Major austerity measures coming in a few months?

Yesterday, Latvian government announced plans to cut more than 100 mln lats (140 mln euros) of spending from this year's budget. The cuts will be mainly to purchases by state organizations and to public administration expenses. A detailed plan is being developed and a vote on spending cuts is expected to be later in the summer.

It's a big amount in cuts. The basic Latvian state budget (excluding social security and municipal budgets) is around 3.5 bln lats (5 bln euros) and, by the time when the changes are passed, most of that will already be spent.

I'm not sure if I agree with this plan. There is no shortfall in Latvian tax revenues yet. State Revenue Service monthly data for first 4 months of 2008 show revenue in two months below the plan and in two months above the plan. On the whole, the tax revenues for first 4 months are a negligible amount of 1.5 mln lats (2 mln euros) below the plan. This hardly justifies such a drastic action...

Also, the Latvian economy is slowing down rapidly and cutting the government spending at this moment can make it even worse. (In their announcement, the government promised to do the cuts in a way that affects the economy least, but how much of that is actually possible?) Our government was very slow with the measures to keep the economy from overheating and it looks like they might be equally slow with stimulating it, when it slows down.

UPDATE (6/12): A more detailed report claims that the government needs to cut expenses by 263 mlns lats (375 mlns euros) if they want to maintain the plan budget surplus of 1% GDP, as planned, and by 108 mlns if they want to have no surplus but no deficit. If that's the case, the cuts are somewhat justified but I still don't see the evidence of 263 mln revenue shortfall...

UPDATE (6/16): After 5 months, the overall state budget shows a surplus of 273 mln lats. It's true that there are more purchases made at the end of year (slowness of Latvian government institutions) but I still don't see how one would get from a surplus of 273 mln to a deficit of 108 mln in the remaining 7 months.

Developing...