Latvia's government tests limits of foreign lenders

  • 2009-09-23
  • By TBT stuff

APPROACHING DEADLINE: Latvian Prime Minister Valdis Dombrovskis attempts to put a squabbling Parliament together to agree to next year's budget

RIGA - Latvia's Cabinet of Ministers at a special meeting on Sept. 19 agreed to cut 275 million lats (392.8 million euros) in next year's budget, though Finance Minister Einars Repse (New Era) said this is still not enough, that expenditures must be cut by 410 million lats, and revenues from tax policy changes need to be increased by 90 million lats, reports Bloomberg.
Saeima so far has failed to come together on budget preparations. After the meeting Prime Minister Valdis Dombrovskis (New Era) declared: "There are different opinions among members of the cabinet about the reduction of expenses for next year's budget." He said that social protection, public health services and issues of public order and safety remain priorities for the budget, and expects that cuts in these areas will be minimal.

Latvia's Parliament rejected on Sept. 17 a Cabinet of Ministers' proposal for a new real estate tax of 0.2 percent of cadastral value on apartments and private residences, part of the plan to boost budget revenues, reports news agency LETA. The vote represents a rejection of part of the agreement Latvia has with the IMF and the EU, to cut the 2010 budget deficit by 500 million lats through a combination of spending cuts and revenue increases. The government agreed to the conditions as part of its 7.5 billion euro bail-out package.

All opposition parties opposed the tax, expected to bring in 13 million lats.
Not raising the tax will be "one notch in the list of problems, but the main problem will be the inability to reduce the deficit by 500 million lats," said Repse.
People's Party Parliament group leader Vineta Muizniece said that her party "is opposed to any additional tax burden." A member of the largest opposition party, Harmony Center's Andrejs Klementjevs, commented that "a decision on such a tax should have been made during the real estate market's good times, not now."

Several MPs from For Fatherland and Freedom/LNNK are concerned about the tax's impact on the underprivileged segment of society.
Many in Latvia feel otherwise, that opposition to the tax increase represents unwillingness among the privileged segment of society, those who have accumulated large real estate holdings, to pay their fair share in taxes.

People's Party leader and one of Latvia's so-called business leaders Andris Skele, earlier said: "I reject any possibility of the People's Party voting for any tax increase… It will damage our economy and give nothing to the budget."

European Commissioner for Economic and Monetary Affairs Joaquin Almunia says he expects Latvian politicians to make responsible decisions and plans to visit Latvia this week. If necessary, he will meet with politicians and President Valdis Zatlers again to explain the loan program to which the Latvian government agreed, and to discuss the importance of passing next year's budget.
Almunia, reflecting on the integrity of Latvia's government, expressed his concern emphasizing that "Those political parties who signed the document, but now pretend that this agreement is not binding anymore, can be seen as irresponsible."

Co-chairman of Latvia's First Party/Latvia's Way and current member of the European Parliament Ivars Godmanis warns that international lenders may decide to refuse to allocate the next tranche of the bail-out loan to Latvia with the government's behavior. He says the European Commission has reason to distrust Latvia. The fact that parliament "voted down introduction of a property tax on real estate, which it had promised, is a bad signal."

Latvian businesses are already struggling with a rapidly deteriorating reputation among foreign investors and customers. President of the Bank of Latvia Ilmars Rimsevics says that "The government is not meeting its obligations regarding state budget cuts and taxation. This could damage the economy. It is a pity that the government has not learned its lesson and now is about to repeat the same mistake as [it did] earlier this spring."

The government plans to submit its budget to parliament on  Oct. 23.