SPAIN'S CENTRAL government budget fell into deficit for the first time in three years during the first half of this year and is likely to end 2008 in the red as a severe housing downturn dents public income, the economy ministry said yesterday.

The central government, whose accounts form part of the closely-watched public sector budget, reported a €4.68 billion deficit in the six months to June, compared with a surplus of €5.2 billion during the year-earlier period, data showed.

"This is a result of the slowdown in the economy, principally in the real estate sector," the ministry said in a statement.

Treasury secretary Carlos Ocana said the central government could post a small deficit in 2008, instead of the government's forecast of a surplus equal to 0.4 per cent of gross domestic product (GDP).

"Looking at the data, it could happen and it's possible we'll have a small central government deficit," he said.

Spain's public sector finances also include local and regional governments, and the social security administration.

Spain's socialist government has forecast a consolidated public sector budget surplus equal to 1.15 per cent of GDP for 2008, down from a record 2.2 per cent in 2007.

The government expects the public sector surplus to slip to 0.8 per cent of GDP between 2009 and 2011.

Mr Ocana does not rule out a wider public sector deficit in 2009 as unemployment claims rise and income slides during the economy's worst slowdown in at least 15 years.

Spanish public income has tumbled as house construction and sales collapse following a decade-long boom, cramping spending and investment in the wider economy.

Analysts have slashed growth forecasts for Spain and many now see risks that the euro zone's fourth largest economy will enter its first recession in 15 years by the end of 2008.

"This is very similar to what has been happening in Ireland. Things in Spain have begun to deteriorate very fast and so much more so than we had expected," said Susana Garcia, economist at Deutsche Bank. "This is a tax-related downturn as income from groups such as the property companies drops."

Spain's largest property group Martinsa Fadesa filed for administration last week following failure to raise funds and meet debt payments. Further defaults are expected. Analysts said Spain's public accounts were at least entering the slowdown in solid shape, after registering the second highest surplus in the euro zone during 2007. - (Reuters)