Municipal plans – municipalities will break

These and other local government leaders, headed by Latvian Local Government Chairman Ginta Kaminski, were sympathetically heard by the Saeima’s State Administration and Local Government Commission, whose core members are former local government leaders and also former ministers. The commission session ended with the intention to hold the next session no later than June, to which at least some sector ministers will be invited. Until then, it should be clear in which sectors the situation is the most critical and how it could be saved if the heads of local governments and ministers started to talk and agree on something. Members of the Saeima claim to be mediators and arbitrators in such negotiations. The main topic of negotiations would be next year’s state budget, the principles of which must be agreed upon in the spring. If this is attempted in late autumn or winter, when the adoption of next year’s budget law is on the agenda of the Saeima, then the discussion of the budget project turns into an exchange of accusations between the ruling coalition and the opposition about which of the parties is more incompetent, malicious, irresponsible.

It promises disasters that don’t happen

There are well-understood reasons why municipalities feel the lack of money faster than the state. The first is that each of the local governments, including Riga, circulates much less money than the government, which has more opportunities to pay today’s bills with money planned for other purposes, left over from yesterday or saved for tomorrow; and when tomorrow comes, its bills are covered from tomorrow’s expenses, etc. The second is that the state has the right to redistribute both revenues and expenses to its advantage and to the disadvantage of local governments. This is what the country, both in the form of the government and individual state institutions, deals with precisely because it is faced with a lack of money.

What was discussed at the session of the Saeima commission showed how the deficit calculated by statisticians in the Latvian economy as a whole is transformed into specific problems. Last year, the gross domestic product decreased by 0.3% compared to 2022, and for the 1st quarter of this year compared to the 1st quarter of 2023 by another 0.2%. Just like the announced 1st quarter indicators, they are presented with the disclaimer that this is a quick assessment, still to be clarified. However, the overall picture of the economy is unmistakably clear, despite the fact that changes in GDP by tenths of a percent are within the margin of accounting error.

From the point of view of local governments and also from the state’s point of view, it does not matter whether money becomes less because the economy is shrinking, or whether the economy is shrinking because the European Central Bank has stopped the printing of money and – most importantly – the distribution between the eurozone member states, so that they take care of putting money into circulation . Thus, the state and local governments have lost part of the money collected in taxes and other payments, as well as the money allocated in loans and donations. As a result, institutions feel like a drunkard or a drug addict who can no longer get their next dose of intoxicating substance.

The alarming statements of local government leaders sound understandable and justified, but worn out. Almost every year has been the most difficult for them before and all the expenses are such that failure to do so threatens with disasters, although we have not really experienced them yet.

Local government spending would bring revenue to the state

E. Helmanis confirmed with specific data and examples from the work of the municipality of Ogre that municipalities currently survive by ending capital investments and using all available money only to cover current expenses. Therefore, the residents have to accept that the municipality cannot open an already built kindergarten because there is no money to equip the building according to the needs of the kindergarten. In the new building of the Ogre library, noted as an architectural masterpiece, the library is only partially furnished.

The suspension of works has an impact not only on the residents of the municipality. If local governments stop capital investments, which largely coincide with the execution of projects financed by the European Union, then the tax revenue base and the revenues themselves disappear for the state. As a result, the opportunity to pay out subsidies and grants, as well as to issue loans to local governments, whose expenses bring revenue to the state, is lost. Latvia has entered such a spiral of revenue and expenditure reduction, from which there is no way out. “The house of cards is collapsing,” emphasized E. Helmanis. “I don’t know what to suggest, but I know it will be worse.”

“The house of cards is said to collapse from the outskirts, but now Pierīga is also collapsing,” A. Elksniņš took over what his colleague had started. “Ogre today is Latgale since 2020,” he continued. “Breathe, colleagues, if we survived, you will too,” quipped Gunārs Upenieks, chairman of the Krāslava County Council.

The number of inhabitants and employed people is decreasing

A. Elksniņš linked the decrease in municipal revenues to the decrease in the population. In this case, too, it is difficult to distinguish causes from effects, because people leave places where money does not circulate, but money cannot circulate if there are no people between whose wallets (pockets, bank accounts) money travels.
The simplest connection between the number of inhabitants and the revenues of each municipality is maintained by the Municipal Financial Equalization Fund (PFIF), in which some municipalities contribute and all other municipalities receive money according to such money redistribution formulas, the purpose of which is to bring the expenses of all municipalities closer to each other, calculated per inhabitant. Daugavpils, as the second largest city in Latvia, has become the largest recipient of PIF money in the promised terms, which makes other municipalities dissatisfied. However, neither own revenues, nor PFIF money, nor borrowings within the borders allowed by the Latvian state in Daugavpils are enough to balance revenues and expenses. In order to accomplish such a task, Daugavpils resorted to laying off employees. “We have been consolidating since 2022,” said A. Elksniņš. He, too, warned that such consolidation would have an impact on national revenues and would lead to repeated consolidations on a national scale.
In theory, it even sounds nice that the local government fires employees who start working in the private sector and whose paid taxes increase the amount of money with which the state and local governments support themselves and some groups of the population. In practice, dismissed people may not find any other job and remain dependent on the municipality. “The housing benefit is higher than the minimum wage,” noted A. Elksniņš.

A good institution is a liquidated institution, including a municipality

One of the easiest ways for the government to help local governments would be to increase state contributions to the PFIF. The question is at what expense the government could get this money. The call to reduce the number of state administrative institutions and employees sounds beautiful. We must, of course, agree with the call of Mārs Sprindžuks, the current member of the Saeima, but previously the chairman of the Ādaži city council and the minister of environmental protection and regional development in the previous government, that the state and local governments should make a “zero budget” in solidarity, in the sense that each institution must prove all its expenses, i.e. its own the necessity of the existence of the institution.

The idea of ​​a “zero budget” has been woven in Latvia for more than twenty years, but it has been implemented so modestly that the liquidation of certain state institutions does not indicate the creation of a zero budget. Rather, it has been indicative of the settling of accounts between various factions of politicians and officials, as well as misunderstandings and coincidences.

The administrative-territorial reform with the reduction of the number of municipalities from 109 to 42, with the already announced intention to continue reducing the number of municipalities, was the closest to the embodiment of the “zero budget” idea. However, the implementation of the reform did not lead to the reduction of administrative expenses of local governments by half and does not compensate local governments for the increase in the cost of performing their functions.

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