RIGA - Lawmakers on Sept. 20 approved government-backed amendments to the 2007 budget calling for a small surplus, and Prime Minister Aigars Kalvitis has said that the government would have to compile the 2008 - 2010 budgets with a surplus of over 1 percent of gross domestic product.
The new budget contains a surplus of 54.4 million lats (77.4 million euros), or 0.4 percent of GDP. Total revenues now amount to 4.48 billion lats, while expenditures are 4.43 billion.
Many analysts said the amendments are insufficient if the government seriously intends to tackle Latvia's runaway inflation, which is exacerbating on a monthly basis. Earlier this month Bank of Latvia President Ilmars Rimsevics said that, in order to combat the double-digit inflation, the government and Parliament needed to agree upon a budget with at least a 1 percent surplus this year.
Still, slowly but surely Kalvitis seems to have grudgingly admitted that more needs to be done in terms of fiscal policy to address the Baltic state's overheated economy.
"While currently the government is working on a budget with a 0.5 percent surplus, discussions with experts have led to a conclusion that it is necessary to seek possibilities and resources to make this budget surplus even bigger," the prime minister told a press conference on Sept. 19.
Kalvitis noted that little time remained for drawing up next year's budget, though he did add that fiscal policy is one instrument that might impact macroeconomic processes in the long run.
In August the consumer price index reached 10.1 percent annually, the highest since January 1997, while growth of the producer price index amounted to 16.9 percent as of the same month, the lowest gain in five months.
Where inflation is headed, no one seems to know. Throughout September Latvians have been bombarded with a vast range of estimates on which direction inflation could move in the last three months of the year, underscoring the lack of consensus among decision-makers.
On Sept. 10 the Economy Ministry said that after August the level of inflation would not undergo considerable changes before the end of the year. Unfortunately, the ministry has been habitually wrong about consumer prices throughout the year.
SEB Unibanka announced this week that 2007 inflation could easily reach 9 percent thanks to rises in prices for food and administratively regulated services such as heating.
Valery Kargin, CEO of Parex Bank, was quoted by the Baltic News Service as saying that inflation in November and December could reach 13 percent due to global trends such as this year's poor harvest and rising demand for grain sparked by production of biofuels.
Kargin added that inflationary expectations were also influencing the consumer price index, as more businesses factor in high inflation in their annual forecasts.
Only Bank of Latvia President Ilmars Rimsevics refused to predict annual inflation when asked during a September press conference. He did say, however, that inflation was only likely to begin declining next spring.
Certainly the government's anti-inflation plan needs at least six months to have a significant impact, and while many bankers and regulators, including Rimsevics, claim that positive results can already be seen, there are still key aspects to the plan that have not been addressed by the government, namely fostering competition and promoting exports.
The crucial battle will come soon as ministers vie to keep their pet projects, such as the new national library and an expansion of Riga International Airport. The library, the construction of which is set to begin Nov. 18, has been crystallized within Latvian society as an example of a public works project that should be postponed during the current spat of economic overheating. Even President Valdis Zatlers has expressed skepticism about the timeliness of the project.
In the meantime, the government has vowed to wage a campaign against skyrocketing wages in both the public and private sectors. Kalvitis said he would hold talks with representatives of employers and trade unions, as well as with the heads of state-owned and municipal enterprises.
One of the proposals under discussion was to link wage and salary increases to labor efficiency, thus ensuring that salaries do not grow faster than productivity. Some economists have proposed linking salary hikes to the level of inflation.
Over the past three years salaries in Latvia have been growing at a rate of 25 percent a year on average, or three times faster than prices. According to the Central Statistics Office, the average gross monthly salary in the second quarter reached 388.7 lats, up 33.4 percent from the same period in 2006. The average monthly net wage grew 33.7 percent year-on-year to 278.9 lats in the second quarter of 2007.
Kalvitis said that ministerial salaries were no exception. Ministers have not received a pay raise since the Kalvitis-led government was installed a year ago. The prime minister said lawmakers' salaries should also be frozen.