While one of the fiercest—and at times most beautiful—winters has gripped Latvia and most of Europe during the past months, we have already seen the first preparations for what is likely to be a very hot spring and summer for Latvia politically, leading up to the Saeima elections in October.

Latvia is still heavily damaged by the economic downturn. Unemployment is heading towards 20 percent, there is little confidence in any foreseeable recovery, the economy is kept alive by international loans that will need to be repaid, and emigration seems to be growing. Despite this, the Valdis Dombrovskis-led government is patiently working away to meet its international obligations to its creditors, particularly the International Monetary Fund and European Commission, and to right the economy and government spending after the previous government’s self-promoted “fat years.” Yet Dombrovskis has to do this in a coalition government where every other party is positioning itself for the Saeima election to convince voters they were not to blame for the mess. This presents Dombrovskis with multiple problems.

The present coalition situation is tense, and presents each party and major player with a diabolical choice: basically, whether it is better for a party to seek to destroy this uncertain coalition, hoping to establish a better government it itself can lead and try to make a fist of the country’s problems, or whether there is no alternative but to be seen to be constructively working in the government until October, hoping that Dombrovskis does not take all the glory for any good policy, and that the parties can get the voters to forget the past. It is an invidious choice. Meanwhile, the parties outside the coalition are also positioning themselves and looking for partners. The first moves to destabilise the coalition have already come.

To briefly set the scene, Dombrovskis is from New Era (Jaunais laiks, or JL), the party that was so long kept out of government by the dominant party in recent years, the People’s Party (Tautas partija, or TP), whose long-term rule under Prime Minister Aigars Kalvītis is blamed for much of Latvia’s woes. Now the TP is in the Dombrovskis coalition, along with the Union of Greens and Farmers (Zaļo un Zemnieku savienība, or ZZS), the breakaway Civil Union (Pilsoniskā savienība, or PS) and the nationalist For Fatherland and Freedom Party (Tēvzemei un brīvībai / LNNK, or TB/LNNK). Each party has its own woes and has to evolve its strategies. For TP, ZZS and TB, which were also in the previous long-term coalition, it is the matter of how to recover their lost prestige due to their governing the country into its present economic crisis.

Yet the governing parties are not the only players. Outside the coalition is the Harmony Centre (Saskaņas centrs, or SC), the mostly Russian-oriented centrist party which did exceedingly well in the Rīga City Council elections last June and now rules there in coalition with headkicker Ainars Šlesers‘ First Party of Latvia (Latvijas pirmā partija, or LPP). They believe they can make a huge impact in the next Saeima election, and are forging alliances and biding their time.

TP took its chance at the end of January by opposing a crucial vote in the Saeima authorising the government to continue negotiations with its international creditors. In an evidently planned but feebly executed move, the TP claimed the Saeima was not given enough say over these negotiations. It looked as though the government might fall on this vote, but some TP members broke rank, the SC abstained and the LPP voted with the government, obviously not wanting to throw out this government at this stage. It was an ignominious outcome for the TP, especially in the light of party founder Andris Šķēle’s previous announcement that he is returning to politics: he must now be seen as having failed at this first attempt to make an impact. His star may well and truly have waned.

So the Jan. 21 vote was carried by the government, without its major coalition partner, but with the help of the opposition, which does not see any advantage in having the government fall before October. On the one hand this may signal that Dombrovskis is relatively safe, being able to head off the TP treachery, but on the other hand it shows how thin is the glue holding the coalition together.

TP may sulk but it is capable of further bastardry. As another example of its contant niggling, it refused to have one of its favourites sacked, the State Revenue Service head Dzintars Jakāns, after various disciplinary moves had been made against him for alleged corruption and incompetence. Once again threatening to leave the coalition, the TP forced a compromise that Jakāns would not be fired but moved to another position of lesser rank.

The antics of the TP do nothing to raise the regard in which the public holds politicians and the parliament (polls often show around 4 percent trust!), and even in terms of gaining populist publicity for opposing the government the party’s stance may have backfired.

The polls

The most recent political poll at the end of January gave notice that the elections in seemingly distant October are very much on people’s minds. SC gained the highest support (18.8 percent), indicating the Rīga result was no fluke, and it will be a very serious contender to be in the new government. But Domrovskis’ JL also gained, up from 5 percent to 9.9 percent, indicating there is growing support for his patient if rather gloomy style of governing. PS also gained, and there is now growing certainty that JL, PS and the other breakaway party Society for a Different Politics (Sabiedrība citai politikai) will form a coalition for the Saeima elections. Meanwhile, the once mighty TP stands at 3.5 percent and the LPP were struggling at 2 percent of the vote. Most significantly, however, there was a drop in the proportions of people declaring they would not vote or who had not yet made up their mind. For there not to be a Russia-oriented government with SC dominant in October, there will need to be a significant mobilisation of alienated voters who would support the centre or right Latvian parties—if only they could stop making war on each other!

We shall see increasingly tense lobbying among the parties to try to shore up their positions, find partners and convince the public to vote for them, and probably increasingly desperate measures if the polls don’t improve for several of Latvia’s traditional heavies. Will there be a spring offensive from the forces trying to unseat the government? The dominant question may well be who else—if anyone—is willing now to take responsibility for the country in the lead-up to the Saeima election.

Imagine the next time you’re visiting Rīga you pull your iPhone or Blackberry out of your pocket and point it to your favourite Art Nouveau architecture to receive more fascinating facts about the building.

Or you are waiting for the next tram to take you to the Forest Cemetery (Meža kapi) and your mobile device notifies you that the service is running three minutes late, because it knows you are currently located at the corner of Dzirnavu and Barona streets. And when you arrive at Meža kapi you need to take the first right and then the second left to get to the Zigfrīds Anna Meierovics memorial grave site, which you couldn’t find the last time.

And you’re getting mighty hungry, so your device presents you with a choice of three nearby eateries, only a few minutes walking distance away, offering good and wholesome Latvian traditional food.

Most of what is described above is already available today. With further consolidation and standardisation of information technologies (IT), particularly in the Latvian government sector, not only will we see considerable cost savings, but even more new and innovative applications will begin to emerge, some of which we might have not even thought of today.

This was one of the recurring themes discussed at the 11th annual Latvian Information Technology and Telecommunications Association conference held Nov. 27 in Rīga. The conference primarily focused on a more effective IT operating model for the Latvian government sector. It makes perfect sense. Why should each ministry continue to maintain its own IT department, operate separate systems and databases, and make important strategic decisions independently? Why should Latvian citizens have to request information from multiple institutions if the process can be simplified and the results achieved in a few mouse clicks?

The Road Traffic Safety Directorate (Ceļu satiksmes drošības direkcija) is a good example of a government institution that has cut through the bureaucratic red tape and focused on the customer—the Latvian citizen. When I recently applied for a Latvian driver’s licence the whole process took no more than an hour, including completing the 30-minute theory examination and receiving the final product—a shiny new plastic card—in my hands. The process was remarkably smooth thanks to the customer-focused processes and consolidated IT systems. Add the e-signature service and next time I’ll be able to repeat the exercise from the comfort of my home.

The EME e-signature product offered by the Latvian Post Office was supposed to reduce waiting in queues getting unnecessary documents (izziņas), but in its three years of operation the number of users has grown to no more than a few thousand (officials were expecting 10,000 in the first 12 months) and the number of institutions and businesses making use of the technology is less than a handful. In order for this to really take off we need to see more commitment from the government, including a major overhaul of how IT is managed. The thinking of three years ago just doesn’t cut it anymore. I can still clearly remember a presentation from a representative of the Latvian Notary Association stating that its services would not be affected by the introduction of this technology. Who are they kidding! I would much prefer the Estonian way, where using the e-signature service it takes no more than 15 minutes to register a new business, compared to the several days of running around various Latvian institutions getting all kinds of documents, some of which have to be notarised as well.

The LIKTA conference was also the opportunity to highlight achievements, including new IT products and services introduced in the last 12 months.

This year’s Platinum Mouse Awards (Platīna pele 2009) were divided into three categories. Ideju Forums (Idea Forum) took the “Best Service to the Community” award with its online digital library project, www.e-biblioteka.lv, launched just two months ago. The library contains more than 5,000 e-books in various languages, 1,200 audio books, 430 videos and a growing number of audio and image files. Ideju Forums is also known for creating audio books for the vision-impaired as well as maintaining the popular children’s stories portal at www.pasakas.net.

The “Business Development and E-commerce” award went to Lattelecom, which has become a world leader in rolling out a new high-speed optical Internet service in Rīga. Customers living in the outer suburbs of Pļavnieki, Purvciems, Ziepniekkalns and Imanta should feel especially privileged since as of the beginning of November they are now able to connect to a blindingly fast 500Mb Internet service—the fastest consumer Internet service in the world. If these residents can’t afford the LVL 50 per month, they can still choose from the 100Mbps service at a very affordable LVL 11.90 per month. Lattelecom hasn’t yet managed to get to the centre of Riga so I’ll have to cope a few more months with my “slow” 10 Mbps Internet service.

Lattelecom was also nominated for its new digital TV product called Interaktīvā TV. What makes this different to the other TV service providers is the ability to watch programs that you might have missed during the previous week. On the night of the Nov. 18, I was among many other thousands of people who sang the Latvian anthem and watched the fireworks on the banks of the Daugava River. When I got home later that evening I switched on my iTV service and relived the event, but this time on my TV. I was also impressed how simple it was to set up the iTV service. The easy-to-read manual and online video set a great example of how new products and services should be rolled out to customers.

The “Best e-Government Solution” was awarded to the Ministry of Agriculture for creating an online solution, E-Pieteikšanās sistēma, that enables farmers to apply for subsidies from the European Agriculture Fund. Several other e-government initiatives were also nominated, but with consolidated and centralized IT infrastructure the number of applications should grow even more. A proposal was also put forward to adopt the ppen data standard that could make Latvian government more open and transparent, similar to the initiatives already started by the U.S. government (see, for example, Data.gov) and several other countries.

The “Special Mention” award went to the Web site Lielie bērnu slimnīcai, which uses various social networking technologies to collect donations for the Children’s Hospital.

The mentions and awards shouldn’t stop there:

• The parenting portals www.mammam.lv and www.tetiem.lv, in 10th place in terms of Web site popularity, provides a useful forum for mums, dads, grandparents and anyone else bringing up children.
• Eurotermbank is the largest online terminology resource encompassing more than 2 million terms in several European languages, including all three Baltic languages and should be included in every translator’s arsenal of translation tools.
• Drošs Internets educates children on the risks of the Internet.
• The Mobilly service provides an alternative way—using your mobile telephone—to pay for a car parking space, a ticket on the Liepāja tram, a ticket on the train or your next taxi trip.

Many more businesses and individuals were not nominated simply because they have been too busy working on their next creations.

The grueling budgetary process in which Latvia has been engaged for months is coming to some resolution with a final adoption of the 2010 budget scheduled by Dec. 1.

Latvia’s politicians are faced with unpalatable choices of cutting more expenditure and trying to raise revenue in a declining economy. They are being carefully watched by international institutions fearful that a total collapse in Latvia’s economy may rebound onto other countries, but concerned that Latvia is still able to meet its obligations to pay its considerable debts.

At the heart of the problem of revenue has been Latvia’s reliance on two taxes that most affect those on poorer incomes: an income tax with a flat rate of 23 percent and a value-added tax, which was raised from 19 percent to 21 percent this year for most goods. The huge property boom of the past 10 years, when Rīga prices hit those of the largest European capitals, was unhindered by any capital gains tax (a sure sign of the economic interests of previous governments), and unhindered too by any tax on bank interest.

The disproportionate reliance on income tax is linked to two features that underlie both official corruption and the sources of the private debt bubble that has now enveloped Latvia. As part of employees’ desire to reduce their taxes (and for employers to escape other charges associated with labour costs), the system of payment by “envelopes”  was widespread. In other words, workers were getting a lower official salary on which they paid tax but receiving under-the-table topping up that was untaxed. Readers will no doubt remember that President Valdis Zatlers fell into trouble with one variant: “envelope payments” to doctors and surgeons so that patients would be looked after better. For many in the workforce, such payments ensured a higher untaxed income at the expense of government revenue, a loophole that previous governments did very little to combat.

One disincentive for such envelope payments was provided by the social security system, which bases pensions on a base minimum plus regard to salary earners’ income and social service tax contributions, so those declaring less income than they received would gain a lower pension in the future. This was only a future disincentive, often not considered by present employees; moreover, constraints on the budget have meant that the gap in pension payments, between those who contributed substantially through their taxes and those who contributed little, has diminished.

However, the envelope payment system is also linked to private debt, as investigations into the operations of the banks have revealed. In determining loans to private individuals, banks would ask for what people earned, but would ask for total payment—official as well as envelope payments—to determine risk. Thus the corruption of the public sector tax evasion also affected private borrowing.

The government’s negotiations with the International Monetary Fund and European Commission to plug deficits and to enable structural reform are nearing their end, with the government agreeing to cut another LVL 500 million from the 2010 budget to minimise the budget deficit, and look to new revenue-raising methods. But the negotiations have been continually interrupted by the political positioning of some coalition parties, and a difficulty in having a rational debate over budgetary measures. International institutions were concerned when some coalition partners doubted whether further budgetary cuts were necessary. With populist language, those coalition partners claimed the cuts will hurt those most vulnerable, but dragged their feet over new and long-overdue tax measures: a capital gains tax, a tax on bank interests and discussions over a progressive income tax. The various proposals are before the Saeima (parliament) now together with the 2010 budget.

The big picture needs to be kept in mind. Latvia must eventually be able to balance its own budget, not continually borrow from international institutions. Moreover, for Latvia to be able to enter the eurozone by 2014, the budget deficit cannot afford to blow out. The problem for Latvia’s politicians is to focus on this, knowing the pain inflicted by them on the population may be well remembered at the next year’s Saeima elections.

Of the measures proposed, the capital gains tax seems to now have approval. The taxes would amount to a tenth of a percent of cadastral value for owner-occupied properties, with progressive rises for those not owner-occupied, an important move but one that will only bring returns in future years and be very dependent on the property market improving. Intense debate is continuing over reform of income tax. It now seems clear that no progressive tax will be introduced, as no other Baltic country has one, and it is feared companies would register in Estonia or Lithuania to take advantage of flat tax. Debate now centres on whether there should be a reduction of the tax-free threshold (from LVL 35 to LVL 25 a month, a move that would hurt the poorest people) or an increase in the tax rate as a whole from 23 percent to 25 percent.

In other cases, desperate measures have been proposed. Prime Minister Valdis Dombrovskis should have known better, but his government raised a short-term proposal to ease private debt pain by adopting the American solution of limiting the debt incurred on a property loan to the value of the property. In other words, if one has borrowed more than the current property is worth because of the declining property market,  one is only responsible up to the value of the current property. Such a provision in the United States has seen thousands of debtors simply walk away from their properties, leaving them to the banks that cannot chase up the balance of the debt. Originally introduced to ensure banks would lend money with due and careful regard to the property market, the phenomenon of sub-prime lending threw this caution to the wind. Luckily, the howl of protest quickly sunk the proposal in Latvia. 

Finally, two other issues deserve comment. Many readers of this column will have used the Internet version of Latvia’s leading newspaper Diena, whose outspoken commentaries on Latvian politics, and relentless exposure of corruption and political chicanery, was one of the antidotes to Latvia’s odious political culture. But in moves that have not yet been fully explained, Diena‘s ownership changed (it was previously owned by a Swedish publishing company), and the new owners (seemingly related to murky British interests but with suspicious links to some of Latvia’s oligarchs) began an immediate cleaning out of the most outspoken journalists, causing others to resign in protest. While the official explanation for these machinations was falling advertising revenues, the change in the character of Diena has been marked, with a decidedly less critical edge to current journalism. Meanwhile, the Diena refugees have started their own online publication, Cita Diena.

And despite the priority of the budget, the Saeima has no forgotten other political necessities as well. In a shock result for the Latvian judicial system, the Saeima in a secret ballot refused to appoint Administrative Court Judge Māris Vīgants to the Supreme Court. Vīgants, supported by the Judicial College and by the Saeima’s own Judicial Committee, was one of the judges who sent Venspils mayor and chief oligarch Aivars Lembergs to prison in 2007. His political opponents in the Union of Greens and Farmers, who had once proposed Lembergs as prime minister, ensured the defeat and underlined once more the considerable forces that still protect corruption at the highest levels in Latvia. In a sublime footnote, Lembergs claimed that he should be considered to have furthered Vīgants’ career, not hindered it.