LATVIA'S 2007 BUDGET

UNCLAS RIGA 001040

SIPDIS

SIPDIS

E.O. 12958: N/A
TAGS: ECON PGOV EFIN ETRD LG
SUBJECT: LATVIA'S 2007 BUDGET



1. Summary: In a relatively swift approval process, Latvia's
parliament adopted its 2007 budget on December 19. The budget,
featuring a 26 percent increase in expenditures (mostly growing
public sector salaries and increased government investment),a
projected 23 percent increase in revenues, and a budget deficit of
1.4 percent of GDP, is one of the most optimistic documents in
recent years. However, in a stable international and domestic
economic environment, it has a reasonably good chance at succeeding.
In a political move, the budget lifts a unique exemption on income
taxes for stipends paid to people carrying out work paid for by the
Soros foundation. End summary.


2. On December 19, the Saeima gave final approval to the law on the
state budget for 2007 and a package of changes in 26 related laws.
National priorities for next year are healthcare, law enforcement,
education, social welfare, absorption of the EU funds, and defense.
The approval process this year was non-contentious and quick. The
law is expected to take effect on January 1, provided the President
signs it, which is fully expected.


3. The budget sets Latvia's budget expenses at LVL 4.4 billion (USD
8.2 billion),a 26 percent increase compared to 2006, and the
projected revenue at LVL 4.2 billion (USD 7.8 billion),a 23 percent
increase compared to 2006. Compared to state revenues and expenses
just five years ago, Latvia's budget figures have more than doubled.
The budget is based on a relatively optimistic 9 percent GDP growth
projection and a realistic 5.9 percent inflation forecast.


4. Despite surplus budget revenues collected throughout 2006, the
2007 budget will run a deficit of 1.4 percent of GDP, largely
because of the government's focus on salary increases and investment
projects, as promised in the parliamentary election campaign. The
GOL will increase the minimum monthly wage from LVL 90
(approximately USD 170) this year to LVL 120 (USD 225) in 2007. In
addition, the GOL will raise salaries for law enforcement officers
and several other groups in the public sector.


5. In addition to the dramatic increase in both revenue and expense
projections and the increase in the minimum wage, several other
noteworthy changes from this year's budget are increases in excise
tax rates on fuel and cigarettes and an introduction of an
electricity tax for industrial users. Additionally, the budget
lifts an exemption from personal income taxes that has applied
uniquely to stipends paid to grantees of the Soros Foundation that
has existed since 2000. (Comment: Media affiliated with the greens
and farmers party (ZZS) have been incredibly critical of Soros'
operations in Latvia - mainly because Soros focuses heavily on
allegations of corruption related to ZZS don and mayor of Ventspils
Aivars Lembergs. We are told by NGO sources that ZZS pushed for
this change in policy. That said, there also were objections that
Soros received unique treatment and this now equalizes the treatment
of all NGO's. End comment.)


6. Comment: The 2007 budget, which one Latvian journalist
sarcastically called "the budget of hope," is perhaps the most
optimistic in Latvia's 15 years of restored independence. The 23
percent revenue increase has a reasonably good chance at success if
international and domestic economic environments remain stable.
However, if the current unprecedented growth -- fueled largely by
domestic consumption and supported by large doses of wishful
thinking -- suddenly turned sour, the budget deficit could
skyrocket.

Antweiler