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Wednesday 26.10.2016 | Name days: Kaiva, Amanda, Amanta

Economic Diary of Latvia. On taxes, despair and paradoxes

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RULatvian politicians love the word ‘solidarity’. Latvia will help resettle refugees as a show of solidarity with the rest of Europe. Latvia has joined sanctions against Russia as a show of solidarity with the rest of Europe, even though Latvia suffers from it. Latvia will help save Greece as a show of solidarity as well, even though Latvia cannot afford it. Now Latvia will have a solidarity tax.

Parties of the ruling coalition have approved the adoption of the so-called solidarity tax. This tax will be collected from Latvian super-rich people. Currently Latvia has the maximum size for mandatory social insurance fees that is equal for all employed people. This makes the tax burden equal for all people receiving minimum wages and those who are paid several thousand euros per month.

Latvian Finance Ministry has drawn the following portrait of people expected to pay solidarity tax: it is a person who is paid EUR 4,000 or more per month. In Latvia, there are only 4,700 such people. They are the ones who are expected to pay solidarity tax if it is ever approved. In FM’s opinion this fiscal fee will prevent the contradiction that a specific number of people can pay significantly less money from taxes. It is planned that the tax burden for all people paying mandatory social insurance tax will be the same, as all unpaid social insurance fees are compensated at the expense of solidarity tax. The current rate of social insurance fees is 34.09% (23.59% are paid by the employers and 10.5% by the employee).

This initiative has already caused sharp discussions and opposition.

The main arguments: the government breaches its promises in tax and budget policy. It was initially promised to carry over tax burden from labour force to consumption and real estate; develop an effective plan to help combat shadow economy; employ planned, not rushed, changes in legislation and continue structural reforms. None of those promises are likely to be completed. Instead, the government does something completely opposite. But it’s not like this is the first time this has ever happened.

Signs of despair

In general, by distancing themselves from interests of certain groups of residents, and based on talks on next year’s budget and tax changes, it becomes clear the ministers push themselves deeper into despair.

The geopolitical situation and mutual sanctions have had a serious impact on Latvia’s economic development. Meanwhile, expenses on defence purposes, healthcare and education continue to rise. And money has to come from somewhere. This has led to sudden tax policy changes and the fight for every euro in talks regarding minimum wages. Everything points to chaos and lack of systematic approach caused by the necessity to create a sustainable budget at chronic deficit of funds in the country.

This may be why the State Treasury plans to attract loans on international financial markets by releasing state bonds this year. Last year, Latvia carried out release of state bonds twice. The size of each emission of state bonds was EUR 1 billion.

Governor of the Bank of Latvia, Ilmars Rimsevics, had previously said that instead of living at the expense of existing funds, the state continues to take loans and spend more than it can earn. This could potentially lead to another economic collapse in the future and the need to ask for money from international creditors. He reminded that Latvia’s external debt has only increased in the past several years.

From bad to worse

Debts continue to rise and the country’s population continues to decline. Central Statistical Bureau of Latvia reported this week that the country’s population was 1,978,000 in August 2015. It is 88.5 thousand people less than there was in 2011. The country has lost 54.8 thousand people as a result of long-term international migration. Another 33.7 thousand were lost as a result of natural migration, as reported by the head of the bureau Aija Zigure.

On Wednesday, 2 September, the bureau launched a micro population census across Latvia. The goal is to determine how accurately official statistics reflect the number of people who live in cities of the republic.

«Exact information on the number of people living in the capital is very important. This information allows the state to better plan expenses on social benefits, discounts for certain groups of the population, routes of public transports, possible burden on schools and kindergartens,» – explains Mayor of Riga Nil Ushakov.

Demographer Ilmars Mezs has said the demographic situation in the country has gone from very bad to just plain bad. He said Latvia is one of the few EU countries to experience negative natural population growth and widespread migration.

Economical paradoxes

What is surprising, however, is that even though money and people are becoming scares, Latvia’s GDP managed to rise by 2.7% in comparison with the same period of 2014.

According to Swedbank experts, the main driving force in Q2 2015 was household consumption, which was mostly because of rising wages and low inflation.


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