VZCZCXRO5451
PP RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSR RUEHVK RUEHYG
DE RUEHRA #0326 1611439
ZNR UUUUU ZZH
P 101439Z JUN 09
FM AMEMBASSY RIGA
TO RUEHC/SECSTATE WASHDC PRIORITY 5891
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS RIGA 000326 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD PGOV LG
SUBJECT: GOL REACHES CONCEPTUAL AGREEMENT ON BUDGET CUTS 
 
Ref: Riga 318 
 
¶1. Summary.  Government coalition parties and key social partners 
have agreed in principle to cut the central government budget for 
2009 by 500 million Lats ($1 billion USD). The decision is limited 
to setting a target level for budget cuts, and specific budget 
cutting measures will be decided upon in the coming days, with the 
plan still to finalize the budget in parliament June 17.  Latvia's 
donors (primarily the IMF, European Commission and Sweden) now await 
specifics to determine if the government's proposed cuts are real 
and substantive, with further disbursements of IMF and EC money 
hanging in the balance.  Achieving these cuts will be difficult and 
the time short.  As former President Vike-Freiberga said "the 
government proposes to do in ten days what it should have been doing 
over the last three months."  End summary. 
 
¶2. Following local government and EU parliament elections, President 
Zatlers convened key players to hammer out an agreement on the 
budget to ensure continued international financial support. 
Governing coalition parties together with key social partners (labor 
unions, the Latvian Chamber of Commerce, the employers' 
confederation, and representatives of local governments) agreed in 
principle to cut the government budget by 500 million lats (roughly 
$1 billion USD).  The agreement is not binding, and cannot be 
interpreted as a clear signal of unity among the involved parties. 
Realizing the inevitability of the cuts, social partners chose to go 
along to avoid being left out of the negotiations.  The government 
has decided that with ever growing contractions predicted, hitting a 
specific deficit percentage target as envisioned in the original IMF 
plan was too hard and decided instead to do fixed cuts.  The 
specifics of the cuts remain to be agreed in cabinet sessions and in 
meetings of a newly-formed "Crisis Working Group," headed by the 
Prime Minister, and including representatives from the social 
partner organizations.  In advance of detailed talks, though, the 
government announced its intention to introduce a progressive income 
tax system, reduce the amount of earnings that are not taxable, 
increase VAT from 2010, decrease the minimum wage, and cut central 
government employee remuneration by at least LVL 120 million ($240 
million). 
 
¶3. The social partners tell us that they will strongly oppose 
cutting social spending, including retirement pensions, funds for EU 
project co-financing, and directly or indirectly shifting the burden 
of budget cuts to local governments.  A view shared by all of the 
organizations is that the majority of the cuts can be made in the 
administrative budgets of ministries, with the local government 
association stating that as much as two-thirds of the total target 
amount can be made through administrative spending reductions.  From 
inside government, we hear reports that ministries are planning for 
further across-the-board cuts rather than targeted, strategic plans 
for reductions.  The chamber of commerce has already announced 
strong opposition to raising the VAT and disagrees with the Finance 
Ministry's revenue projections, stating that future revenues cannot 
be accurately forecast in such a complex situation. 
 
¶4. Comment:  The decision to make such profound fiscal cuts was 
generally welcomed by international donors and the financial press, 
but all key players have stated that they await concrete proposals 
on how the government will reach the 500 million lat target.  After 
all, the government has announced several plans for major cuts since 
January, but little action has occurred to date.  As one newspaper 
said, "It was as if Finance Minister Repse woke up after local 
government elections in an entirely new government, which he 
suddenly discovered had done nothing in the previous two and half 
months."  If the government can demonstrate budget reductions that 
are substantive and represent a strategic restructuring of 
government functions, it is likely that investor confidence will be 
restored and international donors can proceed with agreed 
disbursements of Latvia's financial assistance package. 
 
¶5. Comment continued.  However, Latvians may read EU Commissioner 
Almunia's comments to the press on June 9 as affirmation that it is 
only the amount of cuts, not the sustainability of reductions or the 
quality of structural reforms that matter.  If the government does 
not satisfy investors and donors, the State Treasury can only 
maintain government spending into July.  As one editorial noted, 
failure to satisfy donors and investors now could lead to a 
worst-case economic scenario, and such a meltdown would likely lead 
to special parliamentary elections, which none of the coalition 
parties want to see after their dismal showing in the June 6 local 
and EU elections.  One the other hand, an honest and thoughtful 
attempt by the coalition to make the tough decisions needed in the 
next week could be the positive signal that gets the government 
through the rest of this year, and into 2010 when economic activity 
may improve. 
 
 
Rogers