 7 percent of GDP gap, compared to 7.8 percent in 2010 and a 7.6 percent of GDP target agreed for next year with international lenders, the International Monetary Fund and the EU.

More belt-tightening is expected as the heavily-indebted country continues to dig out of its debt crisis in hopes of eventually normalising borrowing costs which became prohibitive after last year’s fiscal derailment and hurt the euro.

“Our aim is none other than to get out of the tunnel as soon as possible,” Prime Minister George Papandreou told a cabinet meeting on the budget. “Our path remains difficult but after many years of derailment, we are returning to fiscal health.”

One year after his socialist government won elections pledging to help the poor and tax the rich, it presented another tight budget sure to test social peace, while its hands are tied by international lenders. Carrying one of the heaviest debt burdens in the euro zone, seen at 133 percent of GDP this year and 142 percent in 2011, Greece is keen to convince investors it is making solid progress in cutting deficits and pushing reforms as it aims for a return to capital markets for funding sometime in 2011.

The premium investors demand to hold 10-year Greek government paper over Bunds stood at 792 basis points late on Monday, 12 bps down from Friday’s settlement after China pledged to buy Greek government bonds when Athens eventually resumes longer-term debt issuance.

Greece’s borrowing costs hit more than 900 bps last month, but have eased somewhat, partly in response to investor acknowledgement that the Athens authorities look serious about sticking to fiscal discipline.

“With this draft bill we say to Greek citizens their sacrifices are not wasted, that a positive prospect is emerging,” Finance Minister George Papaconstantinou said in a brief televised message. He did not hold a news conference to answer questions about how the budget targets would be achieved.

AMBITIOUS TARGET The economy is seen shrinking by a projected 4 percent this year and by 2.6 percent in 2011, with nominal GDP getting an inflationary boost. Analysts said fiscal success hinged on what specific measures the government would take.

“The GDP forecast looks reasonable. The target for next year’s deficit is more ambitious than the original projections. We need to see what the measures will be and how the government intends to cut spending and raise revenues,” said Diego Iscaro at IHS Global Insight.

Under the terms of a 110 billion euro bailout agreed with the IMF and EU in May, Greece was to cut its budget gap by 50 basis points to 7.6 percent of GDP in 2011, a lighter task compared to this year’s 5.5 percentage point fiscal correction, meant to shrink the deficit to 8.1 percent of GDP.

Austerity policies, including public sector pay and pension cuts and tax hikes, helped to bring about this year’s fiscal adjustment and brought tens of thousands of protesters onto the streets. But performance on the revenue side has been weak.

“Given the fact that they reduced it (the budget deficit) so sharply this year, I surely hope they will continue to do so,” said Ben May at Capital Economics. “There is still this question mark on why revenues are so weak ... there is a risk that that persists.”

Greece’s belt-tightening will continue with next year’s budget relying on property taxes, an amnesty on building violations, new gambling licences and a one-off tax on profitable businesses for the third year in a row.

The budget foresees 1 billion euro revenues from VAT but does not make clear which products and services now under 11 percent will move to a higher tax bracket.

Athens raised the main VAT rate by four percentage points to 23 percent this year but eight months into 2010 revenues trail a 13.7 percent growth target, up just 3.4 percent. (For an interactive timeline on the eurozone crisis, click on (For interactive timeline on the Greek debt crisis, click on; For a timeline on economic events in Greece click on [ID:nLDE693126]) (For a FACTBOX on the details of Greek austerity deal with EU/IMF, click on [ID:nLDE6851Y9]; for a FACTBOX on the main budget figures click on [ID:nLDE693195]) (For a spreadsheet calculating Greek debt, click on (Additional reporting by Harry Papachristou; editing by Stephen Nisbet)