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De Facto: failure to form a government in Latvia forces use of mechanism not used in decades

Dana Reizniece-Ozola/flickr.com/Finance Ministery
Parties’ inability to reach an agreement on the new government has forced the use of a mechanism that has not been used in Latvia in more than a decade. The next year will start with a temporary budget, which means the state will not finance any new initiatives and the state will have to live in accordance with the previous year’s budget, as reported by De Facto programme of LTV.


De Facto explains that to avoid a situation in which wages could reduce for some of Latvia’s working residents in January new Saeima deputies rushed to amendment the law last week to give them a bit more freedom to spend the budget. But this is only a temporary solution, which could also have negative consequences for the next government, which will likely have to make some difficult decisions with the budget.
 

«Simple maths – had the government in Latvia been composed prior to mid-November, the country would have started 2019 with a new budget. Additionally, the new government would have made all decisions in relation to the main financial document. Because the matter of ‘to be or not to be’ remains topical in relation to the formation of Latvia’s Cabinet of Ministers, the next year will start for Latvia with a temporary budget,» De Facto reports.
 

Finance Ministry’s Budget Policy Development director Kārlis Ketners told De Facto: «Technical budget provides for implementation of a policy without changing it much. It also does not provide financing any new political initiatives and solutions.»
 

In other words – services that were not provided in the previous year will not be paid for; there will be no investments that were not performed in the previous year. Monthly expenditures are not allowed to exceed one-twelfth of last year’s expenditures. All expenditures, including loan limits, are approved by one minister – Finance Minister, whose post is currently held by Dana Reizniece-Ozola. According to her, the budget is «balanced with a slight negative side to it,» says LTV.
 

This situation is not unique for Latvia. However, it has not been seen in the country ever since joining the EU. There were two instances of Latvia starting a year with a temporary budget – both after Saeima elections.
 

«This time the situation is made unique by the fact that during the pre-election period deputies had supported increase of wages, pensions and benefits, which is something the temporary budget cannot provide. 1 January marks the coming into force of rulings of the Constitution Court, which affect wages of doctors and judges. Again – the technical budget is not able to secure this. This is why deputies of the new Saeima commenced correcting the law to allow the state to spend more than one-twelfth of current expenditures,» explains LTV programme.
 

Saeima Budget and Finance Committee’s deputy chairman Atis Zakatistovs (KPV LV): «This is a matter of people’s calm. In this case, calm is more important than considerations regarding any possible risks.»
 

As a result, deputies will have already decided on the majority of additional expenditures that will be put on the next year’s budget by the time a new government has been composed.
 

It is also noted that although teachers will receive increased wages, pensioners will have pensions indexed, judges and prosecutors get higher income, normal extended work hours for medical personnel will be cancelled as of 1 January 2019, these initiatives will require around EUR 53 million from the state budget.
 

It was revealed last week that the matter regarding retirement benefits for police officers, rescuers and border guards will require an additional amount of EUR 41 million. Together this forms commitments worth EUR 94 million, which is something the next government needs to keep in mind when compiling the 2019 budget.
 

The budget situation is made all the more difficult by the government’s promise to doctors on increasing their wages 20% starting from 1 January 2019. This will require more than EUR 87 million. But no funding is planned for this. The temporary budget does not cover increase of wages for doctors, De Facto notes.
 

«In such a situation, it would not be wise to approve plans that include new expenditures. The more decisions are made in this direction, the harder it will be for the next government,» says Finance Minister Dana Reizniece-Ozola.
 

Taking on multi-million commitments would tie the hands of the new government, because currently it is unclear how much money will be available for different priorities and previously-made promises. According to information from Finance Ministry, budget fiscal space is currently negative, which means to finance new initiatives it will be necessary to find money – by either raising taxes or cancelling certain initiatives, LTV explains.
 

Fiscal Discipline Council chairman Jānis Platais: «It is shocking to see the list of ignored needs so very, very long. This includes the needs that appeared all of a sudden. It turns out they have to be financed, especially if they were taken on a long time ago but no funding was available until now. Consequences may include putting the new government before a very difficult choice.»
 

Fiscal Discipline Council warns the next year’s budget is at risk of being unbalanced. The government will likely have to make unpopular decisions.
 

Saeima Budget and Finance Committee’s chairman Mārtiņš Bondars says: «The next government may end up in a tough spot. Its only hope is that the finance minister and the government prove responsible enough to not fail hard.»

BNN

03-12-2018
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