Dear Speaker of the Saeima,
Dear Saeima members, ministers,
ladies and gentlemen!
A year ago the Cabinet of Ministers was appointed in circumstances that were critical for the country when the economic crisis and insolvency of the state had almost become an insurmountable reality. Let me cite a Canadian politician:”For years the governments promised the things they could not realize and realized the things which they could not afford” (Paul Martin, Ex-Prime Minister of Canada), therefore the outcome was logical at the time when the flow of cheap credits stopped in Latvia. Only then we realized that we have lived in illusions having no idea where the captain of the ship was taking us. The Government headed by previous Prime Minister Ivars Godmanis made the first steps to retain solvency of Latvia, in a short time period reaching an important agreement with international partners on the loan. At the same time this agreement provided for very serious obligations and changes. Inability to agree on the implementation of the agreement lead to resignation of the Government of Ivars Godmanis.
The time reserves for prevention of country’s insolvency had already been exhausted, therefore, subsequent decisions had to be developed and adopted immediately – in terms which significantly exceeded the time necessary for normal preparation and adoption of decisions.
The first short-term task after the establishment of the Government was to prevent the national insolvency using international loan resources through an unprecedented budget consolidation at the same time pursuing the economic incentive measures that were feasible under such circumstances.
During the year we have accomplished two tasks of decisive importance – prevented the national bankruptcy and ensured fiscal stabilization in the country. Now the third step should be made – it is necessary to start gradual, but stable and sustainable development.
A year ago the country was on the threshold of bankruptcy and a complete picture of crisis could be observed – rapidly increasing unemployment, declining economic activity, loss of export competitiveness, low credit rating and minimal opportunities to borrow in the international financial market. During the year the situation has changed significantly. In the financial market the RIGIBOR rates have returned to pre-crisis level. The Rumours about devaluation of the lat are over. The current account has a significant surplus. The world experts recognize that we are on the right track. The European Commission in its report of January concluded that the institutions of Latvia have acted efficiently and the economy stabilization program is being implemented according the schedule. Already two credit rating agencies have improved Latvia’s credit rating outlook. Growth in industrial production, exports, and also retail figures can be observed.
Gradually, the positive image of Latvia in the world is returning. We are mentioned as a model for crisis management. It is the real basis for national economic development. The national financial stability is directly linked with opportunities to attract investments and credit availability for our businesses. Despite disagreements, and pre-election atmosphere in the coalition, we are able to consistently continue the work.
The worst that could happen this year - the politicians give up the implementation of Latvia’s economic stabilization program and the agreement with international lenders, thereby exposing the future of Latvia to an exceptional risk.
The work of the Government on overcoming the crisis is being carried out in three main directions – fiscal consolidation, economy heating and social security network to mitigate social tension.
I will shortly characterize each of them.
On fiscal consolidation
A bitter experience of Latvia once again confirms the idea that the country's financial stability is a prerequisite for sustainable growth.
We have provided that the budget deficit targets are achieved – 10% of GDP in 2009 and 8.5% of GDP this year. It required tough decisions, but there were no easy options at the time of crisis.
The agreement reached with the international lenders enabled us to expeditiously meet the verdict of the Constitutional Court, and already in February launch payment of pensions.
We will start payment of the detained pensions already in April, and not until 2015, as it was determined by the Constitutional Court.
The fiscal consolidation shall be continued also in the years to come to meet next year’s budget deficit below 6% of GDP, but in 2012 the Maastricht criteria – to limit the budget deficit to 3% of GDP. Thus, in 2014 Latvia could joint the euro.
One important question is how to ensure the fiscal discipline after the crisis. In the democratic system of Latvia which has been characterized by short-term and fragmented coalitions, the parties often respond to populistic pressure forgetting about national macroeconomic stability. The current crisis demonstrates to what consequences the short-term populism can lead. In this regard, the Government has started the work on the fiscal discipline law, which would limit the maximum size of the budget, depending on the phase of the economic cycle. Such laws have been very successful in several European countries, for example, Estonia and Germany.
On economy heating
I have defined the restoration and increasing of country's competitiveness as one of the fundamental pillars on which to base the Government’s policy in the future.
The world experience shows that the role and place of the state is not determined by its geographical size, but by the agreement of politicians and the public on clear political and economic objectives, in other words – a common vision and commitment to make it a reality. In order to consolidate the priorities, objectives, results to be attained and short-term measures to be taken, as well as lines of activity for the medium term, the work is being carried out on the development of the draft Strategic Development Plan of Latvia till 2013.
During the implementation of extensive fiscal consolidation measures, we can not rely on domestic demand as the engine of the economy.
Respectively, the key priority of economic recovery is export. We have reallocated the EU funds, shifting substantial additional funds to the support of entrepreneurship and export. Since June we have activated the export credit guarantee scheme.
Decrease in global economic development, as well as changes in terms of trade and price reductions in 2009 adversely affected the export of Latvian goods – in current prices it declined by 19%.
However, during the last quarter of 2009 export growth showed a positive trend. It is expected that also in the coming months the increase in foreign demand that is associated with global growth and stabilization of the external market will positively affect export. Improved export performance is the most stable basis to increase the number of work places in Latvia.
The EU funds play a significant role in economy heating. As I already mentioned, we have reallocated EU funds, allocating substantial additional resources to the support of entrepreneurship and export. We have facilitated the administrative procedures and accelerated the acquisition of funds.
Till February 15, the projects financed by EU funds were approved in the amount of LVL 1.7 billion which makes 54% of the EU funding available for Latvia for the period from 2007 – 2013. LVL 536 million or 17% of the funding available for Latvia was paid to the beneficiaries. According to the EU fund acquisition rates, Latvia is on the average level of the new EU member states ahead of Estonia and Lithuania.
Support program for businesses
Currently, the funding of business promotion and development during the crisis, as well as other forms of support is available under more than 20 aid programs. Overall, until the year 2013, the funding of more than LVL 582 million to the support measures is provided, in addition providing a substantial private co-financing.
The increase in number of workplaces can also be achieved by opening new businesses. In order to promote the involvement of economically active residents in entrepreneurship we have started a micro-enterprise support program. The capital requirements and registration fees have been reduced. The tax reports should be submitted only once a quarter rather than every month. The VAT can be paid according to the cash register principle and not in advance. A simplified licence system has been introduced. The last stage in the micro-enterprise support program will the introduction of the single tax, and the Ministry of Finance is already working on it. In view of the limited fiscal space for stimulation of the economy through budget a systematic work is being carried out with the aim to reduce bureaucratic obstacles to entrepreneurship.
To facilitate the economic recovery, the Government is actively working on changing the employment structure. It will be realized through partnerships and individually organized trainings in cooperation with industry associations and businesses. These measures also include improving of education quality and its focus on compliance with requirements of the labour market.
On the tax policy
Many tax measures implemented last year can be regarded as short-term measures for budget stabilization. I believe that Latvia should be a country with relatively low tax burden where the tax burden does not exceed 1/3 of GDP. The medium-term tax burden should be gradually shifted from the labour to property and consumption. Gradually, also non-taxable minimum for the residential income tax should be increased. The Ministry of Finance has already prepared and submitted for consideration the draft guidelines for a medium-term tax policy which we plan to discuss also in the Reform Management Group together with social and cooperation partners of the Government.
On the social security network
To ensure the social balance and stability the Cabinet has approved, and in cooperation with the World Bank launched a social security network strategy providing a set of extraordinary social security measures, including increased guaranteed minimum income benefits, co-financing for local-governments to ensure the guaranteed minimum income and housing benefits, involvement of the unemployed in temporary jobs with scholarships, increased availability of health care services and medicine for the poor, and the support to local-governments for education reform. In 2009, LVL 15 million and in 2010 already LVL 45 million were provided for the implementation of the strategy.
Also this year we are working on the improvement of the social security network by allocating additional resources for temporary jobs, increasing the availability of health care services and medicine not only for the poor, but also for people with monthly income below LVL150 and implementing other measures.
On the public administration reforms
The structural reforms in public administration in 2009 were implemented in compliance with the overall objective of the reform - a small, professional and citizen-oriented public administration.
The Government has made serious assessment and reduced the functions of state institutions. Last year the central apparatus of the ministries was reduced by approximately 30%, but the number of agencies by a half. During the year the number of full-time jobs in state financed institutions was reduced by more than 14 thousand. In the beginning of 2010 the number of state agencies was reduced by 52% compared to January 1, 2009. The total number of institutions subordinated to the ministries reduced from 148 – 97 institutions or by 34% compared with the beginning of 2009. Also the number of the employed in public administration was reduced substantially: in January 2010 by 14.2% compared to the beginning of January 2009. These were the issues that had been widely discussed already before, but real decisions were made only last year.
The Cabinet has taken significant steps to reduce the state budget expenditures for salaries of employees in public administration, as well as to limit various bonus payments and additional payments for the time of crisis. The total state budget funding for remunerations declined from LVL 895 million in 2008 to LVL 558 million in 2010, generating total savings of LVL 337 million. In view of the fact that it had been decided to apply the principles of remuneration system to local governments, the budgets of local-governments experience savings in remuneration funds and the spending has decreased from LVL 781 million to LVL 613 million, generating total savings of LVL 168 million.
On future intentions of the Government
2010 is the year of parliamentary elections and, therefore, the Government activities before the elections should be particularly responsible, preventing populistic and economically unjustified decisions. Currently, when trends of economic stabilization become more and more apparent, but the economic crisis is still far from being overcome, it is important to continue the reforms that were started.
I urge you all who are present to remember that we have not yet overcome the crisis and the pre-election populism may lead to repeated recession.
In this respect, Ukraine’s example is enlightening. As the presidential elections were approaching, the politicians of Ukraine started to promote a set of populistic decisions. This led to the termination of the IMF program, followed by instability of financial markets and, consequently, deteriorated economic situation. I hope that Latvian politicians will have enough common sense to avoid such a scenario. Let me recall that the Great Depression in the U.S. is called great because it was W type crisis. It means that politicians and society decided too early that the crisis was over, and as a result of unjustified decisions a second wave of crisis came.
In order to ensure economic growth the Government intends to work in the following directions:
The Government will do its best to ensure that the newly elected Parliament receives a qualitative material for budget 2011. Already now, a schedule of measures, which need to be performed to ensure fiscal consolidation of the state budget in 2011 and 2012 and preparation of the draft law ”On the State Budget” has been considered and accepted at the Cabinet of Ministers and the Reform Management Group
It is already clear that fiscal consolidation is not enough to make the transition from crisis management to national development-oriented activities in the medium term. Therefore, currently, the key objective of the Government is to strengthen the national competitiveness. It means the work at three levels: a level of the Baltic countries – further market integration, in certain areas beyond the EU incl. issues of the social sector and coordination of taxation policy; at the EU level - strengthening of competitiveness of the Latvian companies is required, and an increased attention is paid and will be paid to this issue, especially with regard to redistribution of EU funds. Finally – at global level - we will have to find our own niche product, our "Nokia" if I can say so. There are good grounds, and in certain areas, Latvia has a good competitive advantage, even on a global scale.
In order to proceed purposefully with this issue, already in the near future a comprehensive assessment of national competitiveness will be performed enrolling Latvian, as well as international competitiveness experts. In the future, constant attention will be paid to key indicators of national competitiveness and monitoring of changes in indicators.
Alongside the economic recovery also the attraction of money resources, both in the form of loans and investments is vital to ensure sustainable economic growth. In terms of job creation, direct investment is the most direct source for job creation.
In order to attract investments, in the near future, it is planned to activate the work on the investment environment, including the development of associated regulatory framework, offering clear and stable conditions, a variety of potential investment projects and a hospitable attitude to potential investors.
Therefore, one of the most important tasks of the Government in the nearest future will be a race for each investment project.
Currently, following the best models, in order to ensure a rapid Government response to potential investments, I propose to establish ad hoc groups, which will involve the officials of participating institutions and respective state monopolies. The main task of such groups - rapid decision-making, avoiding unnecessary bureaucratic procedures, because it is not a secret that some investment projects have”died” on the tables of bureaucratic officials. In the present situation we can not afford it.
Alongside the improvement of the investment environment we will continue active work to ensure Latvia’s economy with sufficient financial resources for crediting through an active dialogue with the financial institutions represented in Latvia, as well as using other governmental instruments that would help provide for financial resources needed for the development of local entrepreneurship.
The Reform Management Group will continue work on the assessment of the importance of consumption in the internal market and possibilities to stimulate it recognizing a balance between the resources used for stimulation of the internal market with the expected benefits of national economic development.
The focus will be on the development of a business friendly environment and reduction of administrative burdens by identifying sensitive sectors through proper analysis and making the necessary changes to laws and regulations, as well as assessing the public administration services and their quality.
The most important tasks of the Government in the social sector in the near future are mitigation and gradual overcoming of social consequences caused by economic crisis.
The promotion of the employment is a key challenge for 2010, which is attributed to both initiation of new active employment measures and assessment of the existing measures, promotion of self-employment and small and medium-sized business start-ups, as well as creation of new work places;
Next important measure to be mentioned is further implementation of the social security network strategy deciding on additional or corrective actions, following the acquisition of available resources through operative response to reasons of non-acquisition, wherever possible, facilitating the severity of impact for the population caused by the economic downturn.
The main challenge of the Government - ensuring sustainability of the pension system, by providing the necessary corrective measures, ensuring reliability of the system, extensive discussions with the social partners and all the parties involved, sufficient activities for information of the public and friendly transition from the existing to future system.
Close monitoring of health and education reforms will continue, by regular and careful monitoring of the implementation of reforms, compliance of the results achieved with expected results. In the health care system, it is necessary to continue work to ensure better transparency of procurements of health care institutions to ensure that the price for medicine complies with the purchasing power of residents and the resources acquired as a result of optimization were used for improvement of quality of health services.
The most important tasks of the Government with regard to adjustment of the public administration system and continuous structural reforms in the near future are:
The function assessment. Carrying on the evaluation of the state functions it is necessary to achieve a particular result - until concrete decisions shall be made on further reductions in budget expenditure, preparing final and transparent list of public administration functions, offering the Government a list of those functions which are not characteristic to public administration. Within the framework of function assessment a sufficient time should be provided for discussions in the coalition, the Reform Management Group and society in order the adopted decisions were discussed and understandable for the public.
The work on the assessment of state functions, centralization of support functions and introduction of one-stop agencies should be continued.
In 2010, it is necessary to develop and improve the work of the Reform Management Group so that the adopted decisions were not only harmonized, but also timely prepared and discussed, thus, avoiding the last-minute decision making. This year the Reform Management Group should become a centre for management of medium-term reforms of the Government that would continue work in the most significant directions - economic growth, social security and effectiveness of public administration - in order to achieve the over-arching medium-term objective - to increase the competitiveness of Latvia.
The spending cuts carried out within the framework of fiscal consolidation today require a fundamental review of operation of public administration institutions. The qualification and motivation of employees is the main pre-condition for qualitative performance of public administration. We should not forget that in 2015 Latvia has to undertake the obligations of the presiding country of the European Union. It will be a great challenge for our country, and we should start preparing for this important event already today.
Finally, it is necessary to introduce monitoring of quality of services provided by the state and the officials as soon as possible. A competencies’ approach should be applied to performance quality assessment of state officials assessing capacity, skills, and their compliance with duties of each official. It is necessary to follow the principles applied to the establishment of a single payment system in public sector, ensuring conservation and transparency of the system, as well as adjustments if necessary. The remuneration system should be designed relating it with remuneration in private sector, while avoiding the excesses of past years and ensuring a uniform and equable development of remuneration for employees working for state good also in the future.
In conclusion I would like to say:
This year marks 20 years since the restoration of Latvia’s independence. At that time, the unity of politicians and the people was in the streets, thoughts and ideas. Unfortunately, the privatization frauds, political business projects and, finally, irresponsible policy of the ”good years” have led to a huge gap between the authority and people.
However, the arrangement of the political environment and restoration of public trust is one of the most important prerequisites for serious decisions and implementation of crisis-management measures in life.
After overcoming the crisis, Latvia will become stronger as a country, being aware of what we want and can afford. This crisis is also an opportunity for many unaccomplished reforms to be accomplished. However, in order to use this opportunity a unique political unity will be needed.
Thank you for attention!
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