LJUBLJANA, Slovenia—Slovenia's government announced Thursday an austerity plan designed to raise 540 million euros ($707 million) in new taxes as part of an effort to balance the budget and avoid seeking an international bailout.

The small Alpine country, once a model of socialist economy, is racing to convince investors it has a credible strategy for raising the funds to stay solvent and avoid becoming the fifth euro country after Cyprus to ask for financial aid.

In addition to the hike in the country's sales tax from 20 percent to 22 percent, the government said it will partly privatize 15 state-run companies including the country's second-largest bank, Nova Kreditna Banka Maribor (NKBM); communications operator Telekom Slovenija; airline Adria Airways; Ljubljana airport and Elan ski manufacturer.

The austerity plan has to be approved by Slovenia's parliament and will be handed to the European Union's executive arm, the Commission, which is expected to discuss it this month.

Slovenia is a member of the 17-strong group of EU countries that use the euro. The eurozone has been struggling with a three-year crisis over too much government debt which has already seen Greece, Ireland, Portugal, Spain and Cyprus receive emergency loans. Slovenia is keen not to become the fifth member of that bailout band.

At the center of Slovenia's crisis are five state-controlled banks which have an estimated 7 billion euros of bad loans on their books. Slovenia needs to support these banks to avoid a collapse of its banking system.


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To avoid heaping more debt on to its accounts, the government is introducing the austerity measures.

Prime Minister Alenka Bratusek said that the government decided to choose the state tax hike, and will introduce further taxes next year, claiming the measures will have the lowest negative impact on the economic growth.

"We are aware that tax increases won't have a positively impact on the economy and the recovery, but we have opted for the least harmful option," Bratusek said. "I believe this will satisfy the European Commission."

Earlier in the week, Economy Minister Stanko Stepisnik had said that the government would propose a new temporary "crisis tax" on all incomes. Bratusek said that the income tax would probably be introduced at the end of this year, and added that the government is in the process of negotiating the curbing of wages in the public sector.

Finance minister Uros Cufer said public finances would require additional austerity measures of around 1 billion euros. The economy has been in recession since 2011 and unemployment stands at 13.5 percent. Slovenia's economic output is forecast to shrink 2 percent this year and 0.1 percent in 2014, according to the Commission.

Rating agency Moody's last week cut Slovenia's rating by two notches to "junk." Despite this, the government was able to raise 3.5 billion euros from international bond markets last week, but at relatively high interest rates. Economists say the funds could buy Slovenia time, but will not solve the Balkan country's main economic and financial problems.

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Associated Press correspondent Dusan Stojanovic contributed.