Latvia's prime minister warned lawmakers on Wednesday that more tough choices lie ahead as the recession-scarred Baltic country grapples with a fresh round of tax hikes and budget cuts needed to slash the deficit.
In a speech to Parliament before it formally approved his government, Prime Minister Valdis Dombrovskis said the worst was over for Latvia, whose economic plunge was described by the International Monetary Fund as the steepest in the global downturn.
"The first post-crisis results give cause for optimism, but this growth is very fragile and even small fluctuations can result in negative consequences," the prime minister said.
Dombrovskis, who at 39 is one of Europe's youngest prime ministers, took over the Baltic state's government in March 2009 after the previous coalition failed to cope with austerity measures needed to rescue the nearly bankrupt economy.
Last month the centrist Unity alliance that Dombrovskis leads won the parliamentary election despite the unpopular measures it adopted over the past year-and-a-half as voters entrusted him to complete the painful economic healing process.
The vote also calmed international bond markets, which over the past two years have speculated that Latvia might be forced to devalue its currency to regain lost competitiveness -- a move that could have sparked similar currency moves throughout Eastern Europe.
The new government's priority will be to adopt next year's budget, which will require drastic spending cuts and new taxes in order to reduce the deficit to 6 percent of GDP from an approximate 8 percent this year. By 2012 the deficit should reach 3 percent, Dombrovskis said.
Currently the specifics of how the government will attain the target are unclear, but some form of tax hikes -- most likely on property and the value-added tax -- are inevitable.
"The ability to secure financial discipline and eventually a reduction of debt will send a clear signal to the international community that Latvia is a country that can stick to its goals," Dombrovskis said.
The deficit reduction is required by international lenders such as the IMF and the European Union, who in December 2008 pledged a euro7.5 billion international bailout loan to Latvia.
The three-year loan program aims to iron out inefficiencies in Latvia's public sector and restore competitiveness, which was all but erased after four years of double-digit growth that ended in 2007.
Since then Latvia's economy has shed 25 percent of its value. Last year alone it lost 18 percent, a fall that the IMF described as the worst in the world.
Sixty-three lawmakers voted to support the new government, while 35 were against and two were absent in the 100-member legislature.