Agreement near on Latvia's 2010 budget

  • 2009-11-11
  • Staff and wire reports
RIGA - Next year's budget remains a work in process as government leaders and international lenders this week worked to fine tune the document to satisfy commitments to get lower budget deficit by 500 million lats (714 million euros). As most consider that the spending side of the budget has been cut to the bone, the focus has turned to where to close the gap from the revenue side.
The draft budget, which Saeima passed in its first reading on Nov. 5, forecasts a 560 million lats excess of spending over revenue for next year, reports news agency LETA. Prime Minister Valdis Dombrovskis says that there should no obstacles, though, to passing it in the final reading on Dec. 1, but changes are still possible from the international lenders.

Considering that Latvia is dependent on the IMF-led loan package to bridge the budget deficit, Dombrovskis reminded the public that "Our expenditures exceed our revenue. This is a crisis budget. Even if there are signs of economic recovery, we have not yet exited the crisis. I have no illusions and I am aware that probably no one is completely satisfied with the budget."

"Insolvency of the state, in a worst-case scenario, means suspension of wages, pensions and welfare benefits, budget institutions not paying their bills, the state being unable to fulfill its financial obligations and, therefore, sinking in the swamp of debt. Insolvency of the state would mean mass bankruptcies and complete paralysis of the financial sector," warned the prime minister.
The sticking points now holding up final agreement revolve around where specifically to raise taxes. The lenders want Latvia to restructure parts of the tax code, install a more equitable and broad-based tax plan spread across all elements of society and modernize the system.
Beginning Jan. 1, it seems likely that a progressive residential property tax will be installed, starting at a base rate of 0.1 percent of the living space's cadastral value. The rate then increases to 0.2 percent for properties valued between 45,000 lats and 75,000 lats. Property valued at over 75,000 lats will be subject to a 0.3 percent tax rate.

An across-the-board residential tax rate of 0.4 percent had been proposed earlier, but was rejected by the People's Party, who only reluctantly agreed to go with the initial proposal of a 0.1 percent tax. Civic Union's Saeima leader Anna Seile, during budget negotiations, said she felt "the People's Party's [in] haggling over the tax... is apparently trying to protect its financial backers who have bought up large properties."

The People's Party, led by so-called businessman Andris Skele, and other wealthy individuals remain opposed to the implementation of a real estate tax, as they have accumulated through various methods substantial amounts of property and don't want to impose a tax on themselves, say analysts.
Still, with the base tax rate at 0.1 percent, the owner of a 75 square meter apartment in Riga would have to pay 28 lats a year, for example. In a rural town such as Ludza, in eastern Latvia, the owner of the same size apartment would have a tax of 1.25 lats. However, there may be a minimum tax level of 5 lats imposed on the homeowner.

With a minimum rate of 5 lats, there would then be an 'effective' tax rate on the Ludza property of 0.4 percent, not 0.1 percent. In a strange twist of logic, Latvia ends up with a regressive tax at the bottom, where the rich pay the lower 0.3 percent rate, while the poorest households pay a higher 0.4 percent rate.

This week President Valdis Zatlers said he believes the People's Party is hampering the decision on introduction of a progressive property tax on the pretext of protecting needy residents' incomes, though he says the new tax is actually in the large landlords' interests. He agrees that Latvia must adopt a progressive property tax so that the owners of large and expensive properties pay more than other residents.

The proposed tax bill also calls for a land tax, as well as a tax on farm and industrial buildings that would be 1.5 percent of cadastral value, with a minimum levy of 5 lats. Property tax on unused agricultural land will be hiked to 3 percent of the cadastral value.
 The minimum tax of 5 lats is to protect against the case when the assessed tax would be below the municipality's administration costs.

On another front, the ruling coalition partners, rejecting a call from the IMF group for a progressive income tax to replace the current 23 percent flat tax, have agreed to raise the personal income tax to a 25 percent flat rate. Dombrovskis said after the Nov. 9 meeting with coalition members that this will allow to keep the tax-exempt minimum income level at the previous level, or maybe to reduce it slightly.
The People's Party had argued against the progressive income tax, pushing instead for a reduction in the tax-exempt minimum to counter-balance its fiscal effects.

International lenders object to the idea of lowering the tax-exempt minimum income level due to its social costs on the poor. Zatlers said that "Lowering the tax-exempt minimum would create an additional burden and increase tension in families already living on low income."
Dombrovskis explained that the government would consider offering tax allowances for large families along with an introduction of a lower tax-exempt minimum. He said that the progressive personal income tax suggested by the lenders was not an option because it implies setting a very low tax threshold that would affect an even larger part of society.

The exact figure for the tax-exempt minimum will be announced after talks with the lenders. The current tax-exempt minimum income level is 35 lats.
Political party Sabiedriba citai politikai deputy Artis Pabriks says that a progressive income tax, which exists in most European countries and in the U.S., will be implemented in Latvia. He considers that the largest tax would be applied to that level of society that earns more than the average wage. He adds that a progressive tax doesn't have to be large to cover the deficit, but would be such that society regains trust in the state.

Another defender of the wealthy few, former Prime Minister and now Member of the European Parliament Ivars Godmanis (Latvia's First Party/Latvia's Way) doubts if next year's budget could have been done in any better way. In his view, "Taxes should not be raised anymore. However, if this cannot be avoided, raising personal income tax from 23 percent to 25 percent would be a better option than introducing a progressive income tax."

More than 900 proposals have been submitted for consideration for the 2010 budget, which have been forwarded to Saeima committees for review.
Next year's budget revenue is projected at 3.7 billion lats and expenditures at 4.3 billion lats. The central government's budget deficit next year is planned at 5.1 percent of GDP, and municipal budget deficits at 1.7 percent of GDP. With the European Commission's revisions, the budget deficit could increase by another 1.5 percent, but the total budget deficit should not exceed 8.5 percent of GDP.