Latvian Prime Minister Valdis Dombrovskis announced Monday that his government would make the agreed-upon cuts, but exactly how it will do so has not been made public. Photo by Aivis Freidenfelds, used courtesy of the State Chancellery of Latvia.
RIGA — Latvia’s government, with its back to the wall, announced Monday that it has reached a preliminary agreement on reducing next year’s budget deficit by the 500 million lats (€700 million) required by lenders such as the European Union and the International Monetary Fund.
Prime Minister Valdis Dombrovskis, speaking to reporters, expressed confidence that the coalition would reach a consensus on how to reduce next year’s budget and thus satisfy international lenders. Dombrovskis and his center-right coalition found itself in hot water after it announced earlier this month that it would reduce next year’s deficit by only 325 million lats — 175 million less than what is prescribed in the agreement signed with lenders this summer.
The proposal sparked harsh criticism from EU officials, particularly in Sweden, which currently holds the rotating EU presidency and whose banks have the most to lose from an insolvent Latvia. Lenders want Latvia to stick to its commitments and make the full 500 million lats deficit reduction.
Dombrovskis had argued that Latvia could still fulfill an 8.5 percent budget deficit, another target outlined in the agreement, even while making less painful cuts. However, his argument fell on deaf ears and now his government is scrambling to make a new batch of expenditures decreases and tax hikes. So far officials are miserly on details.
“We agreed to make the details public after they’ve been discussed and the government has agreed with international creditors…to prevent an unnecessary fuss,” Finance Minister Einars Repše said.
Repše did say, however, that according to preliminary estimates expenditures would be slashed by 320 million lats (€451 million) and revenues increased by 120 million lats (€169 million). In an interview Sunday on the television program “Nekā Personīga” (“Nothing Personal”), Repše warned that if Latvia didn’t make the painful cuts now it would suffer numerous consequences far worse. In particular, the government would run out of money by the end of this year and could only balance its budget next year with cuts of 700-800 million lats (€986 million-1.1 trillion).
“We would have to live from hand-to-mouth,” Repše said. The EU’s finance commissioner, Joaquín Almunia, is scheduled to visit Latvia Tuesday to discuss next year’s budget with ministers, lawmakers, the central bank chief and leading trade unions. Almunia said last week that Latvia must fulfill its promises and make the full 500 million lat reduction to next year’s budget deficit.
