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UPDATE 1-Brazil to deduct up to $20.7 bln from budget to meet fiscal goal

* Government to decide final amount before year-end

* Government remains committed to fiscal discipline

* Central bank had warned goal was to be missed

BRASILIA/SAO PAULO, Nov 6 (Reuters) - Brazil's government will exclude up to 42 billion reais ($20.7 billion) in public spending from the calculation of the so-called primary budget surplus this year, in an accounting maneuver aimed at meeting a closely watched budget target.

The exact amount will be decided later this year, Finance Minister Guido Mantega told reporters on Tuesday, adding that the size of such a reduction will be ``the smallest possible''.

However, Mantega reiterated that Brazil's government remains committed to fiscal discipline. He highlighted that the government's net debt as a share of gross domestic product, another widely watched gauge of the soundness of public finances, will keep falling this year.

His remarks come a week after the central bank said the target for the primary surplus - the difference between total revenues and expenses excluding debt-servicing - would not be met. The government has in recent years resorted to the use of accounting changes permitted by Brazilian laws to leave some investment funds out of that calculation.

This year's target amounts to 139.8 billion reais, the equivalent of 3.1 percent of Brazil's gross domestic product.

The accounting maneuver, last used in 2010, has not been endorsed by multilateral institutions such as the International Monetary Fund. Yet it would prevent President Dilma Rousseff from cutting expenses in coming months to meet the goal, which might threaten an incipient economic recovery in Latin America's largest economy.

Rousseff has cut billions of reais in taxes for companies and consumers this year in a bid to revive the economy. Last week she extended a tax reduction for local carmakers through the end of the year.

Large and consistent budget surpluses helped Brazil gain the confidence of investors over the last 15 years, ending hyperinflation, lowering the country's debt burden and leaving behind a long history of capital flight.

Mantega had first admitted missing the primary budget surplus goal in an interview to a local newspaper on Tuesday.