UPDATE: Latvian Cabinet Agrees On LVL500 Million Budget Cuts

(Adds detail, comment.)

By Joel Sherwood and Anna Molin

Of DOW JONES NEWSWIRES

Latvia's coalition government Monday agreed to find spending cuts required by international lenders to keep rescue aid flowing to the crisis-struck Baltic country, a spokeswoman for the state chancellery said.

In an extraordinary cabinet meeting, ministers reached "a conceptual agreement" for fiscal 2010 cuts of 500 million Latvian lati ($1.04 billion) by raising revenues by LVL180 million and cutting expenditure by LVL320 million, Zanda Sadre told Dow Jones Newswires.

"It is obvious that Latvia will fulfill its obligations to international lenders," Finance Minister Einars Repse told reporters after the meeting, his press spokeswoman Diana Krampe confirmed.

Further details, such as possible revenue-raising tax increases and areas of spending reductions, would be discussed at a yet-to-be-scheduled meeting later this week, Sadre said.

"The ministry of finance will coordinate this government decision and corresponding additional fiscal consolidation measures with the International Monetary Fund," she added.

Latvia had said previously that it would meet its 2010 budget deficit target of 8.5% of gross domestic product with LVL325 million ($676 million) in cuts - LVL225 million of which would come from spending reductions and LVL100 million through tax increases.

The cabinet's decision to rein in spending further follows strong words of warning last week from European Commissioner for Economic and Monetary Affairs Joaquin Almunia and from Swedish Finance Minister Anders Borg that additional payments on the country's EUR7.5 billion bailout package will be held back if spending plans aren't further curtailed. Almunia is set to visit Riga on Tuesday.

The E.U. and Sweden are key contributors to an IMF-led emergency loan put together late last year as Latvia slipped into economic crisis.

The Baltic state's economy is expected to contract by a drastic 18% this year.

Borg had said Latvia's planned cuts of LVL325 million for 2010 fell well short of its commitment under rescue loan terms, revised this summer, to lower next year's spending by LVL500 million.

Hard hit by the global financial crisis, Latvia has already been forced by lenders to take harsh austerity measures in 2009's budget, slashing LVL500 million in cuts that pushed public sector wages sharply lower.

Agreeing on more places to cut or ways to increase revenue for next year - an election year - has proven difficult for Latvia's five-party governing coalition, led by Prime Minister Valdis Dombrovskis.

Dombrovskis has warned that further belt-tightening will impair the country's economic recovery effort, but vowed last week to do what's necessary to keep rescue program on track.

Prime Minister's office Web site: www.mk.gov.lv

-By Joel Sherwood and Anna Molin, Dow Jones Newswires, +46 85 45 13 092 or +46 85 45 13 091, joel.sherwood@dowjones.com or anna.molin@dowjones.com

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(END) Dow Jones Newswires

October 12, 2009 09:27 ET (13:27 GMT)


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