There is a great deal of pressure from businesses on the need to significantly reduce labour taxes in order to equalise on the same level with other Baltic States. But such an undertaking is very expensive and would require 500-600 million euros worth of changes in the tax system, said Latvian Minister of Finance Arvils Ašeradens in an interview to LETA.
To illustrate the scale, the minister explained that changing VAT by one percentage point would mean approximately 200 million euros of income for the budget. He also said that there are two countries that use a corporate income tax tactic Latvia uses – Latvia and Estonia.
The minister also said that the assessment of the corporate income tax reform has just been completed. It was decided a zero CIT rate for retained earnings will be maintained, which is a significant setback for businesses.
The value of the balance sheets of all Baltic states and European countries was also assessed – what is the equity and liabilities of companies, said Ašeradens. The level of lending on Latvia’s financial market has remained almost unchanged since 2016. In 2016, lending or liabilities amounted to EUR 14 billion, in 2017 – EUR 14.5 billion, in 2018 – EUR 14.3 billion, in 2019 – EUR 14.2 billion, in 2020 – EUR 13.6 billion, in 2020 – EUR 13.1 billion and in 2021 – EUR 13.6 billion. Over the course of these years banks provided approximately the same amount. In the meantime, corporate equity has grown and corporate profits have also grown. Businesses went from losses in 2015 to profits of EUR 6 billion in 2021.
“What does this show? It shows that the decision was correct and corporate equity was what allowed the financing of economic growth. If banks say companies don’t actively grow and there is no one to provide lending services to, this is not true,” said Ašeradens.
The minister stressed the tax policy cannot be separated from economic policy. Latvia’s fundamental problem is associated with potential GDP growth. The growth assessment shows as much. While in 2023 the country entered a slight recession, next year is expected to have 2.4% GDP growth. The minister says the country should be cautious, because Europe’s “engines” still haven’t recovered. For example, Sweden’s economy is not looking good.
Outlooks indicate that Latvia will stay at GDP growth of 2.9% or 3%.
Ašeradens explained that the macroeconomic goal is changing the structure of the economy so that Latvia reaches a growth rate of more than 3%.
“There are multiple steps to take. The first step, it seems, the government has actualized precisely and that is a matter of human capital. We have a Human Capital Council, which is starting to look at these topics in a structural manner. The first problem is the level of employment,” said Ašeradens.
He explained that in 2020 Latvia ended up below the level when half of the population was employed and was sustaining the other half. While in 2019 there were 910 000 employed people in Latvia, in 2020 there were only 893 000 such people in the country. Outlooks indicate that in 2026 the number of employed people in Latvia will fall to only 879 000, with 23 000 of them being citizens of third countries, including Russia. At the moment employment in Latvia has a negative trend.
The minister said mobilisation of labour force is an important aspect. People older than 55 have the lowest employment level – there are disabilities and a large number of chronically sick people, which is a problem of healthcare. 375 000 people are people with Latvian passports who are outside of Latvia. Ašeradens said it’s possible to return 30 000 people to Latvia using a specific programme – job, housing and school for children.
“We have a large backing from EU funds for focused education of working people. The report from the State Audit on this is critical. “The smart and the beautiful” use these opportunities to grow and develop their career potential. The remaining 80%, on the other hand, remain inactive. This needs to change, and we are already working on that. As for productivity – there is automation and robotisation. There are no other remedies. AI can do a lot of things in state governance as well. The third direction is investments, and we’re working on that as well,” said Ašeradens.
Continuing on the GDP growth potential, Ašeradens said exports account for up to 85% of Latvia’s GDP. According to him, this says about the economy that exporting companies, high added value businesses and export growth are Latvia’s biggest challenge.
“Latvia’s domestic market is relatively small. If you want to work, that’s good, but our primary goal is to look how exporting sectors grow and how successfully our country’s companies integrate in international networks. This is also a priority in the budget,” stressed Ašeradens.
The minister said the next step concerns state services. When composing the budget, the government found a way to restructure money for education.
Additional funding was provided to the healthcare sector. One major challenge will be this sector’s ability to change, said the minister, adding that data is necessary. Then it will be possible to tell what is happening in the system. The healthcare sector currently has a budget of EUR 1.9 billion. Ašeradens stressed this is an enormous budget, and it is necessary to establish a management system to appropriately manage it.
“The economy consists of taxes, funds and investments. Currently it’s unclear how we’re going to grow investments. For the first time the government has composed the Strategic Management Committee with the PM at the helm. This committee will review this issue in a complex manner. There are certain matters associated with ministries’ direct responsibilities. My responsibility is the development of the capital market. This issue is not abandoned. What I’m trying to say is that the economy has not disappeared from the budget. The budget cannot subsidise the economy directly, but we have security, state services and a general strategy how we will approach the economy’s development,” said Ašeradens.
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