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Monday 19.02.2018 | Name days: Zane, Zuzanna

Economic Diary. One more reason to feel proud

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This week flourished with all kinds of evaluations of the state of Latvia’s economic health. If all these assessments were to be compiled into one, there would be more reasons to feel happy than to be sad. And this is good.

Fewer debts to worry about

The topic of state debt being calculated per capita was very popular not too long ago. Economists unanimously claimed that the government never borrowed so much money that several generations of Latvian residents would be forced to pay it back. It has been a mere several years since the beginning of the crisis and the situation is better already.

According to a new outlook compiled by The Economist, the proportion of the debt of the state of Latvia will be 5.49 thousand LVL per capita in 2013. And even if the country is to borrow more money on external markets, the size of the state debt per capita will still be significantly lower than that of the leading world economies.

Latvia also looks good on the background of the total index of state debt in proportion to GDP – 44.2%. The same index in USA or Germany is 74.4% and 82.8% of GDP, while debt obligations per capita reach $37.02 thousand and $34.22 thousand respectively.

But if we look at dynamics of the growth of Latvia’s state debt, we have something to be proud about. In 2007, this index was only 8.2% of GDP, in 2008 – in increased to 18.1%, while in 2009 – it was nearly 37%, in 2010 – 42%. Throughout 2011 and 2012 it remained at 46%. This is why 2013 can be called the pivotal point: if the outlook of The Economist comes true, the size of Latvia’s state debt will reduce for the first time in six years.

The “nicest” tax

One more survey was presented this week. It was carried out by KPMG. During the survey, the company discovered that Latvia stands out on the overall European background with its low corporate tax. This tax has been the same for nine years and is only 15% – one of the fairest in all of Europe. Only firms in Bulgaria and Cyprus pay less (10%). Furthermore, according to KPMG, Latvia has a number of active benefits. Companies working in special economic zones pay a tax of 25%, but have a discount of 80%. Micro enterprises with turnover of 70 thousand LVL have the right to resort to a single beneficial 9% rate, which includes VAT and mandatory social insurance payments among other things.

The VAT rate (21%) also looks good. And, as stated by the authors of the survey, it goes against the European VAT rate increasing trends. VAT rate has increased by 0.29 points in 2012, reaching 20%. This rate is present in Slovakia, Slovenia, Bulgaria, the Czech Republic and Estonia. In Poland, it is equal to 23%, in Romania – 24% and in Hungary – 27%.

The only thing that spoils this batch of honey is that the average beneficial VAT rate in Latvia is (12%) is higher than the overall European level. For example: in Slovenia it is 8.5%, in Slovakia – 10%, in Romania – 5% and 9%.

Enough with saving money!

The state of Latvian enterprises also seems to be good. Specialists of Swedbank have noted in their latest economic survey that they [enterprises] have few debts and that the overall economic state is quite good. This allows them to do what their Southern European competitors cannot – take credits and invest in production, development of new products and conquer new markets. However, this advantage is only temporary, so the moment should not be missed.

Experts have noted that the weak economic growth in Europe forces companies to improve their competitiveness. For example: countries of Southern Europe that are now in deep recession a rapidly reducing their workforce expenses. This strategy was used by Latvia not too long ago. And now, in order for our companies to remain on the market, they need to invest in research and development.

European Commission calls not to relax

The only survey that had Latvia criticized came from the post-supervisory mission of international creditors. One of which is the European Commission (EC).

Achievements of our country are, of course, recognized in the survey. However, the EC still notes that the government of Latvia has let its guard down after the end of the international loan program. Brussels is dissatisfied with the reduction of the PIT with the nearly invisible increase of tax-free allowance.

Authors also call Latvia to adopt the Law on Fiscal Discipline as soon as possible. As well as not to delay the transition of the Mortgage Bank’s commercial assets to the private sector. Finally, the EC wants to see the strengthening of the Competition Council as soon as possible, as well as the improvement of the insolvency procedure.

Economists join Brussels in criticism. They also note: reforms in the country are being carried out not fast enough, the government lacks unity and courage in some important matters. For example: the ideas of Economy Minister Daniels Pavluts on the reformation of the industrial policy and management of state enterprises failed to find support in the government. Experts also note that there are too few points in regard to reforms in the state budget for 2013. They also note that funding for these reforms is insufficient.


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