Oct. 9 (Bloomberg) -- The Baltic governments risk running wider budget deficits next year as slower economic growth leads to less tax revenue, threatening to erode investor confidence, officials said.

Latvia's budget deficit could widen to 4 percent of gross domestic product next year, central bank Governor Ilmars Rimsevics said today. Lithuania, the biggest of three Baltic countries, may have a budget shortfall of 2.35 percent of GDP, Prime Minister Gediminas Kirkilas said. Estonia's deficit could reach 10 billion krooni ($871 million), compared with a Finance Ministry forecast for a 2008 deficit of 3.1 billion krooni, former Prime Minister and Estonian Business Association President Tiit Vaehi said.

The Baltic governments are struggling to collect budget revenue and reluctant to cut spending as growth falters and inflation cuts consumers' buying power after an investment-led boom since the former Soviet republics joined the European Union in 2004. They risk breaching the European Union's budget deficit limit of 3 percent of GDP.

``External imbalances still loom large'' in the Baltic states, the International Monetary Fund said yesterday in its World Economic Outlook. ``It will be important to claw back unsustainable expenditure increases from the recent past and target structural balance.''

The three countries had the grades for their sovereign debt cut one step on Oct. 3 by Fitch Rating Service, which cited worsening financial conditions across Europe. Still, ``strong'' public finances are a key support to sovereign creditworthiness and provide headroom for Baltic governments to help cushion the slowdown, Fitch said. At end-2007, government debt was 2.7 percent of GDP in Estonia, 9.7 percent in Latvia and 17.3 percent in Lithuania, it said.

Latvia's central bank forecasts economic growth between zero and 0.5 percent next year, which would widen the budget gap to as much as 4 percent, Rimsevics said in an opinion piece in the newspaper Dienas Bizness. The International Monetary Fund expects the Latvian economy to contract 2.2 percent in 2009.

The deficit could widen to an ``unacceptable'' 5.5 percent of GDP, Rimsevics said in an interview with Leta newswire today. The government has ``given up trying'' to cut spending, he was quoted as saying.

The Lithuanian government has ditched its plans to post a balanced budget next year, Prime Minister Gediminas Kirkilas said in an online pre-election debate on alfa.lt. He said the budget gap will top 1 percent this year, indicating that the government will miss its target of 0.5 percent.

European Union Monetary Affairs Commissioner Joaquin Almunia called on the Lithuanian government on Sept. 25 to cut spending next year, or risk breaching the 3 percent budget limit. EU rules limit budget deficits to 3 percent of gross domestic product.

``We're getting closer to a critical and psychologically important deficit limit of 3 percent'' in next year's budget plan, presidential spokeswoman Rita Grumadaite said in a press conference today.

The Estonian government on Sept. 25 approved a draft 2009 budget which balances overall finances, including local government and social insurance funds. The budget, still awaiting the first reading in parliament, will fall into a deficit and need to be covered from government reserves, former Prime Minister Vaehi was quoted as saying in an interview with the newspaper Maaleht today.

A deficit of 10 billion krooni would equal 3.5 percent of the expected gross domestic product of 283 billion krooni forecast by finance ministry in August, according to Bloomberg calculations.

SEB AB, the second biggest lender in the Baltics, yesterday forecast a deficit of 1 percent of GDP in Estonia's overall finances next year.

Falling tax revenue has forced the government of Estonian Prime Minister Andrus Ansip to cut spending and find new financing to maintain a budget balance, a linchpin of the Baltic country's fiscal policies. The Finance Ministry this month forecast the budget will fall into a deficit of 3.1 billion krooni, or 1.2 percent of gross domestic product this year, after surpluses in the last 6 years.

To contact the reporters on this story: Ott Ummelas in Tallinn at oummelas@bloomberg.net

Last Updated: October 9, 2008 12:49 EDT