Dubai's ruler approved a state budget for 2011 with the smallest deficit, at around 1.1 per cent of GDP, since 2007 as spending on development projects in the debt-laden emirate dips, the government said on Wednesday.

The 2011 deficit was set at Dh3.78 billion ($1 billion), equivalent to 1.1 per cent of gross domestic product in 2008, the latest year for which full economic output data is available. A gap of Dh5.99 billion  was projected for 2010.

The emirate, facing a debt pile including its state firms estimated at $115 billion, or 123 per cent of GDP - aims to keep its budget gap below 3 per cent of GDP.

Planned spending falls to Dh33.68 billion for 2011, Dubai's department of finance said in a statement, the lowest level since 2007 and down from Dh35.40 billion planned for 2010.

Revenue of the key Gulf trade hub was estimated at Dh29.91 billion, slightly above the year-earlier Dh29.41 billion.

The department of finance did not say how Dubai planned to cover the gap.

The unrated emirate issued a $1.25 billion government bond in September and sources said in November it was eyeing a $1.5 billion Islamic bond in Malaysia.

Development spending was projected to fall to Dh7.5 billion this year, the lowest level since 2006, from Dh10.7 billion planned for 2010. The emirate did not release a more detailed budget breakdown.

Dubai said in September that it planned to slash its budget spending in the coming years as new infrastructure projects will only be launched on merit.

The emirate relies on various fees and taxes for around 77 per cent of its budget revenues since it lacks the oil wealth of neighbouring Abu Dhabi.

Some $30 billion worth of loans and bonds of predominantly state-linked enterprises are due to mature in 2011-2012, which is seen as a key challenge for Dubai as it seeks to recover from a November 2009 debt crisis.

The emirate's flagship conglomerate, Dubai World, sealed a $25 billion restructuring deal with creditors in September, improving investor sentiment. However, some other state firms in a property-heavy investment market still face financing challenges.

Fiscal policy is a key tool for UAE policymakers to steer the oil-reliant federation's economy, as the central bank's flexibility is limited by the Opec member's currency peg to the dollar.

Most UAE government expenditure is undertaken by the individual emirates, with Dubai accounting for around 12 per cent of the total.-Reuters