RIGA - The Latvian government has announced that it will opt for a 2009 budget deficit of 1.85 percent of GDP, a significant slash from the 1.2 percent budget surplus that had been previously proposed.
"The government is united in its decision to go for a 1.85 percent deficit in next year's budget," Prime Minister Ivars Godmanis told reporters following a Sept. 4 extraordinary cabinet meeting.
The news came ahead of a report from the national statistics agency indicating that year-on-year GDP growth in the second quarter was only 0.1 percent 's the lowest growth rate that the country has seen in 13 years (see story, this page). The central bank forecasts that growth this year will reach between 2.5 and 3 percent.
Budget expenditures in 2009 are expected to amount to 5.75 billion lats, while revenues are set to reach only about 5.42 billion. That would mean an increase in expenditures of nearly 10 percent over this year with a revenue increase of only about 3 percent.
The government has already had to cut spending in the 2008 budget in order to achieve a token surplus of 0.05 percent of GDP, down from the original planned surplus of 1 percent.
Central Bank head Ilmars Rimsevics said that the 2009 budget deficit, which is set to reach about 350 million lats, would hamper the country's economic development. In a Sept. 9 interview with Latvian public television, he said the country would not borrow the money to maintain the current level of expenditure.
"These are huge sums. If we borrow 350 million lats from Latvian commercial banks the money is 'eaten up.' [Instead,] we will not invest money in future development," Rimsevics said.
"A balanced budget is first of all needed for entrepreneurs, as this money will be taken away from them," he said.
The central bank head said that the Latvian economy should tend toward conservative and balanced policies because of its small, open nature. He said that the country was reliant on foreign investment and that it should remain as stable as possible to keep investors happy.
The revised budget figures for 2009 prompted the prime minister to announce that the government would freeze all public sector wages next year.
The prime minister and finance minister both said that the country would be forced to freeze wages because of the current economic climate following an emergency cabinet meeting on Sept. 4.
"Every ministry will have to plan its spending very carefully. There will be no exceptions," Finance Minister Atis Slakteris told reporters after the meeting.
Slakteris stressed that the government would abide by its previous agreement to increase teachers' salaries on Sept. 1 and again in 2009. He said that generally, however, pay hikes that had been approved at various political levels would have to be "put off until better times."
The decision to freeze wages drew heavy criticism from both trade unions and opposition parties.
In a Sept. 5 interview with the Latvian television news program 900 Seconds, Chairman of the Free Trade Union Confederation of Latvia Peteris Krigers said that the decision would result in "chaos."
"Doctors, teachers and policemen have nowhere to go â€¦ I fear there will be not only chaos, but a very serious crisis," the union head said.
Trade unions and the government were set to enter a fresh round of negotiations on the topic as The Baltic Times went to press on Sept. 10.