Budget plan unsatisfactory, says FICIL

RIGA - As the Saeima was voting to approve this year’s budget in a pre-Christmas session, Finance Minister Andris Vilks (Unity), in an interview with Latvian State Radio, was explaining that the 2011 state budget will most probably be amended in the second quarter of the new year, reports news agency LETA. By that time, additional measures will need to be agreed upon to consolidate the budget by a further 50 million lats (71.4 million euros).

Data on tax collection during the first months of 2011 will be released in March, and after that there will be several ways to amend the budget for the government to consider, said Vilks. Further consolidation needs to be accompanied by structural reforms that could be carried out in health care, education and social areas. Land cadastral values could also be revised.  According to him, it is necessary to listen to social partners, experts, to find “appropriate solutions.”

He could not yet say how many consolidation measures would deal with spending cuts and how many with increasing the revenue. “The coalition must decide this question and there must be a consensus,” he pointed out. The finance minister described the 2011 state budget as conservative: “There are no positions in the budget where tax revenue could be smaller than planned.”

One of the most important tasks for the government and the entire community in 2011 will be battling the shadow economy. The government plans to recover 60 million lats from the black market altogether, of which 15 million lats is an official budget projection, he added.

Partial tax amnesty is also provided for in the budget. “We can, and we must, help business that continues to work, but has tax debts. This, however, does not concern businessmen who have been hiding their debts for a long time and might now try to legalize them,” warned Vilks.

The minister also said that some state-owned companies could be sold in the second half of 2011.
Foreign investors have said that they do not approve of the government’s plans to take money away from people and public institutions, and recommend the government pursue structural reforms and shift the tax burden instead.
Such were the recommendations for the Latvian government made by parent companies of enterprises operating in Latvia, reported business daily Dienas Bizness. “Emphasis must be on structural reforms, not brutal spending cuts on procurement or other needs,” said Sandis Steins, deputy chairman of Foreign Investors Council in Latvia.

It has been talked over extensively that the state should look into what it could make differently or improve, and how, said Steins. “Unfortunately, seeing the so-called gain from structural reforms, one has to conclude that this simply stands for spending cuts,” concluded Steins. He explains that, for instance, the Defense Ministry’s structural reforms have boiled down to not building new patrol boats for the Navy; those of the Transport Ministry - to reduce spending on road reconstruction and renovation.

“It is exactly the same with the budget revenue section; money is being taken away from residents and businessmen, there are no structural reforms to improve tax collection,” stresses Steins.
He reiterates that the tax burden still has not been transferred from labor (personal income tax and social tax) to consumer taxes (property tax and value added tax). “We have been talking about shifting the tax burden already since 2007; this past summer we even submitted specific proposals that personal income tax be radically reduced to 20 percent (now 25 percent), and the property tax be radically increased to 2.5 percent of the property’s cadastral value (now from 0.2-0.6 percent), but instead of tax burden shift, we saw tax burden increase.”

The state is free to do what it wants, he notes, but it is important that these measures improve the competitiveness of Latvia. “As a result of the proposed tax increases, residents will become poorer, weakening domestic demand, especially in purchases of legal goods and services,” says Steins.
The deputy chairman also lambasted the government’s measures to combat the shadow economy, saying that the government’s plans in this regard cannot be taken seriously, and the government continues its unwillingness to listen to foreign investors’ advice.

Fifty-four deputies voted for, and 38 against, the 2011 budget bill, while one abstained. Janis Urbanovics (Harmony Center) did not participate in the voting.