On Šķēle’s Plan

16. marts, 2010


Vjačeslavs Dombrovskis

Let me summarize some thinking about Mr. Šķēle's "Proposals for Immediate Actions". This is not supposed to be a comprehensive evaluation since the plan entails thirty something groups of actions. Moreover, these actions range range from sweeping proposals to list state-owned companies in Riga Stock Exchange to much lesser ones like "stop producing paper version of Latvijas Vestnesis".

What’s the bottom line of “Šķēle’s plan”? One of the aims is to achieve “non-deficit budget” in 2014. No, I don’t think there is a typo – it seems Mr. Šķēle won’t even settle for the 3% deficit. So we’re talking not just 800 million LVL consolidation that the IMF wants, but also roughly 350 million LVL on top of this to nail down those 3% as well. How is Mr. Šķēle going to do this? He will not increase taxes (but he will reduce some). The only expenditure cut envisaged in the plan is to merge some ministries, which is supposed to result in 100 million LVL worth of savings. Ok, lets suppose, for a moment, that it will. Where would the remaining 1.05 billion LVL come from? Well, the whole idea is that all these measures would produce an economic miracle, resulting in greater tax revenues, etc. Should I also mention that Mr. Šķēle plans to “return all debts in 10 years”? A miracle, indeed.

Has People’s Party put serious work into this? Depends of what definition of “serious work” you’re using. For a start, that “thick document” (that I downloaded from People’s Party website) is really a power point presentation. Yep, 62 pages of PP bullet points, of which 24 pages contain description of current situation, one title page, one table of contents page. However, this presentation is full of promises with very specific numbers. For example, there is a claim that a fixed tax for micro-firms (more on this later) will create 10,000 jobs per annum. I have no idea where this number comes from. Why not 15,000 or 20,000 jobs? Why not 100,000 jobs, for that matter? Maybe there is a more serious document somewhere that can shed light on where all these numbers come from? So far, it’s hard to escape an impression that this plan is a product of a few hours of brainstorming by couple dozen of “experts”. Unfortunately, many in this country think this fits the definition of “serious work”.

What are these proposals, and what to make of them? There is wide variation. Some of the proposals, like merging the ministries (and quite a few others concerning the public sector), seem to deserve further thinking. Some are written in the ‘generally meaningless’ style, the favorite of Latvian bureacracy. For example, “introducing simplified system for business expenses based on concrete criteria” that should “improve business environment” (p.54). Some proposals are sort of ‘political plagiarism’, like the one on fixed tax for micro-enterprises, which is already being prepared by the Ministry of Economy. Then there are those that are extraordinarily naive, and those that are just dangerous. I will have more specific examples of both.

There is a bunch of really naive proposals. For example, Mr. Šķēle suggests to “stimulate the economy” by reaching an “agreement with international lenders to invest the funds earmarked for financial sector stability into the economy”. This is supposed to make 700 million LVL available for loans to the economy. (p.45). This is Slakteris style, no less. This is just not how the IMF works. It’s there to prevent financial crises, not to invest in economies.

Then there is pretty dangerous stuff. For example, Mr. Šķēle proposes to give the 2nd level pension funds back to the State Treasury (Valsts Kase), which would have to buy obligations issued by the newly formed Development Bank (probably created on the basis of the Mortgage Bank). In turn, the Development Bank would use the (pension) money to stimulate the economy by lending to the private sector. I really don’t like this. Why is there a presumption that Mortgage Bank would earn decent returns on its invesments? What motivation does it have to try? More likely this would become a system of payoffs to those with political connections. An infamous 2 million LVL loan to Mr. Birkavs is a case in point.

Can this all work? I put the question very narrowly here. What I mean is the very short run. Consider a counterfactual in which Mr. Šķēle is a prime-minister, who takes this “business plan” to the creditors (i.e. the IMF). No tax increases, no significant expenditure cuts, but asking to believe in a miracle. There would probably be a polite smile, perhaps some amusement, but a firm “no”. As a businessman, Mr. Šķēle must understand that creditors don’t subscribe to castles in the sky. This brings me to my last point.

This plan might be called wishful thinking, even daydreaming, but it doesn’t mean it’s political value is zero. It could very well be that all the above subtleties would be lost on an average voter. Especially someone without a job, or struggling to pay down his loans. Mr. Šķēle says there is a stairway to heaven -one that doesn’t involve tax increases and smaller pensions. Sounds too good to be true, but when did it stop the voters from believing?

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