Latvia cuts budget

  • 1999-08-05
  • By Diana Kudayarova
RIGA - Although the government managed to cut its expenditures by 64.4 million lats ($109.15 million), the fiscal budget deficit is still 3.5 percent of GDP, which exceeds the maximum of 1 percent strongly recommended by the International Monetary Fund, and goes well beyond the deficit the government hoped for.

The deficit is large enough for Latvia's agreement with the IMF to be under threat, warned Finance Minister Edmunds Krastins. It can also provoke suspicions about the stability of the Latvian currency and send a negative signal to foreign investors.

Einars Repse, the central bank's governor, said the fiscal deficit approaching 3 percent is a sign of economic policy failure.

Six laws had to be altered to bring the budget in line, among them the law on pensions, the laws on education and three laws on excise duties. The Parliament is expected to approve the proposed cuts in the second reading Aug. 5.

The three excise tax increases on alcohol, tobacco and oil products used all over the word to patch up budgets were complemented with gambling. The tax on each gambling table has climbed up to 3,000 lats from the current 2,000. Tax on each gambling machine will be 540 lats instead of 360.

The effect these measures will have on the state budget is hard to predict. Some representatives of the gambling industry suggest it may go down.

"Of course it will go down and the business will not be as profitable," says Arturs Jurcevics, Amugames director.

Vladimir Aleksandrov, Mikonix company director, also prophesied the reduction of the number of people employed in the gambling business. The fiscal department of the Finance Ministry refrained from comment.

Increasing excise duties on alcohol and tobacco products are certainly expected to bring in more revenues, but not as much as would be desired. Changes in the alcohol excise tax (up from 460 lats to 500 lats per 100 liters of pure spirit and 36 lats per 100 liters of alcoholic beverages with less than 15 percent of alcohol content) may bring in no more than 1 million lats in the course of 1999, should they be introduced on Sept. 1.

"This is the maximum we can hope for," says Daiga Gulbe, director of the Finance Ministry's fiscal policy department.

Tobacco products are not to rescue the budget either. The fiscal department estimates an increase in revenues of 500,000 lats. The excise rate for 1,000 filter cigarettes will increase from 4.5 to 5 lats, for non-filter cigarettes from 5.5 to 6 lats, and for 1,000 grams of tobacco from 5.5 to 6 lats.

Revenues from tobacco may be kept down by smuggling, since 25 percent to 30 percent of all cigarettes sold in Latvia are brought in by contraband.

"The government should bring down smuggling to 5 percent and then increase taxes," said House of Prince Director Vladi-mirs Camans.

"Measures to reduce smuggling will be discussed after the Saeima [Latvia's parliament] gives its final approval to the budget. Nothing certain can be said now," Daiga Gulbe commented.

Excise tax on fuel oil is to increase from 2 to 4 lats per ton as of Jan. 1, 2000 and up to 10 lats per ton by Jan. 1, 2003. This will hit the pockets of heat providers, industry and transport, making a 4-million-lat-sized hole in the year 2000. Half of it will go to the state budget, the other half to the State Roads Fund. The move is more of ecological value since no increase in budget revenue is expected from this measure.

An unexpectedly low contribution to the state budget also came from the Bank of Latvia. When the government pressed it for something more significant, the bank flatly refused, but promised 25 percent of its profits next year.

Although these manipulations did not pull the state revenues up, they prevented them from going too low.

The planned revenues of 1.4 billion lats went down by a total of 93.1 million lats because of the fall in VAT and excise tax revenues, the Finance Ministry reported.

While trying to increase revenues, the Latvian government also carried out several cuts.

One of them is pension reform. The retirement age is to be increased to 62, what Prime Minister Andris Ske-le, striving for an increase to 65, called a "mild measure."

Currently working pensioners, whose retirement or life-disability pensions exceed 60 or 70 lats respectively, will have to choose between wages or pensions. Working people who enter the retirement age after the law has been passed will have to make such a choice whatever their pension is.

Pension indexation, presently biannual, is to be carried out once a year, and only a pension not exceeding three minimal wages, which currently amounts to 126 lats per month, will be indexed. About 38 million lats are expected to be saved on pensions, 4 million of them - on in-dexations.

Despite the promises to NATO to increase the defense budget, it will have to face a cut by 2.5 million lats, bringing its total budget to 32.8 million lats. For next year it has been promised the more considerable sum of 42.88 million lats.

The government also avoided spending an extra 12 million lats on primary-school teachers' salaries, by changing the education law and leaving this burden on municipalities, although it was expected to be shifted back on to the central go-vern-ment's shoulders.

All ministries' budgets, except the Economics and Welfare Ministries suffered more or less severe trimming. The Welfare Ministry will get 15 million lats to pay pensions and unemployment benefits.

The Transport Ministry is 13.4 percent or 17.6 million lats leaner, the Finance Ministry's expenditures will have to go down by 12.1 million, and the Education and Science Ministry will have to give up 2.54 million lats. The presidential office escaped cutting this year, but its budget for 2000 will be lower.

To get fit for the IMF, the country is going on a diet.