By Aleksandar Vasovic
BELGRADE (Reuters) - Serbia's biggest party threatened its smaller coalition partner on Thursday with a snap election if it keeps up its resistance to painful reforms that the country's new finance minister has vowed to pursue.
The Serbian Progressive Party (SNS), the dominant party in the ruling alliance, has taken on the finance portfolio after a cabinet reshuffle in July, setting up a showdown with Prime Minister Ivica Dacic's Socialists over radical spending cuts.
Lawmakers are expected to confirm SNS candidate Lazar Krstic, a 29-year-old Yale graduate and McKinsey consultant, as finance minister this week.
He has pledged to seek a new loan deal with the International Monetary Fund, which will probably require long-resisted cuts in spending on pensioners and state enterprises to curb a budget deficit of at least 4.7 percent of national output and public debt projected at 65 percent by year-end.
Pensioners and public sector employees are Dacic's main constituency.
"If economic measures become a stumbling block ... if any of coalition partners block reforms then we face the most expensive solution - new elections," SNS chief economic strategist Milenko Dzeletovic told the Serbian daily Blic.
"This time the strongest party will not stop," he said. "We need to transform the public sector, attract new investment ... create new jobs."
Pensioners and the public sector account for about one third of the Serbian electorate and half its outgoings.
The IMF has said that without such changes Serbia's budget shortfall will reach eight percent of gross domestic product.
The Fund froze an earlier 1 billion euro ($1.3 billion) standby loan deal early last year over broken spending promises by the previous government. The absence of an IMF safety net has pressured the Serbian dinar and driven up borrowing costs.
Unemployment stands at around 25 percent and bad loans have hit 19.9 percent of total lending. Loss-making state enterprises are a huge drain on state finances.
The country emerged from recession in the first quarter of this year, but growth is fragile.
Riding high in opinion polls, the SNS is confident of winning big in any early election, but is likely to hold off at least until Serbia clinches the start of membership talks with the European Union in January.
The last parliamentary election was in May 2012.
($1 = 0.7496 euros)
(Editing by Matt Robinson/Ruth Pitchford)