GREECE HAS pledged to raise 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 deficit will shrink by €5.1 billion next year to €16.8 billion, or 7.4 per cent of GDP, back in line with the terms of the bailout deal, it said, after fiscal slippages and a deeper than expected recession derailed this year’s efforts.

Euro zone finance ministers told Athens on Tuesday to cut state spending further to meet the fiscal targets agreed as part of its €110 billion rescue package, aimed at pulling Greece back from the brink of bankruptcy.

The new cuts are bigger than the initially planned €2.2 billion deficit reduction targeted in last month’s first budget draft, but they are expected to keep stifling the economy, with gross domestic product (GDP) expected to shrink 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,” said finance minister George Papaconstantinou.

Greece will miss its 2010 budget targets after austerity measures hurt tax revenues more than expected and a revision of past deficit figures showed on Monday 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.

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.

The budget will be discussed in parliament and changes can be made before a final vote on December 22nd. 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 may contract by 4.2 per cent this year.

Analysts said the additional measures might hurt the economy even more.