October 4, 2010 / 1:09 PM / 8 years ago

Latvia PM woos opposition, budget fight seen ahead

RIGA (Reuters) - Latvia’s prime minister is seeking a cooperation deal with an opposition party backed by the country’s large Russian-speaking minority in a bid to broaden his government’s support base after a strong election win.

Latvia's acting Prime Minister Valdis Dombrovskis of Unity bloc speaks to the media in Riga October 3, 2010. REUTERS/Ints Kalnins

Economists said the main challenge for the government formed after Saturday’s election will be drawing up more tough measures in the 2011 budget to meet the terms of the country’s 7.5 billion euro ($10.28 billion) bailout.

Prime Minister Valdis Dombrovskis has already agreed with existing partners to try to form a new majority government that would have 63 seats in the 100-seat parliament. He wants a parliament vote to confirm it on November 2.

He has said he plans to keep the country on an austerity path laid out by the International Monetary Fund (IMF) and European Union in return for the 2008 bailout.

But in an effort to win support for additional budget cuts and after the minority Russian-speaking party Harmony Center won second place in Saturday’s vote, Dombrovskis said he had reached out to them too.

“We offer an opportunity to sign a cooperation agreement with Harmony Center, to agree on cooperation in parliament, maybe, also delegating a minister,” Dombrovskis told reporters after meeting Harmony Center leaders.

Although Harmony Center failed to win the election as it had hoped, it sharply increased its number of seats in parliament to 29, giving it some influence.

Party leader Nils Ushakovs said Harmony Center was ready to support the new government, though it was not clear on what terms.

Although their pre-election rhetoric was critical of the IMF deal, some kind of cooperation agreement would raise the party’s status after almost two decades in opposition.

“We will do that because both Unity and Harmony and other parties and all of Latvia’s people are in the same boat and this boat must get out of crisis,” Ushakovs said.

Dombrovskis said he would now seek feedback from his coalition partners about cooperating with Harmony.

TOUGH BUDGETS

During the election campaign Harmony Center called for revisions to the government’s deal with the IMF and EU, including using some of the bailout to stimulate the economy.

Latvia over 2008 and 2009 slashed 1 billion lats ($1.93 billion) off its budget deficit, but analysts said tough work remained ahead to meet the targets of the bailout.

Latvia has to cut its budget deficit to 6 percent of gross domestic product (GDP) next year from a planned 8.5 percent this year. The goal is to cut this to 3 percent of GDP in 2012.

“The key task now is thus to work out and pass the 2011 budget, i.e. continue with the structural reforms and consolidate the budget on the grounds of forward-looking decisions rather than a short-term agenda,” Swedbank chief economist Martins Kazak said in a commentary on the election.

Vyacheslav Dombrovsky, assistant professor at the Stockholm School of Economics in Riga, said fiscal consolidation measures for 2011 would include various tax hikes and some spending cuts. Drafting the 2012 budget would be an even bigger challenge.

“So far...these cuts were more mechanical. The huge challenge will be to solve these consolidation problems with structural measures,” Dombrovsky said. Such measures should include reforms to education, health care and other sectors.

Despite 18 months of tough spending cuts and tax increases to meet the terms of the bailout, Dombrovskis, 39, led his Unity bloc to victory in Saturday’s vote with 33 seats in parliament.

His current partners — the Union of Greens and Farmers and the nationalist bloc Everything for Latvia/For Fatherland and Freedom — won 22 and eight seats, respectively.

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