| Latvian analysts call for structural reforms more useful to budget than slashing of social benefits |
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| Thursday,April 23,2009 Posted: 14:16 BJT(0616 GMT) |
| From:Baltic News Service Article type:Original |
RIGA, Apr 22, BNS - Major structural reforms are required in the Latvian public administration which would be a time-consuming and complicated process but in the end would prove more useful to the national budget than slashing of social expenditures, said experts.
Dainis Stikuts, senior economist with Latvia"s Swedbank, told BNS that the government"s intention to cut budget expenditures by 40 percent was commendable but this statement was not quite true and created additional stress for the public.
"Should the government indeed cut expenditures by 40 percent, we would have a large budget surplus. In fact this reduction applies only to certain cost items identified as subject to reduction. But this list is probably incomplete because curbing of public administration costs in Latvia is not being done swiftly enough," said Stikuts.
He pointed out that public administration costs in Latvia were still higher than in Estonia, for example, but it should have been vice versa. Also, structural reforms is one of the key requirements for receiving the next portion of financial assistance from the International Monetary Fund (IMF). If the government demonstrated obvious progress towards balanced budget in the coming years, a larger budget deficit this year should not be a problem, said Swedbank expert.
Dainis Gaspuitis, macroeconomic expert with SEB Banka, told BNS that the economic decline was very steep and the public sentiment reflected it with unpleasant accuracy. The measures to be taken are tough but this is only the beginning, he said.
"Tension will keep growing, in particular amid lack of consensus in the government and resistance by certain politicians to the planned measures," said Gaspuitis.
The situation is further aggravated by the coming elections and promises by politicians as they help to sustain illusion that Latvian could do without reforms or with fewer reforms. Meanwhile the contradictory statements make it difficult for the people to understand the real situation in the country, pointed out the SEB Banka expert.
He said that Latvia also felt the effects of short-term thinking in the previous periods as now it could use larger reserves under the social budget that were never accumulated.
He said that public administration reforms would yield substantial economic effect but the process was time-consuming and complicated, and the public institutions were likely to oppose and delay the reforms. Slashing social benefits is easier way with quicker effects therefore it would be up to the government and politicians which option they would chose, said Gaspuitis.
"So far the progress with the reforms does not demonstrate commitment to tackle the problems on the full scale, to explain them to the people. The failure to carry out reforms in the required scope would result in a situation where salaries and other payments would be delayed and then the reforms would have to be performed forcibly," he said.
Latvia must coordinate its budget amendments with the IMF and the European Commission in order to secure the next portion of the 7.5 billion euro loan that was granted to Latvia at the end of last year. The government had pledged to draw up a budget with a deficit that would not exceed 5 percent of GDP. Besides, to get the next installment this summer the amended budget has to be passed already in June. The government is currently working on budget cuts to reduce expenditures by up to 40 percent, but it is still not enough to bring the deficit down to 5 percent.
Latvian Finance Minister Einars Repse after the government meeting on April 21 said that with expenditures under this year's national budget cut by 40 percent, the budget deficit would be 7.7 percent of GDP therefore the government will have to raise additional 81.5 million lats (EUR 115.96 mln) which means that further slashing of costs in certain areas will be required. The government might have to reduce also the expenditures that it previously vowed to keep untouched such as the costs for servicing national debt, contributions to the EU and NATO budgets, co-financing for implementation of the EU-funded projects and social allowances.
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