The Prime Minister Valdis Dombrovskis

The international lenders will still have to be assured about the government’s commitment to include higher revenues from shadow economy combat into the additional consolidation measures, says the Prime Minister Valdis Dombrovskis.

The Prime Minister emphasized that currently the key factor in the negotiations with lenders is the inclusion of the shadow economy combat plan in the required consolidation of 50 million lats.

This year’s state budget already contains the scheduled 15 million lats in revenues from the shadow economy reduction, of which the lenders approve measures of nine million lats. Similarly, the budget also provides for additional revenues of 60 million lats.

We have a plan with concrete measures. The question is how many of these measures and the planned fiscal effect can be included in these 50 million lats. The Finance Ministry’s proposal is 12.8 million lats, explains the Prime Minister.

The Prime Minister did not project the lenders objections to the proposed state administration cuts, the excise duty changes and the non-banking sector’s taxation, although, regarding the non-banking sector, the Finance Ministry is currently aligning this issue and conducting calculations on the possible tax rates.

A specific time-limit for the implementation of budget consolidation has not been set yet; however, the sooner it happens, the more positive effect will it have. Financial markets would reflect this.

The key issue is the lenders’ consent, because we ourselves did not need these 50 million lats cuts. The budget deficit forms 5.4% of GDP, falling below the limit set in the loan programme. The lenders disposition is what matters, giving a positive signal to the financial markets, emphasizes Dombrovskis.

Once the initial positive agreement with the lenders is reached, the report mission will come to Latvia.

As reported, the approved additional consolidation measures of 39.5 million lats, supported by the government’s coalition, are planned at the expense of income and tax rise, according to the information compiled by the Finance Ministry.

Currently, the measures concerning revenue form 36 255 688 lats, but regarding expenditure – a decrease of 3 324 468 lats is expected.

An agreement was reached on the revocation of VAT reduced rate for natural gas from 12% to 22% from this year’s July 1, bringing 4 000 000 lats in revenue in 2012. It is emphasized that the reduced rate is applied only to households, while heat producers will not be subject to it.

Also from July 1, it is intended to reduce the current excise rate for natural gas (15.6 lats per 1 000 cubic meters) to the EU’s minimum level (for example, 10 lats per 1 000 cubic meters) and remove all unnecessary reliefs. This would secure 980 000 lats in revenues.

It is scheduled to obtain 12 800 000 lats from the shadow economy combat measures, 8 380 000 lats from the special permit (license) for consumer lending service provision and the state re-registration duty, while from the raise of excise duty on fuel by two santims – 10 500 000 lats in addition.

Also, the planned gambling tax revision is likely to generate additional 2 000 000 lats.

With regard to expenditure, local governments’ earmarked subsidies (from September 1, 2011) for the provision of general education will be cut by 700 000, given the drop in the number of schoolchildren in line with the demographic trends. Also, the infrastructure maintenance cost reduction by 226 447 lats is intended, as well as the National Armed Forces funding cuts of 2% for expenses on goods and services (excluding current liabilities)– by 396 086 lats.

Similarly, state administration jobs will be cut by 10% and it is also planned to reduce expenses on claims by 5%, resulting in 2 001 935 lats smaller expenditure.