Wednesday, June 17, 2009

Budget cuts pass, more to come and is disaster accellerated?

The Latvian parliament, the Saeima, approved budget cuts of LVL 500 million (around USD 1 billion) on June 16, practically sparing no one in the general population of painful reductions of living standards. Hardest hit are pensioners and teachers. Working pensioners will see the pensions they earned in their working lives up to retirement age reduced by 70 %. Teachers' salaries will be slashed by almost half and they will be paid (per teaching load, most have more than one) barely over the reduced minimum wage for public sector employees. Other pensions will be slashed by 10 %, government employee salaries by yet another 20 %.
But that is only the beginning. Next year's government budget will also have to be cut by an estimated LVL 500 million, followed by another similar cut in 2011. In other words, one scenario is where there are further salary cuts and reduction of minimum wage, or there are massive lay-offs of public sector employees, something that has been partly avoided by across-the-board wage cuts.
It is reasonable to say that these estimated budget cuts are based on optimistic assumptions about tax revenues, not taking into account (although Minister of Finance Einars Repše seemed to say in a radio discussion show that tax base deterioration was taken into account) the impact of mass unemployment, reduced purchasing power (less VAT revenue), drastic falls in corporate tax revenues and rapid growth of the grey and black economies. People, seeing that the taxes they have paid up to now are either wasted or result in no entitlements (pensions, health care, education), will simply evade paying taxes as a waste of their rapidly declining income. Others (tens of thousands, if economies outside Latvia recover first) will become economic migrants, most never to return, thereby leaving the Latvian tax base.
I can see how the 2009 cuts were, somehow, pulled off, although I suspect, by September 1, I will have to start thinking about home-schooling my son, since the public education system in Latvia is being de-facto abolished. What I don't see is how the other cuts can be made on top of what has already been done. A public sector can be drastically slashed or abolished if the population, at the same time, is given a sufficient increase in purchasing power to afford private, competitive alternatives and such alternatives (modest cost private/cooperative/non-profit education) can be started and up and running as state-financed institutions wind down.
What is likely is that when the "real" figures on which the 2010 budget cuts must be based come out, the deficit (due to tax base deterioration and lower revenues) will have increased by several hundred millions and the downward spiral toward disaster and economic stagnation will continue and accellerate.
The Prime Minister Valdis Dombrovskis, on a morning TV show as I write, says that the EUR 1.2 billion in international loans will be entirely spent on keeping the government running, not a cent for economic stimulus. This will be left to the EU structural funds, caught in a bureaucratic log jam or used (hitherto) for such interesting projects as a laser show in Latgale, the rural eastern part of Latvia.


Talis said...

Budget cuts are only part of the solution. Government, especially municipal (where I am) needs to increase productivity levels. IMF stated this waaaaaay back and it has never been repeated. During the election campaign I lobbied my candidate friends that this should be a high priority in the new term. I gave many examples of how wages can be not cut, but just give these people some more work to do. Instead of playing solitaire and zole for most of the day. Well, we know what happened in the elections and I am waiting to see what will be the ripple effect in my building (soon). I am still adamant in my views no matter who shows up to run our team. I can either make the new director welcome or make him regret ever getting involved. Only time will tell....

Sergejs said...

Sad, but true.
Of course the first thing to start is to cut administrative apparatus (beloved politicians), but it's clear they are not going to offend themselves. One way or another they perform things similar to devaluation, the only difference as they say: "We can better control these processes".