RIGA - Prime Minister Valdis Dombrovskis (Unity) intends to discuss the 2011 state budget with both coalition and opposition parties, despite the obstructionist position held by For a Good Latvia, who indicated they will not support the budget, before even taking a look at its contents, reports news agency LETA. Harmony Center and the alliance All for Latvia-For Fatherland and Freedom/LNNK have displayed a more constructive position.
As the prime minister said in an interview with the daily Neatkariga, “Of course it will also be necessary to speak with the opposition; however, we will not be able to support proposals for measures which would be based on bloated predictions of state revenue.” Corrections are always made in the Saeima to proposed state budgets. Dombrovskis notes that he does not remember a budget which was passed in exactly the form the government wished; however, the Saeima will not be allowed to change the consolidation amount or several other key parameters.
Following a seven-hour meeting over the Nov. 20-21 weekend, the governing coalition reached agreement over the consolidation measures to be implemented in the 2011 state budget. The current draft budget includes measures to reduce the income tax rate to 25 percent from the current 26 percent, increase the tax-free minimum salary to 45 lats (64.20 euros), and raise the minimum wage from 180 lats to 200 lats. At the same time, employees’ social security contributions would be raised to 11 percent from the current nine percent.
The government also plans to raise the standard VAT rate from 21 percent to 22 percent, with the reduced rate increasing from 10 percent to 12 percent. Electricity would henceforth be applied the standard rate rather than the reduced rate. Property taxes, which currently range from 0.1 percent to 0.3 percent, would be doubled under the proposals.
The agreement reached with international lenders leads to consolidation of the budget by around 280 million lats.
Not everyone is happy. Despite bad weather the morning of Nov. 25, a protest by the Latvian Free Unions Association outside the Cabinet of Ministers building gathered more than 200 people. The demonstration was also joined by members of the Latvian Social Democratic Workers Party. Placards were held saying ‘No to austerity!’ and ‘Yes to growth!’ Slogans such as ‘Will the banks also pay for the crisis?,’ ‘What happened to the election promises?’ and ‘Don’t make people suffer’ could also be seen.
Spending by the Latvian state is still too high, and revenue too small - this discrepancy must be reduced to 3 percent of GDP at least, and in the future it could be reduced even lower in order to create a sustainable budget, said European Commission (EC) delegation leader Gabriele Giudice in an interview with the magazine Ir.
Speaking of the measures by which the government hopes to achieve the consolidation of the 2011 state budget, Giudice indicates that the commission was concerned about several of the proposals. “When we reached agreement on a consolidation amount for 2011 of around 280 million lats, we also agreed that the reduction of the deficit should be achieved through high quality measures. The consolidation of the budget must be sustainable, and temporary measures should not be employed. Moreover, the measures used should encourage the long-term growth of the economy, and should be fairly distributed among different social groups. Both those which include the efficiency of the public sector, and, if necessary, also those which improve revenue. This does not mean that consolidation can be achieved simply by raising tax rates. Or by widening the application of taxes and fighting the shadow economy. There must be an overall improvement in public sector efficiency, as there are many opportunities to provide the same and perhaps even better services for less money,” explained Giudice.
He stressed that it is not enough simply to hit the deficit targets in 2011 and 2012 in order to be accepted into the eurozone. “Who can guarantee that the country will not return to a higher deficit after the decision on joining the euro has been taken? The eurozone is currently experiencing the difficulties which arise when some countries are not sufficiently stable. It is very important to give a signal that you take this challenge seriously,” explained the EC representative.
A meeting of the National Trilateral Cooperation Council on Nov. 25 ended without arriving at any compromises, and social partners said after the meeting that they would not support the 2011 state budget. Social partners believe that the planned spending reductions will have a negative effect on the medium-term development of Latvia.
Latvian Employers’ Confederation head Vitalijs Gavrilovs said that his suggestions regarding the budget were ignored at the meeting, and that a political decision was taken that Unity and the Union of Greens and Farmers had already agreed upon.
Latvian Free Unions Association’s Chairman Peteris Krigers also said that the budget project that was presented to the social partners meant “either their unwillingness to do their job properly or a lack of political will.”
The necessary consolidation of next year’s budget should be carried out through structural reforms rather than increased taxation, said Bank of Latvia President Ilmars Rimsevics in an interview on the LNT program 900 Seconds. “It is obvious that not everything can be done in a month’s time,” he added, noting that the consolidation of next year’s budget will be an ongoing process, which means that there is enough time for carrying out structural reforms. “Latvia continues to live beyond its means,” warned Rimsevics.
The head of the central bank indicated that every day Latvia spends 3 million lats of unearned money, but that this sum could be reduced to 2 million lats next year. Interest on the country’s borrowings is close to 300 million lats a year, and this is money which is simply being given away.
Increasing the value-added tax rate may slow down the economic growth of Latvia and expand the shadow economy, said Rimsevics in another interview with Latvian State Television program 100th Article on Nov. 29. In the banker’s opinion, increasing the standard VAT rate from 21 percent to 22 percent, one of the planned budget consolidation measures, may curb economic growth, because the higher tax will definitely reduce domestic consumption.
“Latvian residents are already spending less on purchases and deposit money in banks, waiting for taxes to increase. If the tax is hiked to 22 percent, some of the residents will choose to make larger purchases already this year, not next year. Some businessmen will no longer be able to afford paying taxes, which means that part of the legal economy will drift into the shadow economy, and less money will be collected in taxes than planned,” he said. “We have to learn how to live thriftily from the Estonians.”
Giudice feels that Latvia has so far been very successful in reducing the deficit, but adds that the country should not stop half-way. The EC delegation leader stresses that the total consolidation over 2011 and 2012 could reach 800-900 million lats, and the 280 million lats planned for next year leaves a large sum for 2012. Therefore, it is important that the measures taken by the government harm the economy as little as possible, and are spread fairly among the population.
“We can criticize the budget, as it is not complete; however, it is important to approve the budget by the end of the year,” urges Rimsevics.