RIGA — The Latvian government’s emergency budgetary sessions continue as the ruling coalition struggles to find the right mix of tax hikes and cost cuts to ward off an unmanageable deficit.

The Cabinet will again go over the budget tomorrow after several closed sessions failed to resolve the dispute over how to cut 500 million lats (€710 million) from the national government’s 2010 budget to keep the deficit at 8.5 percent of gross domestic product. The two largest parties in the coalition, Prime Minister Valdis Dombrovskis’ New Era Party and the People’s Party, are at odds whether or not to include additional tax hikes. The People’s Party, along with other parties outside the coalition voted down a New Era proposal to raise real estate taxes to cover 20 percent of the 500 million lats, noting that the value-added and excise taxes have already been increased. Some political analysts say the People’s Party is trying to break the coalition.

Latvia’s finance ministry, run by New Era member Einars Repše, stands behind its proposal to increase the tax base to help cover the deficit.

“The ministry of finance is currently working on the version of the budget which has been discussed on Saturday,” Diana Krampe, finance ministry spokesperson, told Baltic Reports.

She added that the new version of the budget features “things that have been included in the economic stabilization program — capital gains taxes, dividends.”

The government is looking to privatize many of is functions and services to save money, sure to be hotly negotiated in the Saeima.

“We’re trying to find which are the functions the govt must support in full amount, which are the ones we’d give away to the private sector and so on,” Krampe told Baltic Reports. “The debate will also continue tomorrow, it should be finished by the end of Oct. We have to prepare lots of amendments.”

Repše forecasts that tax revenue to be lower than expected and has called for more cuts than the prime minister.

The stakes in the budget debate are high. Thousands of public sector employees’ jobs and wages will be affected. Meanwhile the National Bank of Latvia President Ilmārs Rimšēvičs told the Diena newspaper today that the government is deviating from its agreements with the IMF and EU to the detriment of economy by not enacting austerity measures like the real estate tax increase.