ATHENS (Reuters) – Greece pledged yesterday 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 deficit will shrink by 5.1 billion euros next year to 16.8 billion euros, or 7.4 percent 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 euro ($149 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 euro deficit reduction targeted in last month's first budget draft, but they are expected to keep stifling the economy, with gross domestic product (GDP) seen shrinking by three percent 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," Finance Minister George 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 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 percent of GDP compared with a bailout plan target of about eight percent 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 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 percent 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 percent of GDP in 2011 from 143 percent of GDP.

The minister said that Greece would return to bond markets in 2011 as planned and that Greek banks, reeling from recession and reliant on ECB funding, were overcoming their problems, successfully raising capital and opening interbank credit lines.

"The sooner we get back to markets, the sooner we will return to growth," Papaconstantinou said.

The government said measures next year will include an increase in the lower VAT rates from 11 to 13 percent, affecting food and other basic goods.

Nominal pensions will freeze and a levy will be slapped on profitable companies for another year, while further cuts will be made in government spending, particularly in the wasteful state health sector.

Budget figures showed primary spending marginally lower at 52.6 billion euros in 2011 from an estimated 52.8 billion euros this year.

Some measures will be taken to revive the ailing economy, such as a VAT reduction for tourism enterprises and a lower tax rate of 20 percent on retained corporate profit.

The budget foresees unemployment rising to 14.6 percent in 2011 from an estimated 12.1 percent this year.