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Portugal shrinks budget deficit sharply as bailout nears end

LISBON (Reuters) - Portugal's public deficit shrank 39 percent in the first quarter of this year from a year earlier, coming in far below a ceiling set under its international bailout, the finance ministry said on Wednesday. It said the deficit dropped to 825 million euros (679.33 million pounds), just half the ceiling set for the period, helped by a 4.5 percent rise in tax revenues, which exceeded the goal for the period in the 2014 budget. Revenues from both direct and indirect taxes rose. Overall spending increased 2 percent, which the ministry attributed mainly to interest payments on Portugal's large debt stockpile and transfers to the social security system and municipalities. Spending on public sector workers, mainly wages, fell 3.7 percent, it said. After the formal end of the bailout on May 17, Lisbon still has to cut the budget deficit to 4 percent of gross domestic product (GDP) this year and then to 2.5 percent next year. Last year, it beat its deficit target with a 4.9 percent gap. Portugal's economy started to rebound last year from its worst recession since the 1970s, and the government expects its first full year of growth in 2014 with a 1.2 percent expansion. Earlier on Wednesday, Portugal sold its first bonds at auction in three years, paying a record low yield that was seen as a vote of market confidence and a boost to Lisbon's chances of making a clean break from its bailout. Its secondary market bond yields hit new eight-year lows on Wednesday. (Reporting by Andrei Khalip; Editing by Ruth Pitchford)