KIEV, Aug. 30 ??“ Ukraine will increase international and domestic borrowing next year in order to finance its expanding budget deficit as the government plans massive investment to boost economic growth, the country??™s economic czar said Wednesday.

The budget deficit will expand to 2.6% of gross domestic product in 2007, up from 2% that had been earlier planned, First Deputy Prime Minister and Finance Minister Mykola Azarov said.

???The budget deficit will be financed at the expense of international and domestic borrowing,??? Azarov said at a press conference. ???We are returning to the model of economic development that had been in place in 2003-2004.???

The comments underscore a change in the country??™s economic policy, given that both previous governments have been trying to stick to lower budget deficit policies.

Although Ukraine??™s budget deficit was approved at 2.5% of the GDP for 2006, the government of then-Prime Minister Yuriy Yekhanurov had been reducing spending to keep the deficit below 2%.

Azarov said the change of policy was needed to trigger faster economic growth, and pledged massive state spending on reforms in the energy sector, housing and agriculture.

???This five-year program will in fact define a new [period of] industrialization,??? Azarov said. ???The potential that was created last century has been exhausted. It must be replaced by new technologies.???

Ukraine??™s economy expanded 5.5% on the year in January through July, up from 5% on the year in the first six months, suggesting that growth has been accelerating, according to the State Statistics Committee.

The growth was mostly fueled by robust steel exports and emerging domestic demand, analysts said. The government forecasts growth at 6% in 2006.

Meanwhile, the plans to boost the budget deficit come in contrast with recommendations from the International Monetary Fund, which earlier this year warned the government against increasing the budget deficit.

Viktor Pynzenyk, a former finance minister who was overseeing the country??™s financial policies in 2005 and 2006, criticized the budget draft and said it will most likely fail.

???It means resuming the policy of living on credit,??? Pynzenyk said. ???I don??™t understand how they will balance out the budget, how they will implement investment tasks, not to mention social spending.??? (tl/ez)