By Marja Novak
LJUBLJANA, March 31 (Reuters) - Slovenia's budget deficit is expected to increase sharply in 2009 following a small shortfall last year and a surplus in 2007, the statistics office said on Tuesday.
The office said the Ministry of Finance forecast this year's deficit at 1.4 billion euros ($1.85 billion) or 3.7 percent of gross domestic product (GDP), up from a deficit of 0.9 percent in 2008 and a surplus of 0.5 percent in 2007.
But Finance Minister France Krizanic said last week that Slovenia could end 2009 with a deficit of up to 5 percent of GDP if global demand continued to decrease.
Analysts fear the deficit could be even higher unless the government reduces public spending significantly, as revenue is likely to be below expectations due to economic slowdown.
"The deficit could rise above 5 percent unless the government takes steps to keep it under control," Igor Masten of Ljubljana's Faculty of Economy told Reuters.
Slovenia, which was the fastest growing euro zone member over the past two years, expects its economy to shrink 4 percent in 2009, mainly due to the global financial and economic crisis. The economy expanded 6.8 percent in 2007 and 3.5 percent last year.
But since the start of the year more than 400 companies with about 42,500 employees decided to cut labour hours due to lower demand for their products.
"The government has to cut public sector wages by about 10 percent ... It also has to reform the pension system and rationalise the health system," said Peter Stanovnik of the Institute of Economic Research in Ljubljana.
"Although the deficits are rising globally, a deficit of 5 percent or more would be alarming and I am afraid such a deficit is possible if global conditions deteriorate further," he added.
Parliament last week passed the 2009 central government budget which sees central government revenues at 8.8 billion euros, while central government spending is planned at 9.9 billion.
However, the government had said it would prepare changes to the budget over the next few months due to worsening economic conditions.
The statistics office also reported year-on-year inflation was 1.6 percent in March, down from 2.1 percent a month before and analysts said it is expected to stay below 2 percent this year. (Reporting by Marja Novak; Editing by David Stamp)