TV3 programme Nekā personīga reminds that his summer the European Commission (EC) warned EU member states: the large deficit during Covid-19 pandemic is understandable, but now is the time to bring back fiscal rules. If a member state fails to meet specific requirements, that country may face penalties next year.
Estonia has a strict austerity budget at the moment. Latvia, on the other hand, still does not have clarity about the next year’s budget – there is no government to agree on political topics.
Latvia commenced the year with a technical budget. The real budget was approved by the Saeima in March. The new coalition, however, failed to agree on reformation of taxes. The parliament promised to fix it by the time the new budget is submitted. To do this, a special work group consisting of politicians and public organisations was composed.
President of Latvian Employers’ Confederation Andris Bite explained to the programme:
“We worked intensely in the work group with a two-week break between early spring until the end of summer. Every week we took the time to participate.
I cannot say work was very productive.
The work group is led by the Ministry of Finance with their officials. There is no clarity as to whether or nor any of the initiatives for next year’s budget could end up in the budget plan.”
A month ago the Ministry of Finance submitted proposed tax changes to the government. The work force payment benefits, which is something businessmen wanted to see, is not there. But there is the offer to not tax higher education expenses.
The ministry also proposes introducing corporate income tax advance for payment banks. This means credit institutions will pay it only if owners receive dividends. From now on it will be a fixed annual payment.
However, the government in Latvia has yet to review this report. The next government will have to deal with it. Prime minister candidate Evika Siliņa told Nekā personīga the following:
“On a political level we have yet to discuss it, because we don’t have a budget project yet.”
NP: “It is usually composed around this time…”
“This time we have to wait for ministers to be appointed. Then we will be able to resolve these issues. The Minister of Finance [Arvils Ašeradens] is prepared to explain the situation with his colleagues. We have to address the tax issue in the government formation process. This is not something we are prepared to push during the budget formation process.
It is unlikely for there to be any major tax changes. I believe we cannot do this now. What everyone has talked about, this bank advance tax, if you can call it that – it could be one of those offers, but we need discussions about the rest.”
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While there are no political decisions, officials cannot put anything in the new budget. However, a month from now it will be necessary to submit the state budget project to the European Commission.
In July the European Commission published recommendations for Latvia.
In 2021 Latvia’s budget deficit was 7.1%. In 2022 it was 4.4%. For EU member states there are specific deficit limits part of the Maastricht criteria – at 3%. In spring 2023 the European Commission announced that because of the covid crisis and consequences from the Russian-Ukrainian war there would be no violation procedures commenced against member states, but it may be done next year. There is talk in the Saeima and the government that Brussels is nudging Latvia’s government towards “consolidating expenditures”.
Acting Prime Minister Krišjānis Kariņš spoke with the programme:
NP: “So Mr. Dombrovskis did not send any warning when he visited here this summer?”
“With Mr. Dombrovskis… Right now the government budget policy we’ve had so far has been very responsible. No one gave us any warnings. Rating agencies say we are a reliable partner.”
Minister of Finance Arvils Ašeradens:
“We have one of the biggest budget deficits in the EU economic space. Of course there are invitations to act very responsibly with expenditures. These negotiations are always the most difficult ones – specifically which expenditure positions are included within deficit margins.
One thing is clear –
everything associated with security is usually not discussed.
This is understandable, especially in a situation with Eastern European member states, which share borders with the aggressor.”
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Until now the argument in favour of allowing a high budget deficit was having exceptional circumstances, which should be viewed outside “the fiscal space”. This includes all benefits paid during the pandemic and investments into healthcare and compensation for high energy prices. This and next year the budget includes the improvement of the eastern border infrastructure and a portion of defence expenses. These “out of budget” expenditures exceeded two billion euros in 2021. Next year they could reach 760 million euros.
Reduction of expenditures would require unpopular decisions.
Ministries are not prepared to cut their expenditures. They have already submitted collective requests for next year’s funding for a total amount of two billion euros. Currently the government has 140 million euros allocated to cover these expenditures. About as much will be charged from banks if the aforementioned advance tax is adopted. This money will likely be diverted towards domestic and external security, education and medicine.
Partners of the forming coalition in Latvia invite borrowing more money and spending more. Arvils Ašeradens explains this position to the programme:
“If we want to increase the debt level, we should think about it very, very hard. It is clear the government has invited left-leaning partners to join [the coalition]. They have a clear position that this needs changing.”
Businessmen fear that Latvia’s government is looking only for ways to add to the budget – not how to best apply the tax policy to allow the national economy to grow more rapidly. Andris Bite adds again:
“The reason why we participated in this work group and actively insisted on forming a tax system that would motivate the economy to grow. It would seem the year was spent for nothing.
I can see a will to change it, but there is no courage to do it. Another thing that is lacking is quality data and analysis and predictions as to what will happen to the national economy, state income, people’s and companies’ actions in specific tax change cases. We do not have any way to predict this at the moment. You can fire randomly, but you’re unlikely to hit anything like that.”
Krišjānis Kariņš objects:
“Discussions are never wasted. Just because there is no final agreement in this government’s coalition means discussions will continue in the next. Currently it is difficult to imagine if there could be any radical changes.”
At the start of the pandemic the government allowed the catering sector to postpone their tax payments so that they are at least able to survive. Now this sector’s debt reaches EUR 45 million. But it is the catering sector that complaints the loudest now.
At the end of this year’s tourism seasons several well-known restaurants closed down. But this is a very small portion of those now experiencing difficulties. The number of large companies in the sector has decreased by 42%, the average – by a quarter.
President of the Latvian Restaurant Society Jānis Jenzis comments on the general mood in the sector:
“The catering sector has been in the state of crisis for three and a half years. From the beginning of Covid-19 crisis. At some point, when all restrictions were lifted and it seemed like people will be able to gather again, the Russian-Ukrainian war began. In a month’s time all bookings were cancelled, large group bookings were cancelled, business tourism bookings were cancelled.
Our neighbours are entering the scene – Lithuanian businessmen – to provide catering services to schools and shopping malls. This is because their government had been assisting them for some time. Their government also reduced VAT to 9%. They are steadily becoming more competitive in the Baltic region and Europe. They successfully compete in various business-related events and conferences, where catering plays a major part. When Lithuania reduced VAT […], the sector’s total turnover went up 50%.”
VAT reduction for caterers would create a loss of 39 million euros to the state budget. Politicians say – when reducing the tax for fruits and vegetables, they hoped product prices would go down,
but traders’ profits are what went up in reality.
Jānis Jenzis comments these accusations:
“The Ministry of Finance calculated: by reducing VAT, we would have minus 39 million, but they do not consider that by not reducing VAT, they could lose a larger amount, because businesses might simply go for insolvency. If taxes are at 0%, the state gets zero. If the tax is 100%, the state still gets zero. The burden of tax is different for every sector. Unfortunately, it is one of the heaviest for the catering sector – we pay 30% in taxes.”
Arvils Ašeradens comments again at the end:
“So what do we want to support? Without a doubt we can see that the main source of economic growth is high added value in exporting industries. In this sector [catering sector] it is difficult to notice signs of an exporting industry. It is as difficult to find high added value. In this cause I would be very cautious about that.”
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