Spain's central bank on Tuesday increased its growth forecast for 2018 to 2.7 percent from 2.4 percent as the government plans to reduce income tax for some workers and hike wages for civil servants.
The Spanish government had planned for a deficit of 2.3 percent in 2018.
The central bank also predicts economic growth will be slightly higher than expected in 2019.
In a statement, it put stronger growth down to debt reduction in the private sector and a current account surplus.
It is also expecting a general drop in the tax burden on people in Spain.
The government is expected to adopt its budget for 2018 at the end of March, very late due to the secession crisis in Catalonia. This will then be submitted to a vote in parliament.
After years of economic crisis, Spain has renewed with economic growth and as such the government plans to reduce tax and increase pensions for those with lower income, and increase wages for civil servants.
These measures will come just before regional and municipal elections in 2019.
The central bank is also planning for moderate inflation rates this year and the next.
But it warned there could be challenges afoot, particularly if countries adopt protectionist measures as a trade war between the United States, EU and China threatens.
It also expressed concern over the political situation in the northeastern region of Catalonia, which attempted to secede in October.
"Renewed tension, which would have a negative impact on confidence and (economic) activity, cannot be discarded," it said in its report.
The central bank also touched on unemployment, which while sharply reduced since the height of the crisis in 2013, still stands at 16.5 percent.
It predicted job creation would continue but at a slower rate, prompting the unemployment rate to drop to around 11 percent in 2020.