Latvian economy hurt by excessive taxes

  • 2012-05-02
  • From wire reports

RIGA - Latvia’s Finance Ministry proposes reducing the value added tax (VAT) rate already on July 1 this year, and calls for a drop in the personal income tax rate from Jan. 1, 2013, reports Finance Minister Andris Vilks (Unity) said on the LNT morning show ‘900 sekundes’ on April 27 that the value-added tax rate could be reduced from 22 to 21 percent in mid-2012, on the condition that businesses will agree to reflect these changes in their prices.

Without the agreement, there would be no point in reducing the value-added tax rate, emphasized the minister. He also explained that price monitoring could be resumed, presenting price change data in both lats and euros, thus gradually accustoming people to the expected introduction of the euro.
The planned value-added tax rate reduction will reduce budget revenue by 40 million lats (57.1 million euros), but it will also considerably reduce inflation, by an expected 0.5 percent.

According to Vilks, it is necessary to reduce the value-added tax rate, since Latvia currently has the highest value-added tax rate among all Baltic countries, and it would be a significant step in improving the country’s competitiveness, facilitating consumption and moving toward meeting the Maastricht criteria.

The personal income tax rate could be reduced from 25 to 24 percent on Jan. 1, 2013. The following few years could bring an even steeper reduction - by 2 percent - reducing the personal income tax rate to 20 percent within three years.
It is also planned that the monthly untaxed minimum will be raised from 45 lats to 60 lats already next year.
The minister pointed out that Latvia, possibly, is currently the only country in Europe that can afford to reduce taxes and consider expenditure increases simultaneously with budget deficit reductions. These are the results of the country’s budget consolidation over the past several years.

Before deciding on the Finance Ministry’s proposed value-added tax rate reduction, it must be clear how the Ministry’s reform will be carried out, says Reform Party representative Daiga Holma.
“The Reform Party, by consistently implementing its pre-election campaign and government declaration promises, believes that labor tax cuts are still a priority, which is currently important to both Latvia’s economy and budget. In regard to the country’s tax policy, the government must finally provide a clear and sustainable future vision to ensure the stability and predictability of business environment, which is an important precondition for new investments in Latvia’s economy,” the party announced.

Though value-added tax rate reductions are necessary, currently, Latvia’s economy is more in need of labor tax cuts, said Economy Minister Daniels Pavluts on ‘900 sekundes’ on April 26. According to Pavluts, inflation pressure continues to increase due to global prices for energy resources. Therefore, it is important to calculate whether the value-added tax rate and labor taxes should be reduced simultaneously.

“The reduction of the labor tax burden is what we are waiting for, and the government promised this to business. The reform will improve the competitiveness of Latvian businesses and the economy, creating preconditions for salary increases and new jobs. Therefore the clarity of the reform is the precondition for the discussion on the suggested value-added tax rate reduction. We cannot back down from this reform. Moreover, its implementation must be convincing, ensuring actual progress in our competitiveness,” emphasized Pavluts.
He is convinced that the planned value-added tax rate reduction of one percent would be felt by residents as well. The question is whether it will be possible to agree with retailers and businesses that the prices for goods and services are not raised due to the fuel price increases.

Larger value-added tax rate cuts would considerably increase Latvia’s budget deficit, since value-added tax is among the main sources of revenue, highlighted the minister. Pavluts explained that it is necessary to reduce both, the value-added tax and labor taxes, however, it must be done gradually. “I will keep labor tax cuts on the agenda,” he promised.
The customarily optimistic Vilks believes that Latvia’s gross domestic product this year may increase more than the currently anticipated 2 percent. “Two percent still remains the official projection, but I will not be surprised if the growth is 3-4 percent,” Vilks said in an interview with the LNT television.

Vilks says he is looking forward to seeing the data on economic development in the first quarter and budget implementation data for the first five-six months, yet it seems that Latvia’s economic growth projections may need to be increased sometime in the summer. Economic growth in the first quarter was similar to that at the end of 2011, when Latvia’s GDP increased 5 percent.

The Finance Minister believes that the first half of the current year will be very good for Latvia, with growth reaching 4-5 percent, whereas the second half will be determined by the situation in Europe, Latvia’s main export market. It is clear though that Latvia is not threatened by a recession, for now. The government could review budget projections in July or August.

Considering the “great work” Latvia has done in getting its government budget under control, Vilks notes that other European countries are currently doing what Latvia has already done: consolidating their expenditures.