Dear Mr. Speaker of the Saeima,
Dear Members of the Parliament,
This is a significant accounting period for the Government and the Saeima – for more than half a year Latvia has been experiencing an economic and financial crisis and three month have passed since the present Government was formed in order to ensure country’s solvency. Today the 2009 budget amendments envisaging unprecedented austerity measures are submitted to the Saeima for consideration. The next phase is approval of these budget amendments which would be the first major step towards recovery of the economy showing commitment and responsibility of every MP and every political party elected to the Saeima.
Honourable participants of the Saeima sitting,
I would like to remind the circumstances in which my Government was formed – in December last year the State Treasury faced first serious problems of liquidity. In order to stabilise the situation and to receive an international loan, the Parliament adopted a number of urgent decisions during one evening. However, preparation of the next budget amendments was a failure and the previous Government was toppled due to reasons as if not related to these budget amendments. Now the amendments are prepared and submitted for your consideration.
The main tasks of the new Government were quite clear:
Budget expenditure cuts and ensuring the international loan.
Recovering of the economy and administration of the EU funds.
Ensuring social balance and addressing the problems of unemployment.
Open dialogue with social partners and the public on the decisions adopted.
Unlike other occasions, Government’s Declaration was supplemented by an agreement on the urgent tasks of the Government in order to ensure country’s solvency which was signed by 67 MPs.
Your support was, is and will be of decisive importance in order to ensure Government’s capacity to fulfil its tasks related to overcoming the crisis. The budget amendments need your assessment. They will require an in-depth analysis and awareness of your responsibility. The crisis requires balancing of social protection and recovering of the national economy.
The economic situation has worsened rapidly during the last half of 2009. In December the forecasted downturn of the economy was about 5%, in March – 12% but now the forecast is even 18%. This implies respective underperformance on the budget revenue side denying any possibility to ensure the planned budget deficit. Budget revenue forecast is now by 583 million LVL less than it was planned earlier this year. The draft envisages a reduction of salaries by about 20% but other expenditures will be cut by 40%. Some exceptions are made for education, health care, justice and domestic affairs. The Government has started substantial reforms in public administration, education and health care by ensuring maximum protection for the most sensitive social groups with low income. I would like to emphasise – we should not overcome the crisis on the account of the low-income households. This is key principle which I will observe when working on the state budget, when negotiating with the international lenders, and I expect the same from the coalition partners.
Consideration of the first wording of these budget amendments is just one of the exams to be passed by the Saeima. The most critical one will be the second wording of this draft law when the Saeima will have to consider suggestions on further expenditure cuts aimed at reducing the budget deficit to the level acceptable for our international lenders.
Honourable participants of the Saeima sitting,
After Government’s approval by the Saeima, it promptly started negotiations with the international lenders in order to explain the crisis situation and the available options to overcome it. At the same time we engaged in active negotiations with our social partners in Latvia in order to find a common solution concerning the proposed austerity measures. Demand for explanations of the economic crisis in Latvia was as high as for a vision on further development of the country.
The Government has been focused on the budget amendments and commencement of the structural reforms. Our work is based on three primary lines of activity:
First, overcoming the financial crisis;
Second, addressing social issues;
Third, resumption of economic activity and committed implementation of the structural reforms.
Currently we are launching a number of the best measures suggested by the previous Government – for instance, provision of additional funds in the economy of Latvia in order to support the Latvian business sector by using guarantees of the Latvian Guarantee Agency and the State Treasury. The Ministry of Economics is collecting feedback from businesses on availability and efficiency of the assistance programmes and is seeking a solution with regard to the ‘frozen’ credit market. Some support will be provided by the export credit guarantee system launched on 1 June 2009 when exporting outside the EU, as well as the credit facility programme implemented by the Latvian Mortgage Bank (Latvijas Hipotēku banka).
EU funds play a significant role in the economy recovery process, and administration of these funds should accelerated. Examples of our accomplishments are increased funding for energy efficiency measures and for the heat insulation programme for housing in Latvia, as well as additional funding to address the unemployment problems. Though the expenditures are reduced, the present budget amendments envisage additional co-financing of EU funds in the amount of 66 million LVL.
Another agenda item is a reduced VAT rate for books, periodicals, heating fuel and tourism. This will be an important issue in our negotiations with the international lenders.
The budget amendments cover a significant reduction of expenditures and austerity measures in public administration, as well as reforms in education and health care. I have asked both line ministers to provide the Saeima detailed information on these matters.
Unfortunately some tasks lack a sufficient result. The first to be mentioned is ensuring adequate expenditure cuts together with sound function audits in order to increase efficiency of public administration. I must admit, I was not insistent and demanding enough to my colleagues.
Let’s be honest – not all politicians and civil servants have changed their attitude towards their spending and austerity measures. From now on, I will be more intolerant to those who are reluctant to seek efficient solutions for public administration in rendering its services to the public. Some business-related suggestions presented by public authorities show apparent unawareness of the situation, lack of competence or protests of bureaucrats.
The State Revenue Service and the Register of Enterprises should not just reduce their administrative expenditures but also remove administrative barriers and ensure efficient support aimed at enhancing tax collection performance and recovering the economy.
We should more cooperate with ur social partners and NGOs which now face even bigger problems. The current economic situation requires reviewing agreements reached in previous discussions with the Government.
The state budget amendments are submitted for your consideration but the Government will continue its work on the amendments – the present situation requires closer cooperation of the Government and the Parliament.
We are working a number of measures for stimulating the economy in cooperation with Latvian and foreign experts, including encouraging of economic activities of individuals and the micro-business initiative which will fundamentally change the rules for small family undertakings.
The Government is working on limiting the so-called shadow economy, for instance, by ensuring more active work of the State labour Inspection in relation to illegal employment and receipt of social benefits, as well as by exerting stronger control of the eastern boarder in order to fight smuggling of excise tax goods.
It is also necessary to accelerate protection of borrowers for their only housing. I think the delay in addressing these issues is unjustified leading to higher social risks.
I call for agreements between the Government and social partners aimed at enabling the Government to implement the structural reforms, to considerably reduce public expenditure, to reach a budget deficit level of 3% in a few years’ time and to recover the Latvian economy. A memorandum between the state and social partners should become the basis of social stability. I will invite the stakeholders to a round-table discussion in order to agree on short- and long-term solutions. When addressing the crisis situation, we should also keep in mind our further objectives which are important for country’s development in the long run.
An important issue is ensuring fiscal discipline after the crisis. In the democratic system in Latvia by now characterised by short-term and fragmented coalitions the political parties often give in to populist pressure disregarding country’s macro-economic stability. The current crisis is a vivid example of the consequences such populism may cause. To this end, I suggest drafting a fiscal discipline law in order to limit the maximum budget increase depending on the concrete phase in the economy cycle. Such laws are successfully implemented in European countries, for instance, in Estonia and Germany.
I would like to also once again make a public statement on the stability of the Latvian lat. Pursuant to the Satversme (Constitution) everyone has the right to express his/her views. However, let’s be responsible. I particularly address those making ungrounded statements concerning the stability of the Latvian national currency. These announcements cause harmful damages to the Latvian economy and may have adverse effects on the introduction of the euro. It is easy to release the Genie but it is much harder to get him back. To those thinking of the devaluation as some miracle solution I would like to say that this solution would much more unfavourable for the economy and the society than the proposed and next budget amendments. Expenditure cuts are controlled by protecting specific areas. In contrary, devaluation would have an impact on everyone and bad experience of many countries shows that quite often it is beyond control.
The Latvian Government and our international lenders continue the implementation of the economy stabilisation programme based on stability of the Latvian lat and gradual reduction of the budget deficit. This position has not been changed. I hope everybody understands me.
On 12 March 2009 I emphasised – this is hard situation for Latvia but we have already been in such situations and we have overcome all of them successfully. This time the necessary pre-conditions are political stability, sound economic policies and capacity to implement the decisions adopted.
Today the budget amendments are presented to the Saeima for your assessment. Your support to these budget amendments is of critical importance for country’s solvency. I urge you to analyse the current situation and the draft law thoroughly and to stand apart from cheap pre-election populism.
Your decisions and statements will decide further development of Latvia, public confidence in Saeima work and ensuring social balance in our country. Thank you for your support so far. Bu the first wording of the budget amendments is just the first step, next ones will be harder.
This year and overcoming of the crisis will be a big challenge for all residents of Latvia. And this will be an even bigger challenge for politicians.
I wish you success in your work! Thank you!