The Ministry of Health will give up health insurance policies for employees, the Ministry of Economics plans to lay off 40 employees, and the Ministry of Finance is also considering staff reductions. All of this is being planned in the name of reducing state budget expenditures. But will these measures be enough for the state to increase funding for defense and at the same time pull itself out of the financial hole? BNN asked political analyst and co-owner of Mediju tilts, Filips Rajevskis.
According to Rajevskis, this process has two components. Speaking about staff reductions in ministries, he notes that human resources, taking taxes into account, are the most expensive expenditure item in Latvia. “However, it must also be considered that after the reduction of public sector employees, qualified specialists will be freed up for the real economy. Businesses lack people who actually work and pay taxes,” the political analyst explains.
Rajevskis also points to the Ministry of Agriculture’s plan to save money by reducing inspections and controls, as well as complaints from entrepreneurs about the pointlessness of many inspections.
The political analyst recalls 2010, during the last major budget consolidation.
“The number of inspectors was reduced and the economy immediately began to work much more efficiently, because businesses no longer had to deal with satisfying various inspector demands, but could instead focus on their core activities. We all still remember how well the economy recovered after the crisis and how rapid the GDP growth was. Therefore, these steps—redirecting labor and reducing state control over the real economy—will allow savings in the state budget and will also spur GDP growth, because
entrepreneurs will have time to engage in business, not in meeting the needs of controlling institutions.”
Meanwhile, Saeima member Andris Kulbergs (AS) said this week that the Latvian government can no longer function effectively and warned of a possible collapse of the state budget. He also pointed to an estimated deficit of around 600 million euros and predicted that, in order to cover state expenditures, taxes may be increased and state-owned assets sold.
Asked to comment on whether the situation is really as dire as Kulbergs suggests, Filips Rajevskis says: “On the one hand, it is true that the budget deficit is indeed growing and cannot be said to be well controlled.”
However, he adds, it’s important to also consider the other side—the increase in tax revenue compared to the previous year. “This means that the economy is in a normal state, unlike, for example, during the 2009 or 2010 crisis, when there was an economic collapse. Now we are talking about a crisis caused by overly optimistic state budget planning,” Rajevskis explains. According to him, the only unexpected burden on the budget is defense spending. “In all other areas, reductions and savings are possible, as shown by the 2009 crisis. It just takes political will. The question is—will Evika Siliņa’s government show that it is ready to act, or will it choose to impose higher taxes on people during the pre-election period?”
“I don’t think people want to pay an additional 2% VAT, because that would hit the least well-off the hardest. Or, for example,
a sudden increase in excise duties would make fuel and other excised goods more expensive.
Raising social security contributions would increase labor costs and make us uncompetitive in the Baltics.”
The political analyst stresses that these choices are complex, but the first logical step would be to reduce the bloated public administration. “One thing is when revenues fall; another is when expenses have grown out of control—and controlling them would be much easier than imposing additional taxes on society,” Rajevskis emphasizes.
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