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Friday, April 4, 2008

Latvia Has Budget Surplus in Q1 2008

Latvia posted a provisional budget surplus of about 70 million lati ($158 million) in the first three months of 2008, the state treasury said today. The government had a provisional surplus of about 2 million lati in the month of March. Official budget figures will be released in mid-April, the treasury said.

Latvia's economy is slowing rapidly and while a budget surplus of about 1 percent of gross domestic product had been envisaged for this year this now seems unlikely to be achieved. Indeed there has been some discussion as to whether it might not in fact be advisable - given the rate of the slowdown in Latvia - to move sooner rather than later into suplus to try to avoid the now much feared "hard landing". Be that as it may we are still at this point in surplus, although the situation is more than likely going to change as the economy slows and revenues decline.

``The pace of growth is no longer as strong as last year, when revenue in the first quarter grew 26 percent,'' Finance Minister Atis Slatkeris said in the statement. ``Second quarter results will show if this pace of growth will remain for a longer period of time,''

A deficit now seems quite probable, since it has been estimated that Latvia would have a deficit equal to 1.5 percent of GDP this year on economic growth of 5 percent (which is the latest Latvian government growth forecast for 2008 made by Prime Minister Ivars Godmanis earlier this week), and my feeling is we are already way below that rate.


Latvian abroad said...

There's a detailed breakdown by type of tax (unfortunately, in Latvian only) here and it looks strange to me.

On one hand, there's 34% y-o-y increase in social security contributions and 28% in personal income tax, both of which are way above the plan. On the other hand, VAT is growing by 8-10% y-o-y, which is substantially below the plan and that does not look like a good sign to me. (The plan was around 20% revenue increase for all of those taxes.)

jekabs said...

Edward, would you think it would be an advisable move to run a deficit budget sooner rather than later in order to fuel Aggregate Demand avoid the "hard landing"? Without sufficient monetary policy independence, the fiscal policy options may be the only ones the government has for stabilizing the economy.

Edward Hugh said...

Hi Jekabs,

"Edward, would you think it would be an advisable move to run a deficit budget sooner rather than later in order to fuel Aggregate Demand avoid the "hard landing"?"

Yes I do. This is a very difficult question to call, but looking at the speed of deceleration, and imagining that there is at least a 6 month lag before fiscal packages have an effect, I think it would be wise to be changing course now.

The big difficulty is the continuing inflation, but people need to be very careful about this, since if the thing loses sufficient velocity inflation can just as quickly turn into deflation, even though this looks to be ridiculous at this moment in time.