Ireland's Varadkar says would ease new debt target as prime minister

* Favorite for PM to scrap debt target set seven months ago

Capital spending prioritized, EU allowance sought for more

* Varadkar has near insurmountable lead ahead of June 2 vote

By Padraic Halpin

DUBLIN, May 22 (Reuters) - The overwhelming favorite to succeed Enda Kenny as Irish Prime Minister said on Monday he wants to lower an ambitious debt reduction target set last year, in order to free up more funding for infrastructure projects.

Irish finance minister Michael Noonan, who is due to step down next month, pledged last October to cut the state's debt as a proportion of gross domestic product to 45 percent by the mid-2020s or later, depending on the pace of economic growth. The EU limit is 60 percent.

However Leo Varadkar, who has built up a near insurmountable lead in the contest to succeed Kenny, according to the support declared so far by his Fine Gael party's lawmakers, said on Monday that he would amend the target to 55 percent of GDP to allow for greater capital investment.

Noonan has consistently pitched the measure as one of the key steps required to ensure the economy and public finances are equipped to cope with the consequences of key trading partner Britain's decision to leave the European Union.

The new target was also a response to distorted GDP figures that have flattered the debt ratio. Heavily revised growth figures helped push the debt-to-GDP ratio down to 75.4 percent last year whereas Ireland's national debt remains among the highest in the euro zone by most other measures.

The relevance of using GDP to measure Ireland's highly open economy was called into question last July when GDP growth for 2015 was adjusted up to 26 percent after a massive revision to the stock of capital assets.

That meant at the stroke of a pen that Ireland's proportional debt burden fell to under 80 percent of GDP, below that of Belgium, France and Austria, from the 94 percent originally estimated for 2015.

The easing of the latest debt ratio target marks the first signs of a shift in economic policy under a Varadkar government but also acknowledges that far greater investment in infrastructure is needed in the EU's fastest growing economy after capital spending ground to a near halt during the financial crisis.

Varadkar said Ireland must substantially increase capital spending and that he would seek to restore the so-called "golden rule" in Europe which regards borrowing for capital investment as distinct from borrowing for day-to-day spending, ratcheting up complaints by Dublin that one-size-fits-all fiscal rules act as a constraint.

Fine Gael will pick its new leader on June 2. Varadkar, the social protection minister, has already secured the publicly declared support of 46 of the party's 73 lawmakers compared with 20 who say they will vote for the other candidate, Housing Minister Simon Coveney.

The 73 lawmakers, under party rules, account for 65 percent of the selection vote, with the balance split between ordinary party members and councilors. Whoever wins will be both party leader and prime minister at least until the next election. (Editing by Greg Mahlich)