Bulgaria to raise fiscal deficit to 2 percent of GDP - minister

Bulgaria's Socialist-led government plans to increase the fiscal deficit this year to 2 percent of gross domestic product from 1.4 percent at present mainly due to an expected drop in revenue and increased spending, the finance minister said on Sunday.

Petar Chobanov said weaker than initially expected economic growth would lower revenues by about 1.0 billion levs ($656.08 million), while signed contracts to businesses showed spending would come some 500 million levs above the plans in 2013.

"We are considering to increase the deficit up to 2 percent ... There is nothing dramatic about it. There are increased dues to businesses and a drop in revenues," Chobanov told BNR national radio.

Bulgaria, the European Union's poorest country, is expected to grow by about 1 percent this year, after expanding by 0.8 percent in 2012. It ended 2012 with a budget deficit of 0.5 percent.

The political instability in the country, where street protests that seek to oust the Socialist-led cabinet broke out just two weeks after it took office, are increasing the risks for the fledgling economy.

The budget registered a small surplus in the first five months of the year, but Chobanov said the previous centre-right GERB government has drafted the 2013 budget on overly optimistic growth forecast.

GERB had approved a 2013 budget deficit at 1.4 percent of GDP.

Some local economists have questioned the need for a budget revision, saying the new government is being too vague about the fiscal policy and may just seek to increase spending rather than carrying out much needed reforms in healthcare and education.

The Balkan country needs to run small fiscal deficits to protect its currency peg to the euro. The currency board regime prevents the central bank setting interest rates, leaving the fiscal policy as the key tool to influence the economy.

Chobanov said the cabinet remained committed to fiscal stability and had already trimmed spending at ministries by 5 percent as of July 1, but said the increased deficit was needed to pay to businesses on time and steer the economy.

Chobanov suggested the increase in the budget deficit - estimated at about 600 million levs - would be financed by issuing new debt, but did not elaborate.

($1 = 1.5242 Bulgarian levs)

(Reporting by Tsvetelia Tsolova; Editing by Alison Williams)