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UPDATE 1-IMF expects Saudi fiscal deficit to reach 7% of GDP this year

(Adds Ministry of finance statement, IMF's 2018 fiscal deficit)

DUBAI, May 15 (Reuters) - Higher public spending will push Saudi Arabia's budget deficit to 7% of gross domestic product this year, the International Monetary Fund said on Wednesday, a forecast well above the government's own projection.

The IMF's forecast assumes that Saudi oil output will average 10.2 million barrels a day and oil prices will average $65.5 a barrel in 2019, it said in a statement after a staff visit to the kingdom. The IMF said the fiscal deficit was 5.9% in 2018.

The Saudi government has forecast a budget deficit of 4.2% of GDP this year.

Saudi Minister of Finance Mohammed al-Jadaan said in a statement the IMF view shows Saudi government's progress in implementing economic and structural reforms, as first-quarter budget data showed.

The kingdom recorded a budget surplus of 27.8 billion riyals ($7.4 billion) in the January-March period, its first surplus since oil prices plunged in 2014.

The IMF said the introduction of a value-added tax has been successful, but the Saudi government should consider raising it from 5%, which is low by global standards, in consultation with other Gulf governments.

A reduction in the government wage bill, a more measured increase in capital spending, and better targeting of social benefits will all yield savings, it said.

Last month, Jihad Azour, director of the IMF's Middle East and Central Asia Department, told Reuters the budget deficit this year might be 7.9%, but also said that estimate was likely to be revised after the IMF delegation's visit.

"Higher government spending has supported growth and the implementation of reforms but has increased medium-term fiscal vulnerabilities," the IMF said.

"Despite the budget surplus in the first quarter, the team projects that the fiscal deficit will rise to 7% of GDP in 2019."

Al-Jadaan, the finance minister, said last month the kingdom recorded a budget surplus of 27.8 billion riyals ($7.4 billion) in the January-March quarter, its first surplus since oil prices plunged in 2014.

The IMF said real non-oil growth is expected to strengthen to 2.9% in 2019, boosting overall economic growth to 1.9%, higher than its earlier projection of 1.8%.

It said an increase in oil prices since the turn of the year is boosting confidence, but it was difficult to assess future developments in the oil market given uncertainties about production in some countries.

Brent crude futures were trading at $71.60 a barrel on Wednesday.

Saudi central bank Governor Ahmed al-Kholifey told Reuters last month that Saudi economic growth in 2019 would be "no less than 2%."

The Saudi economy grew by 2.2% last year, after shrinking in 2017. (Reporting by Saeed Azhar; editing by Larry King)