It is tempting to say that life in the Latvian Kingdom is gradually improving. That is, if we disregard the halfness of our economic achievements.

Everything…is not for the people

Prime Minister Vladis Dombrovskis and Finance Minister Andris Vilks signed a memorandum with the Latvian Fuel Traders Association and the Association of Fuel Manufacturers and Traders that after the reduction of VAT by one percent point in July 1, petrol stations will also decrease prices on petrol. Representatives of the Latvian Food Traders Association put their signatures under a similar document on May 16.

After signing the agreement, President of the Latvian Fuel Traders Association Ojars Karcebskis announced that Latvian drivers will be able to save up to 10 million LVL annually thanks to this initiative. And one would cheer for our government and traders if not for one «but». All this is not meant to appease the people, it is meant to lower the inflation index before Latvia’s joining of the Eurozone. The government has calculated that reaching this agreement with the traders would lead to the reduction of the average annual index of consumer prices by one half of a percent point. On top of that, in order to ensure the fairness of traders, a special price monitoring system will be created in autumn. Other countries used this strategy during the transfer to Euro, to prevent a steep increase of prices, but Latvia decided to control these processes while still having its national currency.

Neighbours lead the way

Another tax initiative reached its logical conclusion this week – the Saeima agreed to reduce Personal Income Tax (PIT) in January 1 2013 from 25% to 24%. However, the plans of the Latvian government to lower the fiscal burden on workforce in our country to reach the levels of Lithuania and Estonia are in danger of failing: our neighbours could lower their rates even more.

VAT rate in Lithuania is 21% and PIT – is 15%. While Latvia is nearing its southern neighbor in terms of the first tax rate, the second will remain out of our reach for a long time. Nevertheless, the Finance Ministry plans to catch up to Lithuania in terms of the general workforce burden: the amount of social payments there is 40.79% against 35.09% in Latvia.

It is quite likely that this plan will not see daylight: Lithuanians started talking about decreasing their rates again. In particular, the former finance minister of Lithuania and the currently influential European Commissioner for Taxation and Customs Union, Audit and Anti-Fraud Algirdas Semeta openly mentioned this last week. According to him, the current tax burden on workers in Lithuania cannot be called low: its reduction could become a stimulus for increasing employment levels in the country. The politician admits though that these steps are more likely not to be made before parliamentary elections in October this year. The new government is likely to resort to this initiative.

Meanwhile its social partners warned the government: workforce expenses need to be reduced at a faster rate and more notably, otherwise, the effect will not be felt at all and Latvia will not be able to raise its competitiveness.

Latvia is emerging from the shadow?

The Latvian Chamber of Commerce and Industry organized a conference this week. During the conference the Chamber presented its latest «Shadow Economy Index», compiled by Talis Paulins and Arnis Sauka of the Stockholm School of Economics in Riga and Ventspils University College. According to the data, the proportion of shadow economy remains dangerously high in Latvia. Nevertheless, it is worth noting that while the index notably decreased – from 38.1% of GDP in 2010 to 30.2% of GDP in 2011. And this index is largely linked to the state perception and its business initiatives. So, 70.5% of respondents in Latvia expressed their dissatisfaction with tax policies, 50.9% of respondents in Lithuania and only 29.7% of respondents in Estonia.

Maybe a compulsory medical insurance policy or, rather, «medical tax» could reduce the level of shadow economy in the country. At least a participant of the discussion, Welfare Minister Ingrida Circene, noted that the «personification» of some part of budget payments could be reached this way; she also mentioned the positive experience of our southern neighbors. It is thought that an analogous measure more or less allowed lowering illegal employment and the concealment of workforce taxes. Right now Circene’s institution is discussing the possibility of instituting a new payment of PIT in the form of 5% of gross wages.

«Alcohol, vodka, cigarettes…»

There is still a long way to go before the realization of that scenario, but the government’s hands have finally reached the neck of the main «supplier of shadow economy in the country» – Latgalia. The long awaited «salvation program» for the most troubled region in the country is now fully compiled and provides for the allocation of around 53 million LVL for difference events.

The Eastern region of the country is lagging behind the rest of Latvia in a number of indexes. In 2009 (The Central Statistical Bureau of Latvia does not have any recent data on this), GDP per capita there was 3 197 LVL with an average in the country being 5 797 LVL. The decrease in population in Latgalia is the most rapid one in the country: in between the population census periods of 2000 and 2011 – 21% (in some parts of Latgale and 30%), i.e. by 8 percent points higher than the average index across the country. Income of an average resident there per month is by 100 LVL less than the average level in the country. People there think less about starting their own business and more about changing residence.

The authors of the plan make two unpleasant, but honest statements in the plan’s introduction. Firstly, the first results of the actions they are offering will not manifest earlier than two to three years after implementation. Secondly, these measures cannot help Latgalia reach the levels of the rest of Latvia’s regions, more successful regions; their measures can only stabilize the current situation. In order to do so, it is necessary to create business conditions to increase the number of businessmen (there are currently three businessmen per 1000 residents) and the volume of non-financial investments.

The only thing left – is to hope that this program works and brings us the expected results. And most of all – that it changes the minds of the local population, most of which is not entirely motivated to work honestly, while the prospect of bringing cheap excise goods from Russia and selling them in Latvia three times their normal price still exists.

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