Croatia plans to cut public sector pay from next month as it struggles to reduce its budget deficit, Prime Minister Zoran Milanovic said, bringing an immediate warning of protest action from unions.

"We will have to rejig this year's budget and reduce gross salaries for employees in the public sector by three percent. The alternative would be cutting the workforce," he told RTL television.

Croatia, scheduled to join the European Union on July 1, has suffered four years of recession. This year most analysts, including the International Monetary Fund, expect growth of 0.8 percent at most and some forecast another mild contraction.

Last year the government managed to cut the budget gap to 3.5 percent of gross domestic product from 4.5 percent in 2011. For this year the planned gap was set at 3.8 percent due to higher interest payments, the costs of EU entry and restructuring of the ailing shipbuilding industry.

Moody's and Standard and Poor's have in the past two months cut Croatia's rating to below investment grade, citing slow fiscal consolidation and meagre growth prospects. Fitch has kept it at BBB-, but with a negative outlook.

Finance Minister Slavko Linic said the government wanted to save 1.2 billion kuna ($211 million) through the budget rejig in March. The gap for this year was originally targeted at close to 11 billion kuna.

Public sector trade union leaders reacted by saying they would consider actions against the government's decision.

"I believe that the unions will get together now and be able to find a proper response to this government's move," said Vilim Ribic, who heads a union in the education sector.

This week Croatia said it would go ahead with plans for an international bond issue which could be worth between $1.5 billion and $2 billion, probably in March.. ($1 = 5.6799 Croatian kunas)