Lenders allow for wider budget deficit

RIGA - A preliminary agreement on increasing Latvia’s budget deficit, to 8.5 percent of GDP, in order to pay the reduced pensions, which was ruled as illegal by the country’s Constitutional Court in December, has been reached with the International Monetary Fund (IMF) and the European Commission (EC). “The final decision has to be taken by the IMF board and the EC executives. However, approval by the technical mission mostly means [approval] from Brussels and Washington,” said Prime Minister Valdis Dombrovskis (New Era).

In July 2009, Latvian authorities agreed on reducing pensions by 70 percent for employed pensioners and by 10 percent for the others. About 9,000 pensioners rose up to voice their complaints. The Constitutional Court of Latvia, which considered a similar case in 2002, on Dec. 21 adjudged such cuts to be unconstitutional as well and that the reduced pensions must be returned to the pensioners.

According to the Finance Ministry, implementation of the Court’s ruling requires an additional 185 million lats (264.2 million euros) from the budget - 80 million lats in back payments and 105 million lats to pay full pensions from March 2010. This will increase the budget deficit, which is 7.5 percent now but is not allowed to exceed 8.5 percent of GDP according to the agreement with the international lenders.

The government, which has the necessary funds, will therefore increase the budget deficit rather than try to raise more taxes or cut more in spending.
Considering the desperate economic situation, the Constitutional Court had allowed for paying back the pensions till 2015, yet the Finance Ministry wants to make payments during this winter. “The Finance Ministry will do everything to pay the debt during the winter months, when the citizens’ expenditures are higher due to the heating season,” said Finance Minister Einars Repse (New Era).

However, experts are sure that the reason behind such generosity is nothing but the parliamentary elections which are going to take place in October. The failure of the ruling coalition to return elderly people their money would grant the opposition and the largest coalition party, the People’s Party, additional votes.
“The position of New Era is rather unsteady. It announced the pension reduction the next day after the local government elections and this maneuver helped them to get into Riga Council. Pensioners, who form a huge proportion of the electorate, remember this [trick] quite well,” said MP Jury Sokolovsky of the opposition For Human Rights in a United Latvia.

Increasing the budget deficit allows Latvian authorities to avoid new taxes and further cuts this year, which some say may bring more votes for New Era in the election. According to the Memorandum of Understanding with the European Community and the Letter of Intent with the IMF, the value added tax rate should be increased from 21 percent to 23 percent, and a progressive income tax should be implemented in case the budget income plan is not fulfilled.
However, the allowance to widen the budget deficit is just a delay for taxpayers. “The bottom line is that Latvia still has to get to less than a 3 percent budget deficit by 2012 [for euro adoption plans]. So, there are 185 million lats missing and the only two options to get them is either by cutting expenses or by increasing taxes. The difference is that it will be done after elections, but not before,” said assistant professor at Stockholm School of Economics in Riga Vjacheslav Dombrovsky.

“By allowing Latvia another [increase] in the budget deficit, the European Commission and the IMF simply avoid another round of agonizing about convulsive expenditure cuts and tax increases performed by the local government. Everybody has had quite enough with Latvia.”

There are great possibilities that the maligned Latvian budget may suffer more than expected this year and lead to further amendments. The Constitutional Court is to announce its ruling on the case of child care benefits. After the childcare payments were cut in July 2009, the regulation was made an issue by young mothers and opposition lawmakers.
“As the ruling on the ‘pensions case’ was positive, there is a good chance for the child care benefits cuts to be proclaimed illegal,” Aigars Stokenbergs, an independent lawmaker of Society for a Different Politics, said.