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Friday 21.10.2016 | Name days: Severīns, Urzula

Economic Diary of Latvia. On taxes and even more about taxes

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RULatvia has dropped five spots in the global competitiveness index. Taxes are mentioned as one of the main reason for this, even though in previous years the biggest obstacle for business had been the level of bureaucracy.

The fact that Latvia had dropped from 44th to 49th place is explained with decisions made by the government in relation to the country’s tax policy, specifically the introduction of solidarity tax, believes Finance Minister Dana Reizniece-Ozola. This is why the government is now on the right path, having adopted an early-announcement policy in relation to planned tax policy changes, the minister said.

The publication of the index coincided with the conference of the Bank of Latvia titled ‘Reforms – the key to competitiveness and growth’. During this conference, officials discussed matters related to Latvia’s future. President of Latvia Raimonds Vejonis is certain that healthy and work-able people are vital for the economy’s growth.

According to him, the foundation of a developed and democratic country is formed by people – people who build their country with labour. A blooming and successful country is characterized by a health and educated nation.

It is hard to argue with this assumption. Claims of the finance minister, however, can be disputed easily, because the country’s tax policy has been under development with her and economy minister’s direct involvement.

Preparations for future crises

Ilmars Rimsevics, governor of the Bank of Latvia, has announced his concerns for the future of Latvia. He said that Latvia should prepare for future crises. According to him, there will be crises in the near future. Rimsevics noted that, considering the low growth of GDP in Latvia, Latvia’s economy will grow faster next year. Growth will also be benefited by Latvia’s active use of European funds. Nevertheless, Rimsevics also said that it is bad for Latvia to be hooked on structure funds.

The governor of the Bank of Latvia emphasized that now is the perfect time to sort out the national economy and realize structural reforms. This is especially important because there are crises expected in future years.

Rimsevics added that taxes must not be raised and the state of the business environment should not be affected as well. In addition, he said Latvia has to stop spending more money it can afford. If Latvia continues to live the same way, raising taxes and worsening the country’s overall competitiveness in the process without addressing topical problems in healthcare, there can be no hope for the country’s economic growth, said the governor of the bank of Latvia.

Economy Minister Arvils Aseradens also emphasized the need for modernization of Latvia’s tax system. During his meeting with Secretary General of the Business and Industry Advisory Committee of the Organization for Economic Cooperation and Development Bernhard Welschke, Aseradens emphasized that he views tax reduction on labour at the expense of consumer taxes and real estate tax as the main direction for development.

Pensioners as the mirror of economy

Pensioners also discussed their and Latvia’s future this week. And although this category of the population is not an active part of the labour market and economy, their level of welfare demonstrates the general state of economy.

The fact that approximately 300,000 work-able people have left the country means that pensioners are now paid considerably smaller pensions than they could be otherwise, said the head of Latvia’s Pensioners Federation Andris Silins. If there is no economic breakthrough, only hope remains that people will pay taxes honestly. There are no other options, Silins believes, because 38% of employed people in Latvia pay taxes off minimum wages.

The federation also points to a number of other matters. Poverty risk is on a rise for people of the older generation. The organization believes the most effective method to reduce the risk is to increase be pay for work experience before 1996, which is currently only EUR 1 per year. People who retired before 1996 have the smallest pensions. Furthermore, the federation believes it is necessary to raise tax-free allowance for pensioners to reach the level of minimum wages (EUR 370 at the moment).

In the first half-year of 2016, the average pension size in Latvia was EUR 293. The retirement age in Latvia is currently 62 years and 9 months. It is expected that it will reach 65 by 1 January 2025. Meanwhile, there are only three individuals whose pensions are EUR 19,000, EUR 6,600 and EUR 6.500. Among the recipients of the largest pensions are ex-president of Latvia Andris Berzins and criminally accused Aivars Lembergs.

Reforms that have no end

Saeima deputies in the meanwhile continued coming up with ways of merging State Revenue Service’s finance and customs police offices this week. New drafts for reforms in SRS have been submitted to the parliament from the Union of Greens and Farmers and Unity. According to the latter, the finance ministry’s proposal to make SRS’ interior security office a ‘repressive investigatory institution’ with authority and functions made similar to that of the prosecutor’s office under complete supervision by the director general of SRS had previously caused serious concerns in the Saeima. According to new amendments, the interior security office will remain under direct supervision of the director general of SRS, but it will only address matters associated with ‘direct work violations’.


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