Next year’s budget gap is EUR 460 million, which is planned to be compensated for by raising taxes for alcohol and fuel. Large Latvian municipalities do not support the government’s proposed tax reform.
Leaded petrol excise tax for 1,000 liters is planned to be increased by 7.8%, from EUR 436 to EUR 470 in 2018. Excise tax of unleaded petrol for 1,000 liters is planned to be increased by 24%, from EUR 455.3 to EUR 564.
Excise tax on diesel fuel will be increased by 11% in 2018, from EUR 341 to EUR 378 for 1,000 liters. Excise tax of liquefied petroleum gas is planned to be increased by 12%, from EUR 206 to EUR 231 for 1,000 liters.
The excise tax for cigarettes is planned to be increased by 5.5%, from EUR 67 for 1,000 cigarettes to EUR 70.7 in 2018.
The government plans to cancel tax for reinvested profits, reduce PIT, as well as increase non-taxable minimum and minimum wages. Pensions under EUR 300 are planned to be relieved of taxes. It is also planned to increase benefits for dependents.
Some progressiveness is expected to emerge in taxes. Finance Ministry estimates that minimum wage recipients will have EUR 69 more. People with wages of EUR 910 will have EUR 25 more to spend, and people with wages of at least 1,000 will have EUR 19 more. Pensioners will receive approximately EUR 15 more after the tax reform.
At the same time the state wants to increase the corporate income tax by 15-20% on withdrawn revenue, as well as establish a threshold on justifiable expenses for healthcare, education and donations. The state also plans to levy 5% from royalties to divert to pension insurance, introduce a new 20% tax rate on winnings above EUR 3,000 and increase tax for alcohol, tobacco products and fuel.
Right now these unpopular compensation mechanisms lack support from large municipalities and transit business heavyweights. They especially oppose raising taxes on diesel fuel.
Russia’s decision to reduce transit flow through Latvian ports has created a decline for LDz. If the state also increases excise tax on diesel fuel, the state of company will worsen even more.
Transport Minister Uldis Augulis plans to oppose the reform in its current edition. Municipalities are also dissatisfied with the reform, because diesel fuel is a major part of public transport costs. Large cities planned to increase co-financing of European funds. The intention to reduce municipalities’ revenue from PIT will ruin their dreams.
This reform has strained the government’s relations with municipalities. Kucinskis, who was previously the executive director of the association of large cities, now complains about the powerful lobby coming from municipalities. The association has also hired an auditor company to show the ministry that its estimates about expected budget revenue are wrong. The ministry says that the inflow in structure funds will help overcome revenue decline caused by tax decrease for pensioners and employed people.
FM advisor Jurijs Spiridonovs notes: “We have received criticisms about the ministry’s alleged conservative estimates in relation to tax rates.”
Lower revenue from PIT and CIT will hit healthcare budget and the system of benefits. This is why Finance Ministry offers to establish that 1% of social fees or EUR 80 million would be diverted to healthcare. Welfare Minister Janis Reirs from Unity opposes this. There are concerns that it would eat away savings from the social budget.
This is only one of Unity’s several complaints. The party believes Kucinskis’ intended compensating mechanisms will reduce budget revenue. In the event of a crisis, the state will have to turn to base budget expenditures, putting at risk teachers’ and police officers’ wages.
Unity’s deputy chairman Edvards Smiltens explains the situation: “Did the ministry even consider the possibility of consolidating the budget? Yes, such an assumption was voiced, and it worries us. If this is true, it will be necessary to review the base budget expenditures – for ministries. This means – consolidation.”
Smiltens advises the prime minister to let go of the idea to raise excise tax for fuel, because it would make fuel in Latvia the most expensive among Baltic States. This could result in international cargo transporters refusing to use petrol stations in Latvia.
In response to Smiltens’ concerns, Kucinskis replies: “Border regions will not become a place from which everyone will transport fuel that is allegedly cheaper. Everything is being coordinated with our Lithuanian colleagues. This is why in relation to alcohol and cigarettes my Lithuanian colleague had contacted me at the beginning of the year. My answer was – I don’t know. We will be able to balance out increases in any case,” Kucinskis said with certainty.
CERTUS manager Vjaceslavs Dombrovskis is confused: “We live in strange times if conservators have become reformers and liberals have become social democrats.” (BNN/Business World Magazine)
