Saudi Arabia expects its budget surplus to shrink by a third to $48 billion and economic growth to slow in 2007 after the world's top oil exporter cut output to meet Opec targets, raised spending and paid off debt.

The kingdom ran a record budget surplus of $70.6 billion last year, its fifth successive surplus after two decades in which low oil prices left the government struggling to finance its welfare system.

Government debt would fall to 19 percent of gross domestic product by the end of 2007 compared with 28 percent of GDP in 2006, the finance ministry said in a statement on Monday.

A near five-fold increase in oil prices since 2002 has allowed Saudi Arabia to slash public debt -- all of which is owed to local institutions -- from a peak of 119 percent of GDP in the late 1990s.

The government set aside 53.5 billion riyals ($14.27 billion) from the 2007 surplus to pay back debt, just over half the amount allocated last year, the ministry said.

"They have to strike a balance and try to make sure that money supply doesn't generate too much inflation in the economy," said Muhammed Younas Malick, a senior economist at National Commercial Bank.

"If they pay it all back too quickly there will be too much liquidity in the market," he said.

In 2005, Finance Minister Ibrahim al-Assaf promised to reduce public debt to almost zero. Since then inflation has surged, hitting its highest in at least 12 years in October.

GDP growth in 2007 would slow to 3.5 percent in 2007 compared with 4.3 percent last year, the ministry said.

"Mostly it was Opec production cuts," said John Sfakianakis, chief economist at SABB bank, HSBC's Saudi affiliate. "Next year, with production going up, growth should be closer to 5 percent," he said.

The Organization of Petroleum Exporting Countries agreed to cut output by a total of 1.7 million barrels in two moves that took effect on Nov. 1, 2006 and Feb. 1 this year. Saudi Arabia, as Opec's largest producer, shouldered the bulk of the cuts.

The non-oil industrial sector would grow 8.6 percent in 2007, the ministry said.

The 2008 budget forecast expenditure of 410 billion riyals and revenues of 450 billion riyals, the ministry said. Saudi budgets are usually based on conservative oil-price forecasts. Last year the ministry said it expected a 2007 surplus of $5.3 billion.

The 2008 spending target is about 7 percent higher than this year's.

The 2008 budget "suggests an assumed price of around $50 a barrel," said Simon William, regional economist at HSBC in Dubai. US crude prices hit a record of $99.29 a barrel last month. - Reuters