Reforms discussed but little action

  • 2011-03-23
  • From wire reports

RIGA - Taxes in Latvia could be reduced in 2013, Prime Minister Valdis Dombrovskis (Unity) said in an interview with the business daily Biznes&Baltija. Dombrovskis points out that in 2012, Latvia must meet the Maastricht criteria, which envisage that the budget deficit must not exceed three percent of gross domestic product; therefore no tax reductions are planned for now as Latvia works to join the eurozone.

“The 2012 budget will be the last one to be consolidated. Stimulating measures will be carried out already in 2013,” said Dombrovskis. He emphasized that in 2013, the tax burden will be moved from labor onto consumption and property.
Commenting on the current situation with pensions, Dombrovskis said that the Welfare Ministry is working on proposals on stabilizing the social budget. “We will not be able to ignore the problem of pensions,” emphasized the prime minister.
Dombrovskis pointed out that the revenue from possible privatization of companies belonging to the government will not affect the budget deficit. The revenue will be transferred into a special fund for stimulating business activity. At the moment, the government is considering selling Citadele bank and its shares in the telecommunications companies Lattelecom and Latvijas Mobilais telefons.

Latvia has “used all opportunities for tax increases, now other budget consolidation strategies must be considered,” says the Finance Ministry’s State Secretary Martins Bicevskis, speaking in an interview with the Telegraf newspaper. He agrees that the government will have to consider reducing some of the taxes already in 2013.
One of the areas where reforms are possible is the social budget, although this matter will certainly see serious and complicated political debates. At the moment, there are 570,000 pensioners in Latvia, while the country’s labor force is at 950,000, says Bicevskis.

The current pension system was developed in the 1990s, when the demographic situation was slightly different. For this system to work, the country’s labor force must stay above a certain limit.
Bicevskis is convinced that the situation may be stabilized without destroying the existing pensions system. In his opinion, more money could go to second and third pension pillars, and private pension schemes should be encouraged.
Asked what proportion of labor force to pensioners Latvia should have, Bicevskis says this depends on what welfare level Latvia wishes to achieve. The current labor force might be sufficient if Latvia-produced goods had higher value and productivity was higher. In this respect, Latvia still is far behind other European countries, says Bicevskis.

He goes on to say that Latvia would not be able to avoid tax increases, as taxes in Latvia must be raised to the European level. For instance, excise tax in Latvia is to be increased once every two years until 2018, except Latvia increased the tax slightly sooner this time. He declines to mention the amount by which the 2012 budget will have to be consolidated, saying that the Finance Ministry is still waiting for the data on 2010. Debates with international lenders on this matter will begin in April, which is when the first suggestions could be announced. “It is clear, though, that it will be impossible to achieve a budget deficit below 3 percent of GDP in 2012 without additional spending reductions,” explains the state secretary.

Nonetheless, the situation in Latvia has significantly improved, said Dombrovskis in his annual report to the Saeima on the job done by the Cabinet of Ministers and its future plans, reports Dombrovskis believes that last year was considerably better than 2009. The consistent implementation of the economic stabilization program and duly adoption of the 2010 budget has restored financial markets’ trust.

The government has accomplished its most important tasks - prevented insolvency of the country, overcome the most critical point of the economic crisis, and stabilized the financial and economic system, which is a necessary basis for further work on increasing national competitiveness and restoring economic activity. This difficult task was achieved without very serious social tensions, although not without serious decisions in the social sector.

Dombrovskis also emphasized that the economic recovery in Latvia has also been recognized internationally, as several rating agencies have upped Latvia’s credit ratings and the outlooks on Latvia. “It is a positive signal to the financial markets, which will improve the availability of loans to Latvian residents and businessmen. The country will be able to return to the international financial markets and refinance the international loan,” said Dombrovskis.

Further reforms will proceed in three main areas - raising the competitiveness of Latvia, development of public administration, and development of a balanced welfare system, says Dombrovskis. Until now, setting structural reforms focused more on austerity measures, but now the second stage has begun, where reforms, aimed at improving the competitiveness of the country, sustainable economic growth and efficient public administration, will be implemented.

A thorough analysis of those areas and indexes that are important to investors and the overall business environment will be carried out as part of the plan for raising the competitiveness of Latvia. Preparing a competitiveness report is already under way. According to international methodology, business areas will be evaluated where Latvia is behind other countries and where the greatest improvements are possible, and specific proposals will be provided that are necessary to improve public administration, infrastructure and business practices, exclaimed the prime minister.

For instance, legal regulations on the construction process will be revised in 2011 to reduce the number of permits necessary in the construction business, make the construction business more transparent. “Reforms must continue for Latvia to remain competitive and sustainable. That is why I have invited my colleagues in the government not to stop at what they have achieved, but to continue work on identifying problems and finding solutions. The reform management group has agreed on the principles and aims for further structural reforms,” said the prime minister.

“The most important result of the structural reforms will be measured in terms of what society gains - high quality and accessible state services for residents and enterprises,” stressed Dombrovskis. Reforms will bring results only if each minister takes not only political, but also personal responsibility for the area entrusted to them, and gets involved in an all-embracing discussion with experts, social partners and the non-governmental sector, to make sure that professional and well-thought-out decisions are made.