Prime Minister Valdis Dombrovskis rests his chin on his knuckles and looks at his desk during the final budget debate Tuesday. Dombrovskis' coalition has become increasingly unstable during the protracted budget drafting process. Photo by Thorsten Chr. Pohlmann.

RIGA — After a marathon session stretching late into the evening, Latvia’s lawmakers passed the 2010 budget in a second and final reading by a vote of 64-30 Tuesday.

The budget adoption took place amid several protests on Tuesday, particularly thousands of students who jeered lawmakers outside the Saeima building in Riga’s Old Town. Passage of the austerity budget, which included a steep reduction in expenditures and sizable increases in taxes, means that Latvia has cleared the biggest obstacle to continuing the economic recovery program overseen by international lenders.

A mission from the International Monetary Fund was expected to arrive in Riga on Wednesday for a two-week survey of progress in implementing much-needed reforms. The 2010 budget is part of this reform program. The successful passage of the budget, which was decried by both coalition and opposition parties, also signifies that Latvia will enter a sort of political terra incognito, with all parties jockeying for position ahead of next year’s national elections.

Observers have predicted various scenarios, but many seem to agree there could be some Cabinet reshuffle in the upcoming weeks. Some, judging by the statements from key party leaders, haven’t ruled out a government collapse. Many feel, however, that a government shake-up would only harm Latvia’s ever-fragile position vis-à-vis international lenders, who need a stable Cabinet with which it can continue working on crucial reforms.

The budget itself reflects the economic pain Latvia is undergoing. Next year’s expenditures will be 7 percent less than this year’s, while income will be down 4 percent year-on-year. Taxes on income tax, vehicles, and cigarettes will be increased next year, while a host of other things — e.g., housing, natural gas — will be taxed for the first time in 2010. The budget deficit will amount to 681.5 million lats (€970 million), or 7.6 percent of gross domestic product. The economy is forecast to decline 4 percent — even after an approximate 18 percent fall this year.

The cutbacks in social expenditures are well known, and have led to a number of strikes over the past weeks. On Wednesday students from across Latvia marched from the government building to Parliament, waving banners and shouting angry slogans like “Shut your mouths!” and “Students to Parliament, lawmakers to Ireland!”

The resentment on the street was accompanied by more bad news from Brussels: according to Eurostat, unemployment in Latvia in October reached a staggering 20.9 percent, the highest in the 27-member European Union. Spain had the second highest rate of joblessness with 19.3 percent.

Prime Minister Valdis Dombrovskis said the budget was “unpopular but necessary.”