LATVIA'S 2008 BUDGET

UNCLAS RIGA 000860

SIPDIS

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN ETRD LG

SUBJECT: LATVIA'S 2008 BUDGET

REFTEL: RIGA 852


1. Summary: On November 8th, the Saeima (Parliament) passed the
government's 2008 budget, with 54 parliament members voting in favor
and 39 against. In line with the main budgetary priority, which was
economic stabilization in the face of accelerating inflation, the
budget plans to run a 1% of GDP surplus (Latvian Lats (LVL) 163
million, $341 million USD). Revenue next year is projected to be
LVL 5.498 billion ($11.5 billion USD),while expenditures are planed
to total LVL 5.335 ($11.2 billion USD). Demonstrations took place
outside the parliament building on the day of the last reading, with
health care workers, teachers and pensioners rallying against the
proposed budget and calling for salary and social security payment
increases. The media, several politicians and other sources have
called the new budget a compromise plan, as it attempts to establish
a balance between fiscal restraint and additional funding for worker
compensation. End summary.


2. The new budget provides less additional funding for worker
compensation than what was officially sought by various labor
groups. The Health and Social Care Workers Labor Union was
especially dissatisfied, denouncing the budget and declaring that it
is planning to take legal action against the government for failing
to act in accordance with a previous agreement.


3. The ruling coalition in the parliament rejected all opposition
proposals on the budget, including a proposal to decrease funding
for Latvia's military forces. In all, nearly LVL 305 million ($638
million USD) was allocated to the National Defense, Security and
NATO Integration program. Ninety-one percent (or approximately LVL
278 million, $582 million USD) of those funds were assigned to the
Ministry of Defense.


4. The budget also establishes a new fiscal tool, by creating a
long-term economic stabilization reserve. The budget law stipulates
that all revenue exceeding base-budget spending, and revenue
generated from privatizations, shall be transferred to the fund.



5. Comment: Growing inflation remains the central macroeconomic
issue in Latvia. Several economists have suggested that, with the
inflation rate in double digits, the government should have planned
for an even larger surplus and established incentives aimed at
raising the competitiveness of Latvian businesses. In their minds,
increasing competitiveness should be the topmost priority and would
be the best way to reduce the future risk of a severe economic
downturn due to high inflation. The budget's mix of moderate salary
increases and enough spending constraints to create an overall
surplus represents a compromise budget between various factions and
interests. However, with inflation running at 13.2% (reftel),it
remains to be seen if a 1% of GDP surplus will be enough to curtail
inflationary pressures.