VILNIUS (Reuters) - Centre-left parties look set to be propelled to power in Lithuania's election on Sunday by voters angry at years of austerity, but an incoming government may have little choice but to stick to tough budget policies.
Economists said the Baltic nation's high borrowing needs mean a coalition likely to be formed by the Labour Party and the Social Democratic Party will have little room for maneuver as it strives for euro membership in the next few years.
The parties have said they can ease hardship while being fiscally responsible. They have backed a higher minimum wage, a cut in some value-added tax rates and more investment, which they say will stimulate the economy and reduce unemployment.
The former Soviet republic is one of the European Union's poorest countries and has joblessness of 13 percent. The population has fallen below 3 million for the first time since the Soviet Union's collapse as thousands left to find work.
"Everything needs to be changed, in the government now only one in 10 people really work, the rest just hang out there," said pensioner Edmundas, 73, who declined to give his full name.
Labour and the Social Democrats won 34 of 141 seats in a first round election two weeks ago and are hopeful of winning enough of the 67 seats up for grabs in Sunday's second round to cement their position as core of a new coalition.
Prime Minister Andrius Kubilius, who says cuts to the budget deficit saved Lithuania from bankruptcy, came third in the first round and has only a slim chance of remaining in government.
Lithuania's election could be a taste of things to come for other European governments facing voters angry at budget cuts.
The Social Democrats, led by former finance minister Algirdas Butkevicius, a prospective prime minister, want progressive income taxes to replace flat taxes.
He and Labour, led by Russian-born businessman Victor Uspaskich, will likely need a partner to form a majority, expected to be the party of an impeached ex-president.
POSSIBLE TENSIONS
In a sign of possible tensions ahead of any coalition deal, Uspaskich has said he may push for a budget deficit above the EU limit of 3 percent of output.
Butkevicius has said he would be fiscally responsible and that Lithuania could adopt the euro in 2015.
Uspaskich says Lithuania should not rush to adopt the euro while the single currency is in crisis and public support is low. The Labour leader is on trial for tax evasion by his party between 2004 and 2006, a charge he denies.
After a collapse in economic output of 15 percent in 2009, the second-biggest decline in the EU after northern neighbour Latvia, gross domestic product (GDP) rose 6 percent last year and is expected to increase about 3 percent this year.
The budget deficit fell to 5.5 percent of GDP in 2011 from 9.4 percent in 2009. The Kubilius government has drafted a 2013 budget with a 2.5 percent fiscal gap.
Lithuania's politicians were well aware pressure from the markets would not allow them to be too generous, said Lars Christensen, chief emerging markets analyst at Danish bank Danske Bank.
"I'm quite happy that this election, no matter the outcome, will not lead to crazy economic policies," Christensen said.
Lithuania needs to borrow 7.6 billion litas ($2.85 billion) in 2013, about 7 percent of GDP, to refinance debt, including a 1 billion euro Eurobond, and fund the deficit.
"They have their hands tied at the moment," said DNB economist Rokas Bancevicius.
(Writing by Patrick Lannin; Editing by Jon Hemming and Jason Webb)
