MOSCOW (Reuters) - Russia should use an average oil price of $40 per barrel as the benchmark for its 2017-2019 budgets, the Economy Ministry said on Thursday, giving in to Finance Ministry arguments for fiscal caution.

A slide in oil prices and Western sanctions have pushed Russia into recession, complicating the Finance Ministry's task of keeping the budget deficit manageable.

The Economy Ministry last week submitted forecasts that proposed a base budget scenario in which oil prices rose to $45 per barrel next year and $50 in 2018-2019, an official in policy-making circles said. But it has since bowed to the Finance Ministry's pressure.

"The lower the price (in the forecast), the better for the (finance) ministry," the source said. "Spending is cut automatically."

Economy Minister Alexei Ulyukayev presented the forecasts as prudent, although his ministry has often backed more government spending to stimulate the economy.

"I believe the base scenario has a healthy dose of conservatism," he said in televised comments.

Prime Minister Dmitry Medvedev said conservatism was justified.

"It is better to lean in projections towards understating potential revenues than later try to find additional reserves to balance the budget," Medvedev said.

The Finance Ministry considers $40 per barrel of oil "a realistic level for the next three years", Vladimir Kolychev, head of the ministry's long-term forecasting department, told reporters.

The Economy Ministry, however, remains relatively optimistic when it comes to economic growth. Ulyukayev said GDP is forecast to contract 0.2 percent this year.

That is substantially better than the World Bank's forecast of a 1.9 percent fall. Economists polled by Reuters at the end of last month predicted a 1.3 percent decline.

In 2017-2019, the economy should return to growth and expand 0.8 percent next year and 2.2 percent in 2019, Ulyukayev said.

Still, there will be no growth in industrial output this year and capital investment will fall by an estimated 3 percent.

"Starting in 2017, we expect a recovery in the main drivers behind economic growth, such as consumer demand, spurred by rising real incomes and investment demand," Ulyukayev said.

(Reporting by Darya Korsunskaya, Writing by Lidia Kelly, Editing by Jason Bush and Angus MacSwan)