Targeted cuts still needed to reduce deficit

RIGA - Tough decisions will have to be taken by the next government of Latvia, to be voted into office after the Saeima elections in this fall, says the World Bank’s Lead Economist in the Europe and Central Asia Region, Truman Packard, reports news agency LETA. Packard stressed that the World Bank’s recommendations will be just that - recommendations.

After the final proposal is drawn up, a full dissemination of the World Bank team’s conclusions and recommendations will be provided, leaving these difficult decisions to be made by the next government. “Even at this preliminary stage in our analysis, the substantial cuts made in the education and health sector budgets in 2009 and for 2010 lead the World Bank team to caution against any further absolute reductions in either of these sectors, with some important exceptions, namely budget-financed universities,” said Packard.

In his opinion, the process of public administration reform through the consolidation and elimination of functions, and close scrutiny of subsidies to loss-making state-owned enterprises at the national and municipal level, is far less advanced, offering the government greater opportunities for the immediate fiscal savings it needs to meet the Maastricht criteria, necessary for the euro currency adoption, expected in 2014 or 2015.
“And because of the wind-fall received by pensioners from the unsustainable growth period prior to the crisis, savings can safely be made with reform to the programs financed from the social insurance special budget,” concludes Packard.
The World Bank’s financial support for Latvia is on exceptional emergency terms, and focused on implementation of the Emergency Social Safety Net Strategy. The technical assistance provided to the government, in seeking how best to meet its fiscal consolidation objectives, is separate.

“In order to safeguard critical spending, particularly for the most vulnerable households, the Bank team is only considering targeted fiscal measures. For example, among the ideas we are discussing with our counterparts in the government is to use the savings from reductions in social insurance and state social benefit payments to the wealthiest 40 percent of Latvian households, to increase financing for the benefits received by households with the most financial constraints, including the elderly,” explained Packard.
“We’ve also encouraged the government to maintain spending to alleviate the burden of health costs for needy and low income households, as well as to expand the work-places with stipend programs for those who are still without a job and don’t have access to unemployment insurance, and targeted subsidies to pay for public transportation for disabled people,” said Packard.

It is important that the government take a very broad look at the budget in order to find savings. The World Bank team has a comparative advantage to provide advice in the social sectors and public administration reform, but there are likely to be opportunities for savings in other parts of the budget.

“Latvia has plenty of technical capacity. It is lucky to have many local economists and experts in social policy, as well as access to expertise from the European Commission and other European organizations. Latvia has lots of options and choices other than the World Bank. The Bank is providing its technical assistance on an exceptional basis because of the crisis, and at the request of the government. The Bank team regularly consults with and reflects the ideas of Latvian experts in its recommendations to the government,” stressed Packard.

He hopes that a full and transparent discussion of all fiscal consolidation measures - those recommended by the World Bank and by others - will take place in the months leading to the elections. The Latvian people are well educated, have access to a lot of information, and are interested in policy options. This is a healthy process that will hopefully give policy makers the mandate they need to make difficult decisions after the elections, Packard said.
According to initial documents, the World Bank suggested for Latvia to consider even tougher budget cutting measures, which would affect personal income even more, and would also lead to additional cuts for pensions and social benefits, as well as to the health care and education systems.