Oct. 6 (Bloomberg) -- The Latvian government’s proposed budget will allay concerns the Baltic state may fail to comply with the terms of its international bailout, Prime Minister Valdis Dombrovskis said.

The Cabinet will push through spending cuts and tax increases needed to achieve a deficit equivalent to 8.5 percent of gross domestic product, Dombrovskis said in an interview in Stockholm yesterday.

“What we see is that our budget proposal ensures that we meet the budget deficit criteria,” he said.

Latvia had pledged to cut the budget by 500 million lati ($1 billion) a year until 2012 to bring its deficit within 3 percent of GDP and enable it to adopt the euro. The government now argues it can achieve next year’s agreed 8.5 percent deficit target by cutting its budget by 325 million lati.

Dombrovskis said his government is trying hard to avert a repeat of June’s crisis, when delays in passing budget agreements brought the economy to the brink of bankruptcy.

‘That’s why we are having these discussions now so that we still have sufficient time in the budget preparation process,’’ he said. “Certainly, what we see is that our budget proposal ensures that we meet the budget deficit criteria of 8.5 percent next year.”

Swedish Krona

Sweden’s krona fell against the euro after Prime Minister Fredrik Reinfeldt yesterday said there are “large imbalances” in the Latvian economy. Swedbank AB, the biggest Baltic lender, was down 3.2 percent while SEB AB, the second- biggest lender in the region, dropped 2.9 percent.

Anders Borg, Sweden’s finance minister, said on Oct. 2 that political signals from Latvia were “worrying” and that the “patience of the international community is very limited.”

Elena Flores-Gual, the European Commission’s director of economies of the member states II, on Oct. 1 called on Latvia to fulfill commitments made to the international community.

“In the staff’s view, the likely contraction in 2010 and reliance on one-off measures in the 2009 budget will make it difficult to achieve the rapid-adjustment path implied by the deficit targets in Latvia’s commitment” to the European Commission, the IMF said in a staff report dated Aug. 7.

Latvia turned to a group led by the European Commission and the International Monetary Fund for a 7.5 billion euro ($11 billion) loan to shore up the economy after its second-biggest bank failed. The economy contracted 18.7 percent in the second quarter, the second-steepest drop in the European Union after neighboring Lithuania.

“We see a somewhat more positive scenario developing,” Dombrovskis said. “Probably when the program was drafted, the assumption was that we need to have 500 million lati in cuts to get a 8.5 percent deficit scenario, but now we see that it’s possible with 325 million lati in cuts.”

Teachers, Policemen

The country is implementing measures to reduce the deficit that include closing some hospitals, schools and cutting wages, he said. Dombrovskis said cutting spending and raising revenue by 325 million lati will be better for the economy and for social stability.

“We are closing or reorganizing about 100 schools,” even after the plans led to protests, Dombrovskis said. “We have reduced wages in many sectors by 40 percent, like for teachers, for policemen, many top paying jobs get several times smaller salaries.”

The government may consider selling some state-owned companies “if we see the market situation is right, or if we could get a reasonable priced offer, then it’s certainly worth a discussion.”

To contact the reporters on this story: Aaron Eglitis in Riga at aeglitis@bloomberg.net

Last Updated: October 6, 2009 05:17 EDT