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2001 budget passes first reading: New businesses need more support, say Social Democrats

  • 2000-10-26
  • Nick Coleman
RIGA - The draft budget for 2001 was approved at its first reading in the Latvian Parliament on Oct. 19. Defense, security and NATO integration projects are set to receive the biggest funding increases, provided the budget is also passed at its second reading Nov. 30.

The head of the Budget and Finance Committee rejected criticisms that health care and education are being sacrificed in a rush to meet NATO accession requirements. At 1.9 percent of gross domestic product the planned budget deficit should not cause serious concerns, said Morten Hansen, economist at the Baltic states' Eurofaculty and the Stockholm School of Economics.

The same parliamentary session also gave initial approval to amendments to this year's budget that would authorize a greater than expected deficit of 3.1 percent of GDP. The amendments will receive their second reading in Parliament on Nov. 2.

GDP is expected to grow by 4.4 percent in 2001, while the inflation rate will be 3.5 percent, the government believes. Central government spending is set to increase by 3.7 percent to about 1.5 billion lats ($2.4 billion.) The increases will be funded largely by an expected 6.5 percent increase in revenue from value added tax. No new taxes or tax increases are planned. The Defense Ministry will receive an extra 5.66 million lats, the Internal Affairs Ministry an extra 5.29 million lats, the Transport Ministry an extra 4 million lats, the Environmental Protection and Regional Development Ministry an extra 4.96 million lats and the Agriculture Ministry an extra 2.48 million lats.

The government is sticking to its long-established spending priorities - accession to the European Union and NATO membership, said Aija Poca, head of the Budget and Finance Committee. But this policy does not satisfy Janis Jurkans, leader of the For Human Rights in a United Latvia parliamentary coalition.

"The budget neglects two fundamentals: education and health care," said Jurkans. "We allot too much money to defense. Real security is determined by how healthy and smart a nation is. It is not only about military spending."

Rejecting these arguments Poca pointed to the extra 10.7 million lats being made available for teachers' salaries (an average teacher's salary is now 121 lats per month before taxes, according to the Ministry of Education.)

But neither health nor education will receive dramatic funding increases until they have been reformed, said Poca. So far the reform process has been neither fast nor effective, she said.

"There will be a small increase in health care funding in 2001, but we have to work more on reforms," she said.

"The problems in the health system and at the Ministry of Education are the same. It's difficult to push through reforms in these huge systems. There is internal resistance. We have to know how money should be spent before we think about increasing the budget."

Would-be entrepreneurs may be disappointed by cuts in funding for a central government program to help small and medium-sized businesses in depressed areas by paying interest on their loans. Funding for the scheme will be cut by one fifth, to 800,000 lats, even though it is working well in depressed areas such as Latgale, says Poca. MPs, she acknowledges, are likely to be "interested" in this subject at the second budget debate next month.

But municipalities are to be given increased powers to guarantee loans taken by such businesses. As a result of recent improvements in tax collection procedures, municipalities will benefit from a projected 8.7 percent increase in revenue from residential income tax, said Poca.

But the power to guarantee loans can be unfairly exploited when local councils are corrupt, warned Hansen.

"Guaranteeing loans can overcome inefficiencies in the financial markets but it can easily get dodgy. Perhaps it's okay for start-up businesses," he said.

"In Latvia there isn't a lending culture like in the United States. Banks generally don't have faith in business people's ideas. They need collateral and its difficult for them to enforce loan repayments.

But it's arguable whether society actually benefits from loan guarantees, which the European Union gives for example, and municipalities don't operate according to profit optimization principles."

But Arnis Kalnins, MP from the Social Democratic Workers Party, rejects such skepticism, despite a recent World Bank report which, in highlighting corruption in Latvia, seems to lend weight to Hansen's criticisms.

There should be more government money to help small businesses pay the interest on their loans, not less, says Kalnins.

"There should be 1.4 million lats available for this purpose," he said. "Then new companies would be established and employment would increase."

A fund to help people buy their homes should also be established, said Kalnins.

Empowering municipalities to guarantee loans is essential, says Jurkans.

"If we want to develop we have to trust people and have control mechanisms," said Jurkans.

"Thinking we're corrupt means sitting on our hands and doing nothing."

The government is committed to reducing corruption by improving control mechanisms, says Poca.

"In formulating this budget we began by listening to the auditor general and trying to identify problem areas," she said.

"We want to be better informed about misspending in ministries and municipalities."