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Wednesday 18.10.2017 | Name days: Rolanda, Rolands, Ronalds, Erlends
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Latvia warned that budget deficit under tax reform may exceed allowed threshold

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RUEuropean Commission’s assessment of the effect from Latvia’s fiscal plan and intended tax reform show major risks of diversion from requirements of the Stability and Growth Pack for 2018.

EU fiscal discipline requirements state that Latvia’s structural deficit in 2018 is not allowed to exceed 1.7% of GDP. The nominal deficit included in Latvia’s stability programme is 1.6% of GDP.

EC emphasizes that without appropriate compensating mechanisms realization of tax reform measures would result in the country’s structural deficit reaching 2.4% of GDP in 2018.

EC economic advisor in Latvia Martins Zemitis notes that EC finds the tax reform mostly justified and includes multiple good things. Nevertheless, measures of the reform are expensive and potentially put at risk Latvia’s fiscal discipline. «The reform is pro-cyclic. It serves as additional stimulus for the economy in the time when lending is actively rejected and EU funds flow into the country’s economy. The economy is already heated. The tax reform will heat it even more. EC is worried whether now is the time for such stimulation,» said Zemitis.

EC mentions in its report that the stability programme includes Latvia’s tax reform, whose main measures include: reduction of PIT rate from 23% to 20%, increase of non-taxable minimum depending on income level, introduce a 0% income tax rate for reinvested profits and equalizing capital tax rate at 20%.

Reform measures will cost the budget approximately 1.8% of GDP. It will be partially compensated income-increasing measures at 0.6% of GDP.

EC notes that the most expensive measure is the reduction of PIT from 23% to 20% (0.9% of GDP), which is a regressive measure. It is also more beneficial for groups of residents with high income. Introduction of a 0% tax rate on reinvested profits will mean a significant income reduction (0.7% of GDP in 2018).

Latvia’s tax reform is beneficial for company owners. This reform will be especially regressive, considering the high level of financial inequality, EC notes. Progressive increase of non-taxable minimum depending on the income level will be a significant positive effect on income division (0.2% of GDP).

EC notes that tax reform’s measures will reduce the relatively high tax proportion of low-wage recipients closer to the average EU level. This is planned to be accomplished by increasing maximum non-taxable minimum and, to a lesser extent, by reducing PIT rate. EC also notes that changes to PIT will benefit households with medium and low income.

Stability programme’s tax reform is planned to help increase total state budget deficit from 0.8% of GDP in 2017 to 1.6% of GDP 2018, which will be followed by an improvement – with deficit declining to 0.5% of GDP in 2020.

Ref: 224.109.109.2096


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