SOFIA (Reuters) – The Bulgarian government will target a fiscal surplus of 3 percent of GDP next year to protect the economy from external risks, a government source familiar with the 2008 budget draft told Reuters.

The Socialist-led government plans to increase capital spending to better use hefty European Union aid. It will also increase social and education expenditure but will keep total spending below 40 percent of GDP next year, the source said.

“The document is expected to be discussed by the government on Tuesday,” said the source, who declined to be named. “We need to keep tight fiscal policy and run a surplus of 3 percent. We expect the fiscal surplus to be 3.0-3.3 percent of GDP this year,” the source said.

Bulgaria has pegged its lev currency to the euro in a currency board regime which limits the central bank monetary operations, leaving the fiscal policy as its main tool to influence the economy.

The International Monetary Fund has urged the new EU member to maintain its tight fiscal stance and not bow to pressure to significantly increase public wages to avoid jeopardizing an already overheating economy.

Under the draft, the government sees inflation slowing to 4.5 percent at end-2008 from a forecast 9.3 percent at end-2007. Annual inflation surged to 13 percent in September, driven by higher food prices and strong domestic demand.

The Balkan country’s ballooning current account deficit, its main economic headache, is expected to expand further to 21.9 percent of GDP next year, up from 21 percent in 2007.

The budget draft sees economic growth at 6.4 percent both for 2007 and 2008, while foreign direct investment are seen rising slightly to –4.74 billion next year from –4.65 billion expected in 2007.