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By Andrew Hay
MADRID, Feb 24 (Reuters) - Spain's public sector fell into a higher-than-expected deficit of 3.8 percent of GDP during 2008, but the government said it hoped to bring the fiscal shortfall back close to a European ceiling of 3 percent by 2011.
Spain's Economy Ministry had forecast a deficit equal to 3.4 percent of gross domestic product (GDP) in 2008 following a record 2.2 percent surplus in 2007 that was the second largest in the euro zone.
"We hope to rebalance fiscal accounts in a relatively short period," Treasury Secretary Carlos Ocana told a news conference on Tuesday after announcing the first budget shortfall in four years as the country slid into recession.
"The public deficit is sustainable," he said, adding the government expected the deficit to peak at 5.8 percent of GDP this year then fall close to 3 percent by 2011.
The government's deficit exit strategy rests on Spain returning to relatively strong growth by 2011, putting it in a position to eliminate fiscal stimulus and financial support plans, Ocana said.
"When this happens we can cut large spending measures and fiscal measures in place now. This will require certain political muscle," he said.
The European Commission has started disciplinary action against Spain and five other European Union countries for exceeding the EU budget ceiling of 3 percent of GDP.
The commission, and most private economists, expect Spain's economy to shrink again in 2010 and see the government's forecast for 1.2 percent growth next year as wishful thinking.
Carlos Maravall, economist at the Analistas Financieros Internacionales consultancy, doubted the government's capacity to cut its deficit. "We expect a deficit of 6.3-6.4 percent in 2009 and 2010," he said.
The 2008 deficit of 41.87 billion euros ($53.35 billion) was the first since 2004 when public accounts showed a shortfall equal to 0.28 percent of GDP. It meant total Spanish public debt ended the year at 39.4 percent of GDP.
Spain's public sector budget -- composed of central government, regional, municipal and social security accounts -- was hit by lower tax income as domestic demand tumbled during the collapse of property and credit booms.
Central government non-financial revenues fell by 18 percent in 2008.
The European commission expects Spain's budget deficit to rise to 6.2 percent of GDP in 2009, before easing to 5.7 percent in 2010. (Additional reporting by Manuel Maria Ruiz; Editing by Chris Pizzey)