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Latvian Government Cuts Pensions to Appease Leaders

Earth Times

June 14, 2009




The government in the recession-hit Baltic state of Latvia agreed Sunday night to controversial measures including cuts to state pensions as part of its attempts to receive money from international lenders. During an extraordinary cabinet meeting, the government of Valdis Dombrovskis confirmed that it was prepared to slash expenditure previously considered "untouchable."

The state pension will be reduced by 10 per cent for most pensioners, but those still at work will see their allowances slashed by 70 per cent. 

The amendments must now pass the Latvian parliament in a make-or- break vote likely to take place on Wednesday and would come into law on July 1, with reviews every six months subsequently. 

Pensioners reacted with fury to the news that their already meager pensions would be reduced. 

"I look forward to getting an increased pension in 2012, though I doubt I will be able to live that long," said Haralds, aged 72. 

"All politicians are just bandits - good at taking but no good at giving," said Ilse, 68. 

Other measures likely to prove unpopular include reductions in payments to working mothers, and a 20 per cent wage cut in the public sector for the second time in less than a year. 

However, the government backed down from its threat to revise the income tax regime after business leaders protested that they would be hit too hard. 

A plan to increase Value Added Tax from 21 to 23 per cent has been shelved until 2011 after an earlier rise from 18 to 21 per cent actually saw revenues fall. 

Text accompanying the draft laws admitted that they "could have a negative impact on society" and might even be subject to challenge on constitutional grounds. 

Under the terms of a 7.5-billion-euro (10.5-billion-dollar) economic aid package brokered by the International Monetary Fund in December 2008, Latvia must limit its budget deficit to 5 per cent of Gross Domestic Product (GDP) or risk missing out on payments. 

However, the agreement assumed Latvian GDP would fall by just 5 per cent in 2009 rather than the 18 per cent that is the current official estimate. 

The Latvian government is requesting more leeway on the deficit cap, but has still had to find savings of 500 million lats (1 billion dollars). Similarly-sized savings will also need to be found in 2010 and 2011. 

Latvia has already missed out on a 200-million-euro payment after the IMF judged that reforms were not moving fast enough. 

Failure to approve the 500-million-lat cuts would effectively bankrupt the country, with wages unable to be paid. 

Uncertainty over Latvia's ability to make big enough cuts led to frantic speculation that it might be forced to devalue its currency, but the government has repeatedly stated that devaluation is not an option

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