* Government raises growth forecasts for 2017, 2018
* 2018 budget has “neutral” impact on growth -economist
* Minority cabinet must get backing from two other parties
* Public oil revenue spend now 7.7 pct of mainland-trend GDP (Updates with released figures, crown, adds reaction)
By Joachim Dagenborg and Camilla Knudsen
OSLO, Oct 12 (Reuters) - Norway’s government raised its economic growth forecasts for 2017 and 2018 on Thursday and said it would keep a lid on the proportion of oil revenues it spends in next year’s budget.
Norway has increasingly relied on the sovereign oil fund, now worth a record $1 trillion, to boost state revenues during a two-year slowdown caused partly by a halving of crude prices since 2014.
The economy is now rebounding sooner than expected, and labour market conditions are improving, the Finance Ministry said on Thursday.
Mainland GDP, which excludes offshore oil and gas production, was now forecast to grow by 2.0 percent in 2017 and 2.5 percent in 2018, above May forecasts of 1.6 percent and 2.4 percent respectively, it said.
The right-wing minority government of Prime Minister Erna Solberg - kept in power by two broadly fiscally conservative smaller parties - still plans to spend 2.9 percent of the sovereign wealth fund’s capital.
That figure matches the one budgeted for this year.
But the budget impulse, a number measuring its impact on economic growth, will drop to 0.1 percent in 2018 from 0.4 percent in 2017.
That showed it would be fiscally neutral, the ministry said.
Nordea Markets economist Erik Bruce agreed, writing in a note to clients: “After years with expansionary policy the 2018 budget is close to neutral.”
The budget announcement also had little market impact.
By 1136 GMT, the crown was trading at 9.3685 against the euro, slightly stronger than the 9.3850 it traded at a little before the 0600 GMT release.
Some longer-term problems may be stacking up, however, as by other measures Norwegians are becoming increasingly dependent for public spending on the fund.
In absolute terms, the state’s oil revenue spending has never been higher, at 231 billion Norwegian crowns ($29.2 billion), accounts for a record 7.7 percent of mainland-trend GDP compared with 3.0 percent a decade ago.
“The transfers from the oil fund are, in principle, an indication that Norwegians are living above their means. Revenues simply do not match expenses,” said Kim Blindbaek, an economist at Danish bank Sydbank.
The state’s self-imposed cap on wealth fund spending was cut this year from 4 percent of its size to 3 percent, equivalent to the expected return of the fund’s investments over the economic cycle.
That ensured Norway was sheltered from economic shocks. Still “with this present budget, Norwegian politicians are almost up to the limit,” Blindbaek said.
The governor of the central bank has for years said that the state must limit growth in oil revenue spending.
But cutting the limit could reduce the margin for manoeuvre for Solberg’s minority cabinet.
The budget was the first major policy proposal from her government of the Conservatives and the Progress Party, which narrowly won re-election last month and must now agree a final spending plan in parliament with its smaller allies, the Liberals and the Christian Democrats.
Early signs, were that these parties would be open to negotiations as both said on Thursday the proposal was a good starting point.
$1 = 7.9087 Norwegian crowns Writing by Terje Solsvik and Gwladys Fouche; editing by John Stonestreet