VILNIUS (Reuters) - Lithuania’s parliament approved a 2016 budget on Thursday that boosts defense and other spending, despite EU warnings that the euro zone newcomer is breaking fiscal rules by failing to rein in government spending.

A woman walks past Lithuania's Seimas (Parliament) house in Vilnius October 8, 2008. REUTERS/Ints Kalnins

The European Commission and euro zone finance ministers have warned Lithuania its budget plans don’t tackle its structural deficit, the underlying shortfall.

Hard hit by the global financial crisis, Lithuania’s budget deficit ballooned to around 9 percent of gross domestic product (GDP) in 2009, as the economy shrank by 15 percent. It made deep spending cuts and other reforms to qualify to adopt the euro.

But the Commission now sees Lithuania falling far short from its goal of keeping the structural deficit - measured over an economic cycle - below 1 percent of GDP. It sees Lithuania’s 2016 structural deficit as 1.4 percent of GDP, as opposed to the government’s nominal 1.2 percent goal.

“Our growth is lower than the economy’s potential, so we need to stimulate the economy,” Finance Minister Rimantas Sadzius, told Reuters.

“If all goes well, according to my calculations, we can balance the budget in 2017.”

Minimum monthly wages will increase next year, as well as the wages of state employees and law enforcement agents. Retirees’ pensions will also grow.

Defense spending will increase by a third to 574 million euros ($630 million), or 1.5 percent of gross domestic product (GDP).

The government will also have to repay 1 billion euros worth of bonds maturing in February 2016. It will borrow 1.7 billion euros of which 0.5 billion euros will be raised in foreign markets.

Lithuanian central bank governor Vitas Vasiliauskas said the government, which faces a general election in October 2016, had abandoned its commitment to eliminate both its structural and nominal deficits by 2016.

“(This) might have a negative impact on finance system participants and assessments of the country’s economy,” Vasiliauskas said in a statement to parliament.

The government forecasts 3.2 percent growth in 2016 on the back of increasing domestic demand. The European Commission forecasts 2.9 percent growth.

The Lithuanian central bank and the public auditor have said the budget’s income assumptions are optimistic and pose significant risks. ($1 = 0.9140 euros)