• 2008-12-17

The Latvian government has given its people a Christmas present they will remember for a long time.
At a time when most countries in Europe and the world are lowering tax rates in an effort to spur on economic activity, the Latvian government has decided to increase the base rate by 3 percent 's from 18 percent to 21 percent 's and double the reduced tax rate.

Latvians would have preferred a lump of coal.
The increased value added tax will almost certainly hamper economic growth 's which is already stagnant in the face of the economic crisis. Consumers who once thought the good days of BMWs and new washing machines for all would never end are now cutting back on spending and trying to save for a crisis that everybody seems to believe will get worse before it gets better.

A highly publicized tax hike will only drive people's wallets deeper into their pockets. What the country needs is for people to go out en masse and buy new stuff. In this respect, the tax hike will be counter productive.
Sadly, the people who will be hit hardest by the tax are those that are already struggling. People that have trouble making ends meet will simply have to swallow the increased VAT rate, as they will likely not have many luxury expenses they are able to cut out.

Struggling business will likewise feel the worst pinch. Those industries that enjoy a reduced tax rate 's a rate that was allotted to them for a good reason 's will see a much larger relative increase in what they have to hand over to the government. The higher prices will be passed on to consumers, and everyone will suffer.
Unfortunately, it looks like the tax hike may, for the moment, be a necessary evil. The Latvian government has come to the point where it needs money so badly that anything the IMF suggests will have to be implemented. The country has even been forced to turn cap-in-hand to Estonia for a loan.
And admittedly, the tax hike will, in the short term, provide a much needed boost to the budget.

The funny thing, however, is that none of this would have been necessary if the government had decided to follow through with the Lattelecom privatization deal. Scandinavian telecommunications giant TeliaSonera and American powerhouse Blackstone had already agreed to the deal. Both are large enough companies that they would have had no problem holding up their end of the bargain.
All the government had to do was give it the go-ahead.

Had the government approved the billion-dollar privatization deal, there would not be any problems with the budget right now. All they had to do was accept the deal, and there would have been plenty of money in the nest egg for the government to last through the crisis.
The only question is, would the government have had the foresight to save the money for the inevitable rainy day, or would it have stayed true to form and squandered the much needed cash?