June 2 (Bloomberg) -- Venezuela's budget deficit more than doubled in the first three months of 2007 to the highest level in at least eight years as President Hugo Chavez increased spending on health care, education and housing.

The deficit widened to 7.97 trillion bolivars ($3.7 billion), the highest since record-keeping began 1998, from 3.05 trillion bolivars a year earlier, the Caracas-based central bank said on its Web site today.

Surging spending on social services and salaries for government workers is outstripping oil revenue and fueling inflation in Venezuela, Latin America's fourth-largest economy. Venezuela's annual inflation rate accelerated to 19.5 percent in May, the highest in the hemisphere.

``Severe fiscal dominance is openly reducing the central bank's ability to bring inflation down to single digits,'' said Alberto Ramos, a New York-based senior Latin America economist at Goldman Sachs Group Inc.

The budget figures include extra revenue from oil sales and unexpected tax collections, while excluding off-budget funds set up by Chavez since 2005 to funnel government money into social programs. Oil accounts for 95 percent of Venezuela's exports and half of government revenue.

The central bank yesterday said that the monthly rate of inflation rose to 1.7 percent in May from 1.4 percent in April. Consumer prices in May rose 19.5 percent from a year earlier, up from a gain of 19.4 percent in April.

Government Largesse

Chavez, using government largesse to consolidate political support, has handed out subsidies to millions of poor families. Spending has outstripped revenue pushed higher by rising crude oil prices.

Spending on salaries, capital improvements and interest on the national debt rose 15 percent to 33 trillion bolivars in the first quarter from a year earlier, according to bank data.

The government posted a consolidated budget surplus of 328 billion bolivars in March, the first in four months, the bank said. That compares with shortfalls of 1.04 trillion bolivars in March 2006 and 3.62 trillion bolivars in February 2007.

Cash reserves at the National Treasury rose for the first month in four to 21.94 trillion bolivars in March, the report said.

To contact the reporter on this story: Guillermo Parra-Bernal in Caracas at gparra@bloomberg.net.

Last Updated: June 2, 2007 13:30 EDT