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Friday 15.02.2019 | Name days: Olafs, Aloizs, Alvils, Olavs

Economic Diary. Compromises and agreements week

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RUThe Latvian government stayed true to its word and reduced the rate of compulsory social insurance contributions. The reduction was small – 1%. Nevertheless, entrepreneurs thought this was good enough.

This week, the Cabinet of Ministers approved amendments to the Law on State Social Insurance. According to these amendments, the rate of social insurance contributions will drop to 34.09% starting with January 1, 2014. It will drop from the current 11% to 10.5% for employees and 24.09% to 23.59% for employers.

The Latvian Chamber for Commerce and Industry called this tax reform option the most optimal in the current conditions. It should also be viewed in the context along with other steps that were agreed upon by social partners and the government: tax-free allowance and dependants’ benefits should be increased. This will make sure the general effect of the reform is also felt by working people who have children.

At the beginning of 2013, it was initially planned to reduce the general burden on labour force by means of PIT: the law states that its rate is to be reduced to 22% in 2014 and to 20% in 2015. However, protests of municipal governments and the government’s own wish to reduce social inequality have led to this alternative option. The plan included the introduction of a differentiated tax-free allowance and increase of dependants’ benefits, but made the reduction of PIT impossible at its promised rate.

Entrepreneur organizations have demanded that the government keep its promise. This way they achieved the creation of a working group that became integral for the search of a compromise.

Farmers to be offered some money

Another agreement was reached this week. Following long and tedious negotiations, representatives of the European Commission, European Parliament and European Council have finally agreed on the programme of subsidies for EU agriculture. For Latvia this means that its farmers will be able to expect nearly EUR 2.7 billion in the next EU budget period. This is EUR 1 billion euro more than the last seven-year period.

Also, an agreement was reached that will provide for diverting 25% of additional funds to Latvia and some other countries for countryside development. This instrument will also allow Latvia to increase the competitiveness of its farmers.

Re-accounting performed in banks

Some more good news brought by Moody’s Investors Service: the agency has changed its outlook of Baltic bank’s development system from “negative” to “stable”. Moody’s has explained its decision with several factors. The key factor in this is the general improvement of the region’s macro-economic situation. The growth of the three countries’ GDP value in 2013 is expected to be 3.8% for Latvia. 3.2% for Lithuania and 3% for Estonia. In conjunction with low inflation, this creates a reliable platform for banking business, analysts believe.

Another important factor is related to the reduction of the share of problematic loans. Even though the volume of the latter remains significant in absolute numbers, its impact on the banks’ financial results is surely dropping. The gradual increase of demand on credits also contributes to the increase of profitability of members of the industry.

According to the agency, in light of the banking systems of other European banks, risks of Baltic banks related to market funding are less notable. Analysts see no signs of Latvian, Lithuanian and Estonian banks needing to go to the market for funding soon. Subsidiaries of Scandinavian banks can be provided with support of their managing structures.

One thing for another

Another economic situation was resolved this week. The adoption of a tax for large ports no longer causes protests from the ruling coalition. In order to achieve this, however, the initiator of this idea – Reform Party – had to work on its offer. According to the current idea, Boards of Latvia’s ports are to pay to the state in two stages. First, they will need to transfer 10% of port revenue. Then, the decision to collect more money will be made by the government after reading through investment plans of specific ports.

Coalition partners, who had initially expressed indifferent feelings towards this offer, suddenly accepted the new version with great enthusiasm. Prime Minister Valdis Dombrovskis told the media that this initiative can already be used as bass for further discussion of the matter.

At first, the idea proposed taking away 20% of the large ports’ revenue. Soon, however, it was uncovered that this would cause Liepaja to drown in losses. So a new proposal was developed – similar to the first, but less flexible: first, the aforementioned 10% will be taken. Then, another amount would be taken as well. Together with the 10%, it would form 50% of the port Boards’ revenue. If the second part of this amount is unavailable for a too large a difference between revenue and expenses, the state treasury will still receive at least some money.

According to this plan, the state budget will be able to attract no less than LVL 8 million and divert this money to the maintenance of road infrastructure.


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