Latvian government passes 2022 state budget project

On Tuesday, 12 October, Latvia’s government passed the legislative draft On State Budget 2022. In it state consolidated budget revenue is planned at EUR 10.6 billion and expenditures – at EUR 12.5 billion.
A considerable amount of funding in the 2022 state budget is planned to be allocated to increase wages of healthcare workers, teachers and workers of the interior affairs sector. Considerable finances are planned to be allocated to fund state security-related measures, implementation of previously made decisions and other priority activities.
One of the government’s outlined priorities in taxes is the reduction of labour force tax. To continue the reduction of labour force tax for low-wage recipients and improve the competitiveness of enterprises in Baltic States, it is necessary to continue increasing non-taxable minimum while also increasing the non-taxable minimum for pensioners.
For these changes the government plans to allocate EUR 93.8 million next year. It is planned that next year the maximum differentiated
non-taxable minimum for pensioners will be EUR 350 starting from 1 January 2022 and EUR 500 starting from 1 July 2022.
Revenue of the consolidated 2022 state budget is expected at EUR 10.663 billion and expenditures – EUR 12.406 billion.
Compared to the budget plan of 2021, the legislative draft for the 2022 state budget includes a revenue increase of EUR 1.078 billion and expenditures increase of EUR 1.642 billion.
For the 2022 state base budget revenue is planned at EUR 7.47 billion and expenditures planned at EUR 9.263 billion.
The increase of state base budget expenditures is EUR 1.417 billion or 18.1% when compared to 2021. The increase of expenditures of EUR 1.006 billion is intended to finance the main functions of the state. The remaining EUR 410.9 million is intended to cover EU policy mechanisms and other foreign financial aid projects.
Revenue of the state special insurance budget is planned at EUR 3.438 billion and expenditures are planned at EUR 3.387 billion. The increase of expenditures of the state special budget is EUR 214.5 million or 6.8% when compared to 2021.
Aside from increasing non-taxable minimum for pensioners, it is also planned to increase wages for workers of priority sectors (medical workers, teachers, interior affairs workers).
In the legislative drafts accompanying next year’s state budget project includes the reduction of VAT from 12% to 5% for books and printed press (newspapers, magazines, etc.).
There are also plans to increase the maximum state social insurance contributions from EUR 62 800 to EUR 78 100. It is also planned to increase income for certain non-tax positions.
In addition to the aforementioned, tax revenue will be influenced by previously approved tax measures – increase of natural resource tax rates for certain subjects and tax revenue distribution change between the state and municipal budgets. The next year’s state budget plan includes the increase of excise tax for cigarettes, cigars, cigarillos, smoking tobacco and e-cigarette liquids. Excise tax will be increased to EUR 14 per 100 l for non-alcoholic beverages with sugar concentration of 8 g per 100 ml.
The medium term macroeconomic development scenario for 2021-2024 was developed in June 2021 based on Q1 2021 GDP data and information that was available at the time on macroeconomic information and the government’s approved support measures imposed to overcome Covid-19 crisis.
The medium-term macroeconomic development scenario was developed by the Ministry of Finances in cooperation with the International Monetary Fund and experts of the European Commission. The macroeconomic outlook was coordinated with the Bank of Latvia and the Ministry of Economics. On 14 June 2021 it was approved by the Fiscal Discipline Council.
According to this scenario, Latvia’s GDP growth will reach 3.7% in 2021 and 5% in 2022, which is 0.7 percentage points and 0.5% percentage points more when compared to February 2021. In 2023 and 2024 the country’s GDP will increase 3.5% and 3.4% respectively.
The macroeconomic development scenario is based on the assumption economic growth in 2021 and 2022 will depend on the restriction of Covid-19 outbreaks in Latvia and the recovery of the world from the crisis.
The main driving force of Latvia’s economic growth will be the increase of private consumption, which has recovered rapidly following the lifting of certain epidemiological restrictions and improvement of consumers’ mood in Q2 2021. This means this year it may have increased 6.3% this year. Considering the low base, private consumption growth may reach 10.4% in 2022.
The volume of investments may have increased 4.1% this year. In 2022 it may reach 8.5%.
Growth will be provided by EU funds and Recovery and Sustainability Fund, as well as continued implementation of Rail Baltica project.
The average inflation is expected to be 2% in 2021 and 2.4% in 2022.
Following more rapid economic growth, the unemployment levels in Latvia dropped to 7.9% in 2021, which is 0.4 percentage points below what was expected in February 2021, because the government’s support programme helped reduce unemployment in sectors impacted by Covid-19 the most. In 2022 rapid economic growth will continue and unemployment is expected to drop to 7%.
The number of employed people will increase slightly in 2022 and will have been stabilized at 900 000 by 2024.
The average net wage increase is expected at 8.0% this year, with average wage increasing to EUR 1 234. Next year’s wage increase will reach 6%. In the medium-term perspective wage increase is estimated to be 3.2%
The possibility of another Covid-19 outbreak in Europe and Latvia is the biggest negative risk. If mortality increases again, it may be necessary to impose tougher restrictions.