RIGA - Latvia may face further hikes to the value-added tax rate if it is to meet a budget deficit of 3 percent of gross domestic product by 2011.
The move was revealed in a letter penned by the Latvian government to International Monetary Fund director Dominique Strauss-Kahn before Christmas and ahead of the IMF's 1.7 billion euro loan to help stabilize Latvia's struggling economy.
The letter, which has since been made public, also predicts further redundancies and wage cuts in the government sector.
According to LETA reports, the letter says that it may be difficult for Latvia to reach the budget deficit projection, taking into consideration ongoing economic uncertainty in the medium-term perspective.
The letter further stresses all political possibilities will be constantly analyzed and changed when necessary.
As of January 1 this year, the regular value-added tax rate in Latvia rose to 21 percent, up from the previous 18 percent. The reduced VAT rate has also increased from 5 to 10 percent.
It is planned that a 10 percent tax on all capital gains 's interest, dividends, royalties, rent, as well as profit from share and property deals 's will be introduced in 2010.
Also starting 2010, property taxes, which are currently lower than average property taxes in the Organization for Economic Cooperation and Development member states, will be increased.
The amount of dividends from state-owned enterprises will be raised from the current 27-35 percent to 50 percent.
Latvia will also request international assistance for improving tax administration, although government forecasts do not say if tax revenue will increase notably before 2010.
In the letter, Latvia guarantees limiting budget spending to under 40 percent of GDP. To achieve this target, wages in the government sector will be cut by about 15 percent, pensions will be frozen and subsidies rationalized. Government spending on goods and services is also expected to come under scrutiny.
On the other hand, measures for restructuring the banking sector, including recapitalization of banks, honoring liabilities of the deposit guarantee fund and ensuring various liquidity instruments, may cause significant extra fiscal expenditures.
The letter further ensures Latvia's fiscal discipline will be consistent and persistent.
Extensive reforms in the education, civil service, public administration and health care systems will be rolled out later this year with aid from the World Bank. Once reforms are completed, they are expected to save Latvia about 2 percent of GDP, mostly due to smaller staffing levels, starting from 2010.
The IMF was among several international lenders that agreed to provide a 7.5 billion euro financial aid package to Latvia (see story Page 12).
