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UPDATE 1-'We can afford it', budget hawk Austria says, planning deficit of 9.5%

(Recasts with budget speech, adds detail)

VIENNA, Oct 14 (Reuters) - Fiscal hawk Austria’s negative bond yields mean it can afford to run a record deficit of 9.5% of economic output this year, and it will only return within the European Union’s 3% limit in 2023, its finance minister said in a budget speech on Wednesday.

The conservative-led government, a member of the “frugal four” that oppose lavish EU spending, took office in January pledging to balance the books. But with the onset of the coronavirus pandemic in March it scrapped that playbook and said it would spend whatever it takes to keep the economy afloat.

It soon outlined plans to spend tens of billions of euros on loan guarantees and grants for companies, as well as a layoff prevention scheme that has subsidised the salaries of more than a million people.

“You have in front of you the budgetary answer to the COVID crisis. This answer is expensive but we can afford it,” Finance Minister Gernot Bluemel said in his budget speech to parliament, following up on a stopgap budget passed in March.

A presentation by his ministry showed Austrian 10-year government bonds currently have a negative yield of 0.39%, slightly better than France’s 0.35% but 19 basis points short of benchmark Germany’s 0.58%.

“Investors have long-term confidence in Austria,” said Bluemel, adding that he planned to return to a more conservative budget policy once the crisis had been dealt with.

Austria’s debt as a proportion of gross domestic product will shoot up to 84% this year from 70.5% last year, peaking at 85% in 2022, his ministry’s presentation showed, adding that the projected EU average for 2020 was 95.1%.

In total, 50 billion euros in coronavirus-related economic aid is planned for this year and next, of which 24.8 billion euros has either been paid out or approved for disbursement, Bluemel said, summarising previously announced measures.

The budget assumes that GDP will shrink 6.8% this year before rebounding 4.4% next year, and that there will be no second lockdown. The country is, however, grappling with a second wave of coronavirus infections. Daily cases reached 1,346 on Wednesday, a new record.

“No second lockdown is planned - that is simply a fact,” Bluemel told reporters.

This year’s 9.5% deficit will be the biggest since records began in 1954, the national statistics office said - even next year’s 6.3% exceeds the previous record of 6.1% set in 1995. The deficit is due to shrink to 1.9% in 2023. The EU has suspended budget rules including its deficit ceiling during the pandemic. ($1 = 0.8522 euros) (Reporting by Francois Murphy; Editing by Toby Chopra)