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Greece sees smaller deficit this year, fiscal gap looms later

By Harry Papachristou

ATHENS (Reuters) - Greece will cut its budget deficit this year by more than expected after securing debt relief, but will need to bridge a 2.5 billion euro gap to meet its long-term fiscal targets, new budget projections showed.

In an updated 2013-16 medium-term budget plan submitted to parliament on Friday, Athens cut its 2013 deficit target to 4.3 percent of GDP, from 5.5 percent in a projection made in October, and down from 6.6 percent in 2012.

The updated plan takes into account debt relief measures Greece agreed with the European Union and the International Monetary Fund in December to keep its bailout on track, averting a chaotic bankruptcy and potential exit from the euro zone.

But the December deal also left unfinished business, obliging Athens to spell out additional savings of 2 billion-4 billion euros for 2015-2016 to hit a primary budget surplus of 4.5 percent of GDP in 2016 as agreed with its lenders.

Friday's projections showed Athens will need savings of 2.5 billion euros to achieve this - the lower end of the 2 billion-4 billion range - as it expects to run a primary surplus for 2016 of only 6.35 billion euros or 3.2 percent of GDP. That falls short of the 8.88 billion euro target agreed with lenders.

A primary budget surplus excludes debt payments.

Facing public discontent, strikes and the rise of anti-bailout parties, Greece's fragile coalition government has rejected any new austerity measures, betting instead on a stronger-than-expected recovery and targeted spending cuts to meet its goals.

"The government believes ... that with the emphasis it will place on structural measures and growth initiatives, it will cover the small fiscal adjustment that might result in 2015-16," the updated plan said.

Under the mid-term budget plan, Athens sees the economy returning to growth in 2014, with a 0.2 percent expansion, accelerating to 2.5 percent in 2015 and 3.5 percent in 2016.

INDUSTRY OUTPUT SHRINKS

President Karolos Papoulias, echoing calls by several government officials, said this week that no new austerity measures should be introduced.

"The Greek people can't take it anymore," Papoulias told Peer Steinbrueck, who will stand in this year's German election against Chancellor Angela Merkel, in Athens.

Greece already plans to impose more than 13 billion euros of austerity measures in 2013-2014, which are expected to keep the country in recession for a sixth consecutive year in 2013.

The economy is expected to have shrunk by almost a quarter over 2008-2013, partly as a result of austerity imposed under Greece's EU/IMF bailout.

Unemployment hit a record high 26.8 percent in October, the highest in the euro area, fuelling a wave of strikes. Support for fringe parties such as the ultra-right, anti-immigrant "Golden Dawn" has risen as the economy and job prospects have deteriorated.

Industrial production data released on Friday confirmed the gloom, showing output shrank by 3.2 percent in 2012 and has contracted by a quarter since 2008.

Prices are still climbing even though households' real disposable income has fallen by almost a third since the debt crisis began in 2009.

The inflation rate stood at 0.2 percent in January, easing from 0.8 percent in December, ELSTAT said on Friday.

(Editing by Susan Fenton)

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