* Government sees economic growth of 0.3 pct in 2010
* Targets balanced budgets through to 2012
* Aims to cut value added tax from 2011
* Application for ERM-2 entry likely after April
(Adds details, quotes, background)
By Tsvetelia Ilieva
SOFIA, Jan 27 (Reuters) - Bulgaria on Wednesday forecast a return to slight economic growth of 0.3 percent this year, reversing a previous forecast for a 2 percent contraction, thanks to the new government's tight fiscal policy.
The forecast came in a 2009-2012 fiscal plan pledging balanced budgets to spur growth and achieve the centre-right government's main foreign policy goal of entering the euro zone by 2013 and applying for the ERM-2 waiting room this year.
Finance Minister Simeon Djankov said after a cabinet meeting
Bulgaria, the poorest European Union member, planned to keep its
currency peg
"For Bulgaria the only option of entering the euro zone is with the currency peg we have got now," Djankov told a news conference after the plan was approved.
But analysts and some diplomats say Sofia's bid is likely to be rejected by West European members opposed to allowing more countries into the euro zone during the financial crisis and that Bulgaria will have to prove its fragile economy is ready.
Djankov said Bulgaria would be able to apply for ERM-2 after April when the European Commission approved its 2009-2012 fiscal plan. Initially he said Sofia would submit its application in Nov. 2009 but then changed the date several times.
The government, elected in July, would try to end 2010 with a balanced budget, which would make a planned cut in VAT next year more likely, he said.
"The balanced budget ensures that in future we would not raise taxes," he said, reiterating that the government hoped to reduce the value added tax by 2 percentage points to 18 percent next year and possibly by another 2 percentage points in 2013.
In its budget for this year, the government has penciled-in a deficit of 0.7 percent, the lowest in the European Union.
Djankov said the economy was poised to return to growth this year, helped by the government's measures to cut spending and raise revenues by cracking down on smuggling.
Economists estimate the Bulgarian economy shrank by about 5 percent last year as the global economic crises halted 12 years of growth.
Bulgaria has a currency board regime, introduced in 1997 after a financial meltdown, and a peg of 1.95583 levs per euro. The board significantly curtails monetary operations and leaves fiscal policy as the main tool to steer the economy. (For a table with main economic projections, please click on [ID:nLDE60J24N])
(Editing by Ron Askew)