Athens: Greece pledged on Thursday to hike VAT, freeze pensions and cut government waste further in 2011 to meet the terms of an EU/IMF bailout after admitting it will miss this year's targets.

The new measures are meant to shrink the deficit by 5.1 billion euros (Dh25.64 billion) next year to 16.8 billion euros, bringing it back to 7.4 per cent of GDP and into line with the terms of the bailout deal, after fiscal slippages and a deeper than expected recession derailed this year's efforts.

Eurozone finance ministers told Athens on Tuesday it must do more to meet the fiscal targets agreed as part of its 110 billion euro rescue package, aimed at pulling Greece back from the brink of bankruptcy.

The new cuts are bigger than the initially planned 2.2-billion euro deficit reduction targeted in last month's first budget draft, but are expected to put yet more strain on the economy, with gross domestic product (GDP) seen shrinking by 3 per cent next year.

"We have not yet won the battle but we are now in a better position to deal with the real problems ... a wasteful state, problematic state companies and tax evasion," Papaconstantinou told a news conference after submitting the budget to parliament.

Greece will miss its 2010 budget targets after austerity measures hurt tax revenues more than expected and a revision of past deficit figures showed that the country's finances were in even worse shape than assumed.

"It is a pretty big extra squeeze," said Ben May, a London-based economist with Capital Economics. "It spells bad news for the economy ... We are not convinced that the government can get its debt down to a more sustainable level without having to do some sort of restructuring," he added.

Draconian measures

The 2010 deficit will amount to 9.4 per cent of GDP compared with a bailout plan target of about 8 per cent of GDP.

The socialists, who came to power last year and revealed a gaping budget deficit, prompting a debt crisis that shook the euro, have braved public discontent and taken draconian measures to meet the bailout terms.

In response to the budget, the public sector labour union said it would join private sector workers in a 24-hour general strike planned for December 15, to protest against job cuts and austerity measures.

‘Our fears are confirmed. Unprecedented austerity will hurt all civil servants and private sector workers, with no exception," the head of the private sector union GSEE, Yannis Panagopoulos, said in a statement. "We will strike on December 15, and take further action."

The budget will be discussed in parliament and changes can be made before a final vote on December 22. The government has a comfortable majority and is expected to pass it easily.

However, the austerity steps have plunged the economy into an even deeper recession than expected, and GDP is seen contracting by 4.2 per cent this year.

Analysts said the additional measures might hurt the economy even more, without providing guarantees that the country will avoid a debt restructuring to cope with ballooning debt. Greek debt is seen rising to 153 per cent of GDP in 2011 from 143 per cent of GDP.

Spanish measures considered adequate

European Central Bank Executive Board member Jose Manuel Gonzalez-Paramo said measures to support growth and cut debt would protect Spain from the risk of contagion spreading from the Greek and Irish fiscal crises.

"Any strengthening of economic policy that supports credibility and strengthens expectations of more dynamic growth and sustainability of debt" will "protect it against any risk of contagion," he told reporters in Madrid.

Meanwhile, Spain's Economy Minister Elena Salgado said yesterday the country's troubled savings banks could avoid a second wave of mergers if they keep carrying out necessary restructuring.

The country's unlisted savings banks, which took the biggest hit from the country's property bust after a decade-long bubble, are immersed in a government-driven consolidation process to cut their numbers from 45 to under 20.

"If they do their homework, we can avoid a second wave of mergers," Salgado said in an interview on Spanish television.