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DE RUEHRA #0542/01 3101615
ZNR UUUUU ZZH (CCY ADD3D38C MSI8982 641)
O 061615Z NOV 09
FM AMEMBASSY RIGA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6127
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INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY

UNCLAS RIGA 000542 
 
SENSITIVE 
C O R R E C T E D COPY SIGNATURE 
SIPDIS 
 
E.O. 12958:N/A 
TAGS: EFIN ECON PGOV PREL LG
SUBJECT: LATVIA'S 2010 BUDGET PASSES FIRST HURDLE 
 
REF: A. RIGA 516, B. RIGA 484, C. STOCKHOLM 632, D. RIGA 413 
 
 
SENSITIVE BUT UNCLASSIFIED 
 
 
 
¶1. (SBU) Summary: The Latvian parliament (Saeima) voted in favor 
(64-32-1) of the government's 2010 budget at the first reading of 
the bill on November 5.  Consultations between the government and 
the IMF and EC are still ongoing and there remain disagreements in 
the coalition about tax reform and expense cuts. The draft law is 
likely to elicit a record number of proposed amendments and undergo 
significant changes going into the second and final readings 
scheduled for December 1. Passing the budget in the first reading 
sends a positive signal, but significant challenges remain. End 
Summary. 
 
THE BASICS 
---------- 
 
¶2. (SBU) The Saeima adopted the government's 2010 budget on November 
5th in the first reading.  The draft law received 64 votes in favor, 
32 against and one abstention. Votes were cast strictly following 
coalition - opposition lines, except for one opposition MP who 
abstained. The budget package was given urgent status under 
parliamentary rules. Consequently, amendments can only be submitted 
only until November 9th. The second reading date was set for 
December 1st. 
 
¶3. (SBU) The draft budget estimates revenues at LVL 3.8 billion (USD 
8.1 billion) and expenses at LVL 4.3 billion (USD 9.1 billion) which 
would result in a 6.1% cash flow deficit. These projections are 
still under scrutiny by the IMF.  The proposed budget assumes 3.7 
percent deflation, 13.8 percent unemployment and estimates 2010 GDP 
at LVL 11.9 billion (USD 25.3 billion), which represents a 4 percent 
contraction of GDP.  These figures are consistent with the IMF's 
economic outlook. 
 
PARLAMENTATY DEBATES REVEAL TENSION 
----------------------------------- 
 
¶4. (SBU) In his address to the Saeima, Prime Minister Domborvskis 
acknowledged that there is widespread discontent with the budget and 
termed it a 'crisis budget' that reflects the limited resources 
available to the state. Dombrovskis said he is confident that there 
is no better alternative to stabilizing the Latvian economy and 
reiterated his commitment to work with international lenders. 
Domborvskis explained that international assistance is allowing 
Latvia to undergo gradual fiscal consolidation as opposed to the 
more drastic measures that would be necessary without it, and 
highlighted that turning to the IMF was Latvia's choice. 
Dombrovskis also addressed devaluation and said that Latvia is 
committed to keeping the lat stable. He said there is both the 
political will and sufficient resources at the Bank of Latvia to 
keep this commitment. 
 
¶5. (SBU) The lengthy debates that followed the Prime Minister's 
address revealed the extent of disagreement that still exists within 
the governing coalition regarding specific budget details. Although 
the budget was voted on as presented, individual Saeima members used 
the session to outline the amendments they will be proposing as the 
process moves forward.  For example, Vineta Muizniece, the Faction 
Head of the People's Party (which currently controls 19 seats), said 
her party objects to a tax on personal use of company automobiles, 
and the proposed distribution of Personal Income Tax (PIT) revenues 
among the central and local governments. 
 
¶6. (SBU) The most contentious issue for debate moving forward will 
likely be the Personal Income Tax reform.  Muizniece expressed 
strong disproval to the proposed reduction in the tax-exempt 
deductible amount.  According to her, People's Party will propose 
instead to replace this regressive measure with a raising the flat 
PIT rate from the current 23 percent back to its previous rate 25 
percent. Soon after, the Civic Union party (which holds six seats) 
announced they will propose a progressive income tax that would 
start at 18 percent and reach a 34 percent for the highest income 
earners. 
 
¶7. (SBU) Harmony Center, the largest opposition party (with 18 
seats), declared they will submit their own version of the budget. 
Harmony Center proposed a progressive income tax, keeping corporate 
income tax at 15 percent, lowering the VAT to 18 percent from 21 
percent, no increase in excise taxes, increasing the efficiency of 
tax collection, and lowering the social security tax.  On the 
expenditure side, Harmony Center proposed cutting all military 
operations abroad, reducing expenses related to top defense 
officials, cutting public sector salaries by 20 percent compared to 
pre-crisis levels, and consolidating the number of ministries to 7. 
It is unclear whether Harmony Center will submit their ideas as a 
complete alternative budget proposal to the Saeima or as a series of 
amendments. 
 
CONSULTATIONS WITH INTERNATIONAL LENDERS CONTINUE 
--------------------------------------------- --- 
 
¶8. (SBU) Despite the passage of the budget in the first reading, 
there still remain significant differences between the IMF/EU and 
the government over the effectiveness of the proposed budget.  The 
differences concern roughly LVL 150-200 million (USD 320-440 
million) or nearly 40 percent of the total budget. While exact 
details remain unavailable, among the concerns are the regressive 
nature of several proposed tax measures and the across the board 
nature of expenditure cuts.  In general, the IMF is reviewing the 
budget measures to determine which ones represent carry-over from 
2009 budget adjustment versus new measures. In addition, they are 
looking at what the 2011 impact of the measures will be to determine 
how sustainable and structural the adjustments are. The government 
and the international lenders agreed to work out the differences 
during the budget amendment process, rather to push for a further 
delay in its submission to Saeima. The IMF's Second Review team is 
anticipated to arrive in Riga before the end of November. 
 
CRITICAL DAYS AHEAD 
------------------- 
 
¶9. (SBU) Comment: Adopting a credible budget that is supported by 
its international partners is crucially important for Latvia. 
Passing the budget in the first reading was an important step that 
sends a positive signal.  However, the next few days and weeks will 
be critical in determining whether the government and lenders can 
agree on a final budget and whether there will be sufficient 
political support for the agreement to pass in the second and final 
reading. 
GARBER