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Wednesday 22.11.2017 | Name days: Aldis, Alfons, Aldris

Economi Diary. Nothing is ever free

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RUThis week, it became known just how much it will cost Latvia to join Eurozone. In the next five years Latvia will be required to transfer at least EUR 202 million to the European Stabilisation Mechanism (ESM). The Latvian government will need to look for additional money in the budget for 2014 in order to be able to afford the payments to ESM.

However, the Finance Ministry will first need to submit an application in order for Latvia to be accepted into ESM. Latvia will officially become a member of ESM after the document is approved by the Saeima.

ESM’s total budget is EUR 700 billion; 80 billion of which – actual money. The rest is virtual funds the allocation of which can be carried out in an emergency (bankruptcy of one of the members of Eurozone). The contribution of each member is determined by the size of the economy and population. Furthermore, countries with GDP per capita being below 75% of the average EU level have the right for a discount in the first 12 years of membership. This discount, however, will need to be compensated later on.

Latvia’s initial ESM share will be 0.2513%. After the transition period, this share will be 0.3927%. In the next five years Latvia will need to transfer EUR 202 million (EUR 40.4 million per year) and EUR 113 million in the next 12 years.

Contributions to ESM will not impact the state budget because they are to be considered budget deposits, not expenses, says the Director of Finance Ministry’s Fiscal Policy Department Nils Saks. However, in order to be able to afford this, the state will have to borrow money and pay interest (approximately LVL 1 million per year). According to Saks, membership in ESM for Latvia will not be all that different from IMF.

Ships steer clear of our ports

Continuing the topic of the 2014 state budget, it is worth remembering the idea of introducing a port tax. As BNN had previously reported, this additional budget contribution is planned to help increase the revenue of the state treasury and compensate the costs aimed at introducing benefits for businesses. This plan, as it was expected, caused representatives of the industry to rebel. According to the acting head of the Latvian Ports Association Karlis Leiskalns, the implementation of such a measure will lead to a drop in the cargo handling of ports; something they are already accused of in comparison with ports in Klaipeda and Tallinn.

There are three major ports in Latvia: Ventspils, Riga and Liepaja. According to estimates of the Economy Ministry, the total profits of the aforementioned ports for 2012 was LVL 57.2 million. The government has its eyes on these particular millions, hoping to transfer up to 40% of revenue.

However, port representatives note that ports currently hold EUR 1 from each handled ton of cargo. If the state decides to take away 40%, this amount will need to grow to EUR 1.40. This may lead to cargo being rerouted to neighbouring countries.

Strength lies in compromise

A compromise was found for the next year’s planned reduction of workforce tax at the expense of reducing PIT. It is currently planned that life can be made easier of entrepreneurs by reducing social insurance tax contributions.

The alternative to reducing PIT from 24% to 22% was offered by the Finance Ministry. The new scenario provides for the reduction of state social insurance contributions 35.09% to 34.09% in 2014. There will also be a differentiated tax-free allowance (for low-salary workers, it will be increased from LVL 45 to LVL 85) and an increase of benefits for dependants: from LVL 80 to LVL 98.

Finance Ministry had previously proposed to review the rates VAT reduction in order to take steps to reduce financial inequality and increase support for families with children. Heavy criticism from the largest business association ensued.

Nevertheless, PM Valdis Dombrovskis believes the government cannot disagree with the request to divert all available funds for the effort to reduce taxes.

Tariff increase planned to be sorted out

With that, the government approved the measures proposed by the Economy Ministry to sort out the rise in tariffs on electricity. These measures provide for the creation of a special fund and implementation of a new contribution. This initiative is likely to be added in regulations in the months to come.

The Achilles’ heel of Latvia’s energy industry is the system of subsidies for CHP and green plants. The current mandatory procurement component is 1.89 santim per KW/h. According to the latest estimates, it will grow to 2.2 santim in 2014, 2.41 santim in 2015 and 2.46 santim in 2016. The goal of these measures is to hold MPC on the current level.

The idea to create a special fund has been approved. Latvenergo is to be appointed as the manager of this fund. Its budget will consist of contributions from the Tax on Energy Subsidies. It is planned to adopt this tax in April 2014. It will remain in force until 2017. Its creation still needs to be harmonized with the European Commission.


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