Latvia Finance Ministry: more consolidation expected, if budget is not adopted by late 2010
If 2011 budget is not adopted till the end of the year, more consolidation measures will be necessary next year than it is possible at the present moment, estimated the Ministry of Finance (MF).
In compliance with the Law on budget and financial control, if at the beginning of financial year, the annual state budget law has not entered into force, the Minister of Finance approves the state budget expenditure, loans and loan limits necessary for the state actions. In this case, it is necessary to draft temporary budget for the first months of2011, reports LETA.
Although the Law on budget and financial management stipulates that the annual state budget Bill can be submitted to Saeima not later than four months after the newly-elected Parliament has expressed confidence to the Cabinet of Ministers, due to several reasons it should be adopted this year so the Bill «On 2011 State Budget» can be enacted already on January 1 2011, the MF emphasized.
As the Ministry indicated, if 2011 budget is approved until the end of the year, the amount of consolidation will be attributed to the 12-month period. Whereas, if 2011 budget is adopted only in March 2011, the necessary amount of consolidation has to be ensured during the remaining months.
Namely, the fiscal effect of the particular consolidation measure package on 2011 will significantly differ, that is, if the consolidation measures are solely attributed to the period of nine months, starting from March 2011, then the fiscal impact (savings) of the proposed measures is by 60 million lats smaller than if they are related to a period of 12 months, starting from January 2011. Accordingly, when adopting the budget in March 2011, additional consolidation measures will be necessary to fill the mentioned shortfall, pointed the MF.
The Ministry also concluded in case the budget is adopted in March 2011 the selected resources for financial sector stabilisation will not be available for general funding in the first quarter of 2011. This means that liquid resources at the State Treasury accounts will have to be used for the overall financing and liquidity reserve securement.
Similarly, additional borrowings in the internal financial market will have to be made, because borrowing from the Nordic countries should be maintained to ensure financial market confidence. However, according to the provisional budget scenario, borrowing in the international financial markets during the first quarter of 2011 would cost more than in case 2011 budget is adopted until the end of 2010.
The temporary budget situation will cause nervousness among the internal financial market investors, which will affect the borrowing rate levels. As a result, potential loans in the internal financial market will be relatively more expensive during the first quarter of 2011, compared to the borrowing rate levels if the budget is accepted by the end of 2010. In line with the State Treasury indicative calculations, based on the above mentioned assumptions and financing necessity assessment, the provisional budget scenario would increase the state debt servicing on average by six or seven million lats per year, the MF estimated.
It should also be taken into account that the temporary budget adoption would hinder the positive progress of the state credit rating, which in turn will prevent the recovery of business lending and will slow down the economic growth.
If the state budget for year 2011 is approved until the end of 2010, it would facilitate faster credit ratings boost, ensuring a strong incentive for the investment increase and economic recovery processes, as well as, providing more extensive options for financial resource attraction in the international debt securities market at lower costs than with the current credit rating level, considered the MF.
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