Spending gap closes

RIGA - The ruling coalition reached agreement on a further 50 million lats (71.4 million euro) in budget consolidation measures at a meeting on Feb. 22, after agreeing that most of the new measures would be carried out by increasing tax proceeds, reports news agency LETA. In anticipation of the expected public disapproval over these additional cuts, the leader of the Union of Greens and Farmers, Augusts Brigmanis, cried out that “50 million is 50 million. It is not a small amount.”
The agreement closes the 11 million lats gap, between the 50 million lats additional budget consolidation called for by the group of international lenders and the 39 million lats that the government was already able to come up with.

Finance Minister Andris Vilks (Unity) previously said that most of the budget consolidation measures will be carried out by increasing tax proceeds; however, the coalition also put on the table possible cuts in education and other sectors.
The final negotiations centered on the ruling coalition’s previously proposed raising the lacking 11 million lats by increasing excise tax on liquor and cigarettes. “We plan to alter certain taxes and duties,” explained Vilks, adding that Unity had gone back on its intention to increase excise tax on diesel fuel.
Details on the specific agreement are yet to be released, but earlier discussion included Unity’s proposals to increase excise tax on liquor from 890 lats to 940 lats per 1,000 liters.

Unity estimates that this could bring an additional 4.5 million lats to the state budget. Unity also proposed to increase the tax rate for cigarettes from 48 lats to 52 lats per 1,000 cigarettes, and increase excise tax on smoking tobacco from 29 lats to 34 lats per kilogram. This, Unity believes, would increase budget revenue by 9 million lats.
At the same time, an increase on taxes on gambling was considered, and reduced payments for natural gas could be lifted; nevertheless, the 15.6 percent excise tax on natural gas was expected to remain unchanged, or even be lowered.

During the negotiations, Vilks said in an interview with daily Latvijas Avize that the government must be careful with taxes that are near the maximum or minimum limit - personal income tax, too small non-taxable minimum income, and large social insurance contributions. He noted that real estate tax has been comparatively low in Latvia, compared to other taxes. “This tax must be increased, so local governments would have a reliable source of income that they could make use of,” said the minister.

The minister went on to say that tax collection from tax evaders must be improved. If this plan is supported by the public, the government will not have to worry so much about budget revenue.
Latvia will have to convince international lenders about its plans to extract additional finances from the gray market, said Prime Minister Valdis Dombrovskis (Unity) on Feb. 18. He emphasized that the inclusion of measures against the shadow economy into the 50 million lats budget consolidation was the focus of the talks with the lenders. The government plans that combating the shadow economy would net 15 million lats to the state budget. The lenders are skeptical, forecasting this at only 9 million lats.

The international lenders’ consent to the plan is of key importance, as the consolidation measures must be in line with their demands for Latvia to receive the next loan installment, said Dombrovskis. Latvia’s 2011 budget is forecast at 5.4 percent of GDP budget deficit, which is significantly lower than the 6 percent set by the international lenders.
Vilks explained that agreeing on the full cuts would make it possible for the government to introduce its austerity measures from July 1.

Looking ahead, he stressed that he is “confident that during the work on the 2012 budget tax increases will not be considered, except a higher real estate tax. At the same time, we want to level out personal income tax rates in all three Baltic countries in 2013 and 2014; we have to return to the 20 percent tax rate. Social insurance contributions must also be analyzed, but we have to see what happens to the budget, how many employees there are in 2014, and structure the budget so that there is no large hole in the social insurance budget,” said Vilks.