Latvian legislators say 2010 budget proposal satisfies IMF demands

  • 2009-11-04
  • Staff and wire reports
RIGA - Finance Minister Einars Repse (New Era) says he does not see the possibility right now for any chance of introduction into Latvia's tax code of a progressive personal income tax, reports news agency LETA. He defends his position by pointing to neighboring countries Estonia and Lithuania, noting that they also have no progressive personal income tax policy.

Earlier this summer the Finance Ministry proposed introducing changes to the tax code to bring in a progressive income tax, but the proposal was rejected. International lenders, to whom the Latvian lawmakers are relying on for a 7.5 billion euro bail-out loan to get the country through the economic and fiscal mess, would like to see a progressive income tax brought in to increase government tax revenue and help reduce the budget deficit.

The group of lenders says they have objections to the government's decision to lower the tax-exempt minimum income. The foreign lenders are also getting jittery over concerns that part of the promised planned spending cuts "might actually be carried over to future years," warns Prime Minister Valdis Dombrovskis (New Era). As for the 2010 state budget expenditures, the lenders' objections "are more of a technical nature," he says.
The 2010 state budget bill and accompanying documents were handed in to Saeima by Repse on Nov. 2. The budget proposal is now in committee review. Saeima is expected to vote on the budget in the first reading on Nov. 5.

"The government has managed to keep the tax burden at a relatively low level in next year's budget plan; this will positively advance economic growth," said Repse. He promises that "In terms of competitiveness, Latvia will be in the front line once the global economy recovers. Of course, it must be taken into consideration that a low tax burden goes hand in hand with low expenditures. As our total tax burden is only 30 percent of GDP, we cannot allow overly generous financing for various sectors which would otherwise be feasible if our tax burden stood closer to the European average, which is around 39.8 percent of GDP."

It is as yet unclear whether the international lenders have endorsed the budget plan. The Finance Ministry continues harmonizing the budget with the international lenders, though it says that it does not expect any significant changes to it.
Repse told reporters that the 2010 budget is the toughest budget since the war, and work on it was very much affected by the continuing economic downturn, but at the same time it is a budget to counter the economic crisis. He affirmed that Latvia "has carried out its commitment to reduce next year's budget by 500 million lats.

The current recession arrived following the "years of abundance" during Prime Minister Aigars Kalvitis' (People's Party) government, says Repse, which has made structuring the budget extremely complicated. "During the economic boom we got used to heavy spending, nobody really wanted to think about economizing, households and state institutions alike. All of a sudden salaries and state revenues shrank, and it was very difficult to accept initially. With time, adjustments are made and people get used to living within their means," Repse said.

The minister is confident that the state has not become insolvent and, thanks to the government's efforts, is not threatened by insolvency. "I would describe this as a budget for overcoming the crisis. It focuses on social protection and economic development," he says.
"The international lenders could ask to amend the plan, but in this case it would only be in line with ordinary procedures and should be viewed as a normal process," said President Valdis Zatlers. "We have to be ready for the international lenders asking to change some parts of the budget plan in case they find the suggested measures of low quality," he said, pointing out that lender's assessment can help to improve the quality of the plan.

Zatlers however argues that the international lenders might doubt if the planned budget revenues are "feasible," and that the budget should be assessed not by viewing just the figures outlined, but by the actual capacity to implement the plan.

Speaking of the degree of unity among the members of the coalition, he says that "I believe that the serious politicians, who lead coalition parties, clearly understand that the budget has to be endorsed. We have no other option. Everyone wishes to have as good quality budget as possible, because it is the budget that will determine how peaceful or troublesome next year, the year of elections, will be."
He urges confirmation "without further delay, that the two budget amendments carried out hastily this year already have had a strong impact on people and that the society has lost trust, and that indeed no more radical changes in the budget plan should follow."

The budget revenue is projected at 3.7 billion lats and expenditures of 4.3 billion lats next year. The central government budget deficit is planned at 5.1 percent of GDP. With the European Commission's corrections, the budget deficit could increase by another 1.5 percent, but the total budget deficit should not exceed 8.5 percent of GDP.
Personal income tax is expected to bring in a total of 624.3 million lats next year. The maximum government debt could reach 7.5 billion lats at the end of 2010.