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Wednesday 21.03.2018 | Name days: Una, Unigunde, Dzelme, Benedikts

Economic Diary of Latvia. «There won’t be micro – only necro»

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RUThis week, after twenty-hour long talks, the Saeima finally approved the budget of 2017 and the law on the medium-term budget for 2017-2019.

The parliament began viewing budget matters at 09:00 on Wednesday, but discussions ended up lasting longer than expected because opposition deputies demanded holding votes on many proposals. The opposition’s initiative to continue viewing the budget in the morning on Thursday was declined by the ruling coalition. The meeting was instead continued at night. In the end, the Saeima approved 59 laws – the budget for 2017, the medium-term budget outline and amendments to 57 laws associated with the budget.

The budget of 2017 provides for an increase of funding to healthcare (by EUR 34.3 million), defence (by EUR 98 million), social insurance (by EUR 197 million), public order and security (by EUR 80 million).

Amendments approved to different laws also provide for a number of changes, including to calculation and payment of social insurance benefits. Requirements for the payment of unemployment benefits have been increased and a qualification period has been introduced for the issue of sick leave benefits.

GDP outlook for the medium-term budget in actual prices is EUR 26.4 billion for 2017, EUR 27.9 billion for 2018 and EUR 29.6 billion for 2019. GDP growth is expected to be 2.6% in 2017, 2.8% in 2018, 2.8% for 2019, 2.8% for 2020 and 2.8% for 2021.

After the budget’s approval, the Finance Ministry and the government will have to address a number of priority matters in the field of fiscal policy, believes Bank of Latvia Economist Baiba Traidase.

She noted that it is highly important to limit the usual and significant end-of-year rise of expenditures, when ministries and state institutions try to spend as much of the funding provided to them as possible. Secondly, and this is the main priority for the nearest future, the government plans an in-depth review of the tax system.

According to Traidase, it is important that Latvia’s tax system becomes more competitive in the region and on a global scale. It is also highly important to reach an agreement once and for all that the government does not pull taxes every year, as this holds back investments, creates uncertainty and impedes growth of Latvia’s national economy. Another important aspect – the tax policy has to be simpler, more transparent and predictable.

Low blow

It seems that transparency and predictability are traditionally in short supply in Latvia’s tax system. This week’s events have only confirmed this tendency this week.

This week, the Saeima approved amendments to the State Social Insurance Law. According to amendments, starting from 1 January 2017 employers will have to make monthly social insurance payments for each employee whose salary is below minimum or if said employees work part-time.

Members of the parliament chose not to accept the offer to refuse this requirement in relation to employers, as society is not prepared for such changes.

This is confirmed by the first public announcement of a massive lay-off for this exact reason. Latvijas propāna gaze has announced its decision to lay off 185 trade agents employed by the company and whose salary ranges from EUR 1 to EUR 100 – depending on the number of sold gas cylinders. It should be said that this job serves as a source of additional income for 60% of those trade agents, so not all of them will join the ranks of the unemployed. In total, the company employs 497 people.

Micro or necro?

A fate most unpleasant also awaits most micro-enterprise workers, as it will be necessary to pay mandatory social insurance fees for them as well starting from January 2017. This measure will apply even if the company does not make profits. There was a protest organized at the Saeima this week. Nearly 250 participated in it. Participants held up posters with slogans like ‘I returned only to leave again?’, , ‘No more micro – only necro’.

Many interviewed Micro-enterprise Tax payers said mandatory payments of EUR 97 will likely become a reason to lay off employees, reduce wages or cease of economic activities altogether, said Kristina Putintseva, spokesperson of organizers of the protest.

According to data from the Finance Ministry, there are currently more than 50,000 micro-enterprise tax payers registered in Latvia. Their total turnover reached EUR 327.3 million in 2016.

The number of micro-enterprise workers does tend to increase: their numbers have grown 58.6% in Q2 2016 when compared with the previous quarter.

SRS collected Micro-enterprise Tax worth a total of EUR 46.8 million in the first three quarters of 2016, which is EUR 3.6 million or 8.4% more than 2015.

Autumn mood

It is possible that because of the tax changes the overall level of optimism of the population has declined significantly in November, according to the latest Latvian Barometer of the Baltic International Bank.

According to the survey, Latvians are more pessimistic in regards to the current state of Latvia’s economy (-9 points) and the possible change of the economic situation in one year’s time (-6 points). Respondents gave the most negative outlook for the overall development of the situation in Latvia – this score has dropped by 18 points.

Latvians are now more sceptical about the work done by the government. While the overall assessment of October was more positive and had even increased by 5 points, residents’ optimism in November had declined by 7 points – from minus 35 to minus 42.

Dangerous addiction

Development outlooks are also reduced by banks. Scandinavian SEB Group reduced its prediction for economic growth in Latvia and Estonia for 2016 in its latest outlook. Nordic Outlook mentions that Latvia’s economic growth will be 1.6% this year (2.4% last year) and 3.5% next year.

Estonia’s GDP growth is predicted at 1.3% this year and 2.2% next year. Lithuania’s GDP growth remains the same for 2016 and 2017 – 2.2% and 2.5% respectively.

Current development speed is too slow in Latvia and Estonia. In Latvia’s case, however, SEB expects EU funds and private consumption will force GDP to grow faster.

In Lithuania, growth is slowed by the low level of investments in the public sector. The country’s commercial real estate market remains stable nonetheless, and the country became a leader in development in the region this year.

DNB Bank expert Peteris Strautins has also published an outlook for the development of certain sectors of the national economy. According to him, the situation is the best in hotel and restaurant business, IT and communications, culture and entertainment. A possible decline is likely in the financial sector, real estate and construction.

Prime Minister Maris Kucinskis announced that talks of stagnation and declines in Latvia’s economy are unacceptable. According to him, the decline on the real estate market is insignificant and is related to the geopolitical situation, because of which the interest of citizens from third countries for real estate in Latvia has declined. The decline in construction is related to the delay with the allocation of EU finances. The prime minister emphasized that the Cabinet of Ministers has done everything to ensure realization of EU funds continues next year.

Nevertheless, experts view the addiction Latvia has for European funds very dangerous for the country’s development.


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