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Saturday 19.08.2017 | Name days: Melānija, Imanta

Swedbank: lower labour taxes should be compensated by increasing other taxes

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RULatvia’s economic growth remains rather good. It is expected to remain strong in the next couple of years as well. The current weakness of exports is temporary; it is not expected to have significant impact on the job market and private consumption, as mentioned in Swedbank’s latest economic outlook.

Economists note that the political cycle is not reform favourable, undermining the medium-term growth potential and raising risks of labour market and price pressures building up towards the end of the forecast period. Swedbank economists advise politicians and entrepreneurs to act and continue investing on development.

Latvia’s tax revenue forms nearly 28% of GDP, which is one of the lowest levels in the European Union (EU) – average 39%. The central government’s and municipalities expenses are estimated at 38% of GDP, where those in the EU are 49%. The goal of the Finance Ministry’s recently approved tax policy is to have tax revenue reach 33% of GDP in 2016. The proposals for next year’s budget provide for a reduction of labour tax without compensating the reduction with increasing rates of other taxes. This means that the total tax burden will not increase on GDP. It is possible that it will reduce, as reported by Swedbank’s economists.

According to Swedbank’s economist Mārtiņš Kazāks, labour tax should be reduced. But this step needs to be balanced with an increase of some other tax. Otherwise there will be no way to increase funding for healthcare, social security, defence (which is still under NATO’s advice of 2% of GDP). Swedbank economist believes the best option is to increase the real estate tax – it would impact shadow economy and has the least serious impact on economic growth. This would bring the budget considerably more money to combat social inequality and more rapidly reduce the general labour tax.

Meanwhile developing countries remain the global economy’s main engine. However, their growth rates have become slower and their risks – larger. Economic growth of developed countries is gradually becoming stronger. It seems the worst is over. Nevertheless, the economic situation and political action differ from country to country. This creates uncertainty for exporters. Eurozone’s recession seems to be over; the situation is slowly improving. Economic growth, however, will remain weak for the time being, because demand is low, unemployment high and problems remain within the banking sector.

Latvia’s GDP growth outlook remains the same – 4.3%. The main engine will be households’ consumption – it will grow more rapidly than investments and exports this year. Exports and investments growth will become stronger next year. This also applies to GDP (4.7%).

According to Swedbank’s economists, Latvia’s exporters are swimming in the stormy waters of the global economy. On top of that, their sailing speed has dropped. Aside from other obstacles that are guaranteed to impact exports growth in 2014, the main reason for the reduction is low foreign demand. This includes the problems of Liepājas metalurgs, reduced flow of cargo export to Afghanistan, smaller exports of grains due to lower yields and lower prices. Nevertheless, exports of other industries continue to grow and Latvia’s export companies continue to gain ground in other markets.

Swedbank’s senior economist Lija Strašuna says it is hard for Latvia’s entrepreneurs to gain market shares because competition is becoming more and more fierce. The same applies to the job market: unemployment reduces and the pressure on salaries and prices gradually grows. In order for Latvian exporters to continue to increase their exports and market shares, they need investments in order to improve productivity and increase capacity.

It is expected that the global economic situation will improve and companies will become more optimistic about their growth potential. Investment activity will increase in the second half of 2013. The financial situation in companies is rather good – obligations have reduced, the ratio between loans and deposits has dropped below the level of 2005. Export growth in 2014-2015 is said to be more rapid. The currently stagnating export of services is growing in strength. Tourism and other related industries’ increase could be more rapid as Riga becomes the European cultural capital in 2014 and Latvia taking on the presidency over the EU in 2015.


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  1. J. says:

    The charlatan economists at Swedish banks blew up our economy once. Why do we still listen to them?

    Thumb up 0 Thumb down 0

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