Latvia sees spending deficit leaping to 11.6 per cent of GDP

(RIGA) - Overall deficit spending in crisis-hit Latvia will be more than double the limit agreed with international lenders as part of a 7.5-billion-euro bailout, Latvia's finance minister said on Monday.

Latvia had undertaken to ensure that its public deficit did not exceed 5.0 percent of gross domestic product.

"The worst case -- or the so-called baseline deficit scenario -- after the parliament votes for the cuts in the second reading will be 11.6 percent" of GDP in 2009, Finance Minister Einars Repse said in a radio interview.

Latvia's 100-member parliament is expected to vote as early as Tuesday on painful austerity measures, estimated to account for 10.0 percent of total budget expenditures. -- including slashing public wages by 20 percent and pensions by 10 percent from July 1.

When Latvia reached for an emergency loan of 7.5 billion euros (10.4 billion dollars) from the International Monetary Fund, the European Union and other lenders in December, it agreed to keep its public deficit below 5.0 percent of output.

Since then, the Baltic nation of 2.3 million people has entered the deepest recession in the EU. The finance ministry expects the economy to contract 18 percent this year, and inflation is forecast to be 3.1 percent.

For Latvia to obtain the next 1.2-billion-euro chunk of the rescue package due at the end of June or early July, it has to continue its ongoing round of belt-tightening to curb its gaping budget deficit -- the shortfall between government revenue and spending.

Speaking on Latvian television on Monday morning, Prime Minister Valdis Dombrovskis said that he was confident Latvia would receive the next instalment of the international loan on time.

Trade unions have called for protests in Riga on Thursday against belt-tightening in the education and medical sectors. Over 2,000 people are expected to attend.

A much smaller protest involving is also slated for Tuesday as the parliament debates yet more budget cuts.