Cablegate: Latvia: Pensions Ruling Complicates Budget, but Doesn't

VZCZCXRO2936
PP RUEHIK
DE RUEHRA #0611 3561439
ZNR UUUUU ZZH
P 221439Z DEC 09
FM AMEMBASSY RIGA
TO RUEHC/SECSTATE WASHDC PRIORITY 6195
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS RIGA 000611

SIPDIS
SENSITIVE

E.O. 12958: N/A
TAGS: ECON EFIN ETRD LG

SUBJECT: LATVIA: PENSIONS RULING COMPLICATES BUDGET, BUT DOESN'T
SCUPPER IT

Ref: Riga 573

1. (SBU) The Latvian constitutional court ruled on December 21 that
while reductions in pensions are permissible, the Government of
Latvia failed to demonstrate that some USD 400 million in 2009-2010
pension reductions meant to trim the budget deficit to meet IMF and
European Commission targets were sufficiently deliberative and truly
necessary. The court ordered the government of Latvia to begin
paying pensions at pre-cut levels effective March 1, 2010, and to
make retroactive payments of some USD 180 million before July 2015.

2. (SBU) The court did not slam the door on future pension
reductions, and gave the government some breathing room to make its
retroactive payments phased in over a 5-year period. The government
now has several options available to limit its losses: to take the
politically difficult step of again raising taxes (perhaps the
newly-established property taxes, which are currently very low); to
address the courts' concerns by demonstrating due deliberation and a
full consideration of options before enacting future pension cuts;
to enact additional expenditure cuts; and to limit future losses by
accelerating the planned raise in the retirement age from 62 to 65.
None of these will be easy in an election year, with fractious
coalition partners demanding tax cuts, but some means of addressing
lenders' deficit concerns will be necessary. On paper at least (see
reftel), the GOL had estimated its 2010 deficit at some USD 200
million, or 0.9%, under the European Commission target of 8.5% of
GDP. Coincidentally, this leaves wiggle room to factor the ruling's
impact (approximately 0.9% of GDP or USD 200 million) into the 2010
budget and still meet the original deficit reduction target.
Garber

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