Gross domestic product will expand 3.7 percent this year and 6.4 percent in 2009, the ministry said in its semi-annual review of forecasts on its Web site. In November, it had forecast 2008 growth of 5.2 percent and 2008 growth of 6.1 percent.
The ministry forecast a budget deficit of at least 1.1 percent of gross domestic product through 2011.
Banks such as Danske Bank A/S and SEB AB expect the Baltic country's economy to slow to between 3 percent and 3.5 percent this year from an eight-year low of 7.1 percent last year as decade-high inflation and weakening consumer and business confidence cut consumption, borrowing and investment.
Parliament adopted the 2008 budget in December with a surplus of 2.7 billion krooni ($270 million), or 1.3 percent of planned gross domestic product.
Finance Minister Ivari Padar said at a press conference in Tallinn that the government decided today to cut spending by 3.1 billion krooni.
Prime Minister Andrus Ansip said last week public spending cuts are ``unavoidable'' given a slowing of the economy and waning tax revenue. Estonia uses budget policy as its main tool for controlling inflation because the Baltic nation has a fixed exchange rate under a currency board system.
Prices, harmonized to European Union standards, will probably rise an average 9.1 percent this year and 5.3 percent next, the ministry said. It had previously forecast a 2008 inflation rate of 8.5 percent, and 5.5 percent for 2009.