According to data from the State Treasury, Latvia’s consolidated general budget deficit was EUR 227.1 million in the first half of 2022. This is EUR 726.5 million less when compared to the first six months of 2021.
General budget revenue in the first half-year accounted for EUR 6.8 billion. When compared to the same period of 2021, it is EUR 773.1 million or 12.9% more, as reported by Ministry of Finance.
General budget expenditures accounted for EUR 7 billion, which is an increase of EUR 46.6 million or 0.7%. This year the state budget continued financing support measures associated with Covid-19, benefits to help compensate the rise of energy prices, and benefits for Ukrainian refugees. The total approved support, considering the support measures approved in June for the 2022/2023 heating season, is planned at EUR 2.2 billion (6% of GDP). Expenditures reached EUR 819.4 million by the middle of the year (2.2% of GDP).
The volume of collected taxes in the first six months of 2022 was EUR 768 million or 16.6% higher when compared to the same period of 2021 and was EUR 5.4 billion. This year’s income increase has a significant effect on economic activity, employment and average wages, as well as rapidly growing prices for all goods and services.
It is important to explain that this year the State Revenue Service (VID) continued improving the distribution of taxes after the introduction of a single tax account in 2021. According to data from the State Treasury, undivided balance of revenue in six months was EUR 103.8 million. This means tax revenue analysis and conclusions about the first six months should be done very carefully.
Data from VID indicates the biggest increase in VAT in the first half of 2022 was observed in the commercial sector, electricity, gas and heat supply sectors. In total, VAT revenue has increased by EUR 305.3 million or 23.1%, reaching EUR 1.6 billion. This is indicated by data from the Central Statistical Bureau of Latvia on retail trade turnover in the first five months, which turned out 23.7% higher than a year prior, which was largely due to the rapidly growing prices for food and fuel. In the first half-year the most rapid rise in tax revenue was observed for accommodation and catering sectors, as well as art, entertainment and leisure sectors.
Revenue from the labour tax was affected by the improvement of the situation on the labour market, as well as rapid rise of the labour pay fund. The state social insurance contributions to the state budget increased by EUR 444.9 million or 32.6%, reaching EUR 1.8 billion. Revenue of PIT reached EUR 1 billion, which is EUR 272 million or 36.7% higher when compared to the same period of last year. According to VID, in the first five months of 2022 the number of employed people in Latvia increased the most in sectors previously impacted the most by Covid-19 pandemic – art, entertainment and leisure sectors, as well as accommodation and catering services sectors, where average pay is on a rise. As economic activity continues to rise, trade and processing industry, which are the biggest in the country employee number-wise, the rise of the number of employees was moderate. Nevertheless, stable increase of average wages continues in these two sectors. It should be noted that 1 July marked the coming into force of changes to legislation – non-taxable minimum increased to EUR 500 for both employed persons and pensioners as opposed to the previous EUR 350. This could result in a slower rate of PIT revenue in the coming months.
Although general budget expenditures increased only slightly in the first half-year, the level of expenditures is considered high and it remains dependent on the government’s approved benefits.
According to assessment from the Ministry of Finances, in the first six months Covid-19 related support composed an important portion of expenditures – EUR 1.5 billion. Benefits paid for energy support reached EUR 351 million in the first six months. The total indicative financing for the upcoming heating season between October 2022 to April 2023 is planned at EUR 350.2 million. After the start of Russian invasion of Ukraine, the decision was made to divert additional funding towards Latvia’s armed forces and support of Ukraine. Latvia has also paid a total of EUR 31.2 million by the end of June. Municipal budgets also provided EUR 22.5 million towards accommodation, catering, education and social aid.
In the first half-year the biggest general budget expenditures increase was observed for subsidies and grants – EUR 458.9 million or 35.1%, reaching EUR 1.8 billion. The increase is mainly associated with the government’s approved energy aid package, which was paid out by 30 April. The increase of subsidies and grants was dictated by the additional funding provided to the healthcare sector and EUR 41 million provided to ALTUM.
The procurement to help enhance the country’s security, as well as the growing expenditures for consumption of energy resource, promoted expenses on food and services in the state budget by EUR 156.1 million (+23.2%) when compared to the first six months of 2021, reaching EUR 828.5 million. The increase of expenditures on this position was influenced by higher expenses on goods and services in municipal budgets. In the first half-year expenditures were higher for road and street maintenance. Heating and electricity expenditures increased under influence from energy price rise. Expenses in municipalities also increased for catering and social activities. Social expenditures have also increased in municipalities across Latvia – for guaranteed minimal income and housing benefits, as well as municipal benefits for crises, which was influenced by changes to legislation, which increased guaranteed non-taxable minimum and aid provided to Ukrainian refugees. It should be said that considerable increase for municipal expenditures was also observed for social care, both at home and in social care institutions.
General budget expenditures for pensions accounted for EUR 1.3 billion. When compared to six months of 2021, they have increased by EUR 58.9 million or 4.7%, which is indicated by indexation performed in October.
Expenditures on benefits accounted for EUR 933.3 million, which was EUR 589 million or 38.7% less when compared to the first half-year of 2021. Considerably lower benefit level was dictated by the high expenditures observed in first months of 2021 – when the state paid benefits to employed persons, families with children and seniors during Covid-19 pandemic. It should be noted that the drop in expenditures could have been more rapid, but this year’s benefit payments continued, and benefits paid to reduce the rise of energy prices were paid in five months: EUR 50 for families with children and EUR 20 for seniors.
At the same time, the state special budget demonstrates a higher level of expenditures for sick leave benefits: EUR 45.2 million or 26.9% higher when compared to last year’s six-month period. According to data from the State Social Insurance Agency, in January-May period the number of sick leave benefit recipients in the country increased from 55.7 thousand a month to 72 thousand or 29.3%.
Capital expenditures of the general budget turned out lower when compared to last year’s first half-year, which was largely due to a drop in foreign investments. Capital expenditures in the first half-year reached EUR 359.2 million. Compared to last year, this is a drop of EUR 11.7 million or 3.1%. The drop in construction volumes caused a slowing of use of investments in municipal budgets. Capital expenditures in municipal budgets dropped by EUR 39.8 million or 18.5%. Construction growth is limited by the lack of construction materials on the market, the growing costs, which are further increased by the Russian-Ukrainian war, and construction companies’ inability to implement projects within the terms of their contracts. At the same time, in six months of 2022 there was a EUR 16 million increase of capital expenditures in the base budget.