The ruling coalition in Estonia is set for a make-or-break vote in parliament after it reached agreement on a money-saving amended budget in the early hours of Thursday morning, dpa reported.
The plan includes cost-cutting measures that would slash 8 billion kroons (685 million dollars) from state expenses.
Controversial measures include an across-the-board reduction of 10 per cent in public sector wages which would save an estimated 2 billion kroons (171 million dollars) and a provision to raise pensions by 5 per cent from April.
Pensioners had been promised a 14 per cent increase and are set to protest in the Estonian capital, Tallinn, next week.
Finance Minister Ivari Padar told the Baltic News Service the cuts would be formalised in a bill to be presented to the Estonian parliament or Riigikogu in two weeks' time.
At a press conference on Thursday, Prime Minister Andrus Ansip upped the ante further when he said such was the importance of the proposals, the budget vote could be linked to a vote of confidence in his administration.
"The proposal of linking it with a confidence vote is one that could be taken into consideration," Ansip said.
Under such circumstances, failure to pass the budget could result in the resignation of the three-party coalition government.
Ministers were set to confirm whether the confidence vote would take place after a cabinet meeting on Thursday evening.
The Estonian economy has been in recession since mid-2008 and several rounds of cutbacks have already resulted in substantial job losses in the public sector.
However, with the global economic outlook worsening, Estonia is being forced to cut even more deeply.
On Thursday the Estonian central bank, Eesti Pank, issued a downbeat flash estimate of the Baltic nation's medium-term prospects.
"As external demand has eased considerably, Estonia's real GDP may decline up to 5.5 per cent this year," the bank said.
"If the economies of Estonia's trading partners decrease 3 per cent on average, Estonia's economy may decline up to 9 per cent," it warned.