The government has approved Latvia’s Stability programme for 2017-2020, which provides for increasing Latvia’s GDP to 3.2% in 2017 and 3.4% in 2018 at unchanged policy. For 2019 and 2020, on the other hand, it is planned for GDP growth rates to come close to the potential growth level, as predicted by Finance Ministry.
The stability programme is a medium-term policy document that covers Latvia’s fiscal policy. This document is submitted to the European Commission every year in April. The document details information about the previous and current year’s economic development and offers an outlook for economic development for the next three years. The fiscal development scenario is developed based on economic development predictions. The development scenario sets the permitted deficit, as well as revenue/expenditures development for the next three years, the ministry explains.
The stability programme also predicts that the consumer price index in 2018-2020 period will grow 2% annually. Average monthly gross wages and salaries in actual prices will grow by an average of 5% during this period. Unemployment level is expected to decline from 9.4% in 2017 to 8.2% in 2020.
The ministry about predicted developments: stability programme’s fiscal development scenario provides for the defence budget to reach 2% of GDP in 2018, road maintenance funding to grow by EUR 25 million in 2018, and funding of healthcare reform to grow from 0.4% of GDP in 2018 to 0.5% of GDP in 2010. It is also expected for the fiscal guarantee reserve to be created in that time.
«The most important part of the Stability programme is the realization of the tax reform to ensure a positive economic breakthrough for the National Development Plan – making sure that Latvia develops at a pace of 5% a year, not 3%», Finance Ministry notes.
«Tax policy has a major effect on decisions made by businessmen. Tax volume and structure, its proper calibration are a major tool to ensure an economic breakthrough and reduce grey economy. Under conditions of high grey economy size, it is necessary to combat grey economy participants and reduce this phenomenon’s overall influence on honest entrepreneurship. One additional effect from balanced tax structure is lower inequality among employed people, as well as higher budget revenue in a medium-term perspective,» says Finance Minister Dana Reizniece-Ozola.
The main measures planned as part of the tax reform include the transfer of the tax burden from labour to capital, as well as improve the competitiveness of businessmen by introducing 0% tax rate on re-invested profit and sorting out tax regimes of small businesses. Measures were ordered to accommodate balanced growth of supply and demand, as well as secure structural changes, not enhance cyclic effects, the ministry explains.
Realization of the tax and healthcare reforms, securing 2% of GDP for defence and providing increased funding for road maintenance will ensure that the overall government deficit is set at 1.6% of GDP in 2018, 1.2% of GDP in 2019 and 0.5% of GDP in 2020, the ministry states.