Smooth sailing ahead as major budget negotiations wind down

  • 2009-11-25
  • Staff and wire reports

Tough decisions: Prime Minister Valdis Dombrovskis is confident his 2010 budget will pass Saeima's vote next week.

RIGA - The major decisions on the 2010 budget have been agreed, with any minor changes not expected to interfere with Saeima’s vote on the bill on Dec. 1, says Prime Minister Valdis Dombrovskis (New Era), reports news agency LETA. The budget has been debated under a stiff negotiating position from the IMF-led coalition of the willing international lenders, leaving the government little choice but consolidate the budget by the demanded 500 million lats (714 million euros).
Dombrovskis said that the progressive property tax rates could have been higher, to help shrink the deficit, though this was impossible to achieve due to People’s Party objections. The party also stonewalled in the proposal for instituting a progressive income tax, and for other efforts to restructure and modernize the tax code.

The prime minister says that the 2010 budget bill “has been agreed upon at the technical level with the international lenders.” Nevertheless, the final decision by the international lenders will only be known after the review mission arrives in Latvia, which will be after the Saeima vote.
So, the new tax levies will probably, at this point, include a personal income tax rate that will be increased from 23 percent to 26 percent. The proposal to increase the corporate income tax for earnings over 5 million lats to a 25 percent rate was rejected, says the Finance Ministry’s spokesman Aleksis Jarockis. This means that the current corporate income tax rate of 15 percent will stay.

The government agreed that speculative property deals will be assessed a 15 percent personal income tax, whereas income from dividends will be applied with a 10 percent tax. A capital gains’ tax, which for certain will come into force, remains only to be debated as to the amount. It has been agreed to at 10 percent, but under new demands this could be raised to 15 percent.
The progressive real estate property tax, agreed to earlier, will be introduced implementing a 0.1 percent rate on property with a cadastral value up to 40,000 lats; 0.2 percent for property valued between 40,001-75,000 lats; and a rate of 0.3 percent on properties worth more than 75,000 lats. This is expected to add about 500,000 lats to the government’s revenues.
Other expected taxes will include an increase in the annual duty for motor vehicles, bringing in an additional 15 million lats. Another proposal will be to introduce a tax on natural gas, though this may not apply to this year’s heating season.

Under discussion is the option to lower tax allowances for dependant persons, from 63 lats to 50 lats per month. Also proposed is the reduction in the tax rebate for donations made to charity organizations, from 85 percent to 25 percent.
The government is working towards the deadline in an effort to wrap up the package through steps to squeeze out a final 55 million lats in cuts, discussed after a Nov. 16 ruling coalition meeting. The lenders have expressed reservations still about various budget aspects, specifically in how a total amount of 150 - 200 million lats in cuts will be achieved. They are concerned that expenditures are not being reduced, just forwarded to future years.