The amount of budget consolidation will depend on economic development trends
By admin at 24 August, 2010, 4:44 pm
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Preparation of draft state budget for 2011 is going on according to the schedule approved by the Cabinet of Ministers – base expenditure forecasts, macroeconomic development forecasts, draft tax policy guidelines, shadow economy combating plan are prepared, function evaluation is going on in cooperation with the State Chancellery and non-governmental partners. Only the deadline for the submission of World Bank’s assessment of public financing for health, education and social sector is postponed because experts needed additional time till September.
In February 2010, the Cabinet of Ministers approved a schedule for drafting the state budget for 2011 envisaging that that government shall submit draft budget for the next year to the Parliament according to the Law on Budget and Finance Management, namely, no later than four months after the newly elected Saeima gives the Cabinet of Ministers a vote of confidence.
Currently the Ministry of Finance in cooperation with international and domestic partners has developed medium-term macroeconomic development forecasts envisaging 3.5% increase in the gross domestic product in 2011. Quick GDP assessment of the second quarter of 2010 shows that the economy has slightly improved in two subsequent quarters comparing with previous period. It proves that the Latvian economy gradually recovers from the recession and gives a hope for further gradual economic improvement.
However, undoubtedly, data on the Latvian economy development in the third quarter of this year will be decisive in the state budget for 2011 drafting process and will show the sustainability of economic recovery process. Then it will be possible to forecast economic growth rate in 2011 more precisely. However the GDP growth rate will determine tax revenue forecasts for the next year, and only after that it will be possible to specify necessary amount of budget consolidation to reach the defined goal – in 2011 general government budget deficit should not exceed 6% of GDP according to ESA methodology.
When base forecasts will be approved – economic growth rate in 2011 and tax revenue amount, it will be possible to specify the amount of necessary consolidation. Current estimates and agreements with lenders show that necessary consolidation amount in 2011 could be 392-440 million lats, but this number will be specified.
The consolidation may be reached in two ways – by increasing revenue and decreasing expenditure. The Ministry of Finance works at proposals for the government in both directions – in terms of revenue increase (shadow economy combating plan measures, tax policy guidelines and possible tax changes) and in terms of expenditure cuts (evaluation of public functions, structural reforms, recommendations of foreign experts).
The Ministry of Finance considers that the consolidation has to be done by balancing revenue increase and expenditure cuts, therefore possible state budget expenditure reduction in 2011 could be 100-200 million lats. As it was said before, the number will be specified after economic development data of the third quarter will be received.
The government will continue intensive work at the detailed list of consolidation measures for 2011 which will exceed the necessary consolidation amount in order to let the newly elected Parliament and the Cabinet of Ministers which will be given a vote of confidence to take immediately qualitative, deliberative and weighted decisions.
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