Estonia is the smallest of the Baltic States, while its national budget revenue and spending are the highest of all three countries – although Lithuania is set to overtake Estonia in both of these indicators in 2023, according to Svetlana Nesinova, senior tax consultant at BDO Latvia, in an interview with the Baltic Business Quarterly magazine.
The Baltic States share a common past, having gained their independence from the USSR in 1990. However, the size of their wallets has been showing fairly significant differences over the last five years.
The Baltic Business Quarterly featured an analysis of tax revenue, total national revenue and total national expenditures in the three states.
A comparison of inflation rates in January showed that the inflation rate was 21.5% in Latvia, the highest level among the Baltic States. Estonia’s was the lowest at 18.6% and Lithuania’s was 20%.
In 2022, Latvia’s unemployment rate was above the EU average and the highest among the Baltic States, peaking in the first quarter of 2022, when the unemployment rate in Latvia reached 7.3% and exceeded the EU average by 0.8%, while Lithuania and Estonia had an unemployment rate of 6.4% and 5.5% respectively.
Nesinova pointed out that a country’s tax revenue depended on the capacity of its economy, its tax policy, its business environment as well as credit availability.
“The COVID-19 pandemic had an impact on tax revenue in 2020, as all three Baltic States saw a slight but real year-on-year decrease in their tax revenue,” she explained.
Nesinova said that 2023 offered an unusual picture in terms of tax revenue forecasts, as compared to 2022. Specifically, the governments of Lithuania and Latvia predicted and included less tax revenue in the budgets for this year than what they generated in 2022. While the Estonian government plans to raise almost 1.7 billion more in tax revenue than it did last year in its budget for 2023.
“We expect to draw conclusions about what the real situation is in early 2024. At that point, we will also be able to give accurate answers to questions about the extent of the recession expected in Latvia and Lithuania, especially if Estonia plans to grow,” Nesinova said.
She also emphasized that although Estonia got more tax revenue, the rates for a number of its taxes were lower than their equivalents in the other Baltic States.
“The base rate of value-added tax in Estonia is 20%, while in Latvia and Lithuania it is 21%. The individual income tax rate is also 20% in Estonia, although in Latvia, it is the lowest rate,” she said.
She pointed out that Estonia had higher excise duty rates than Latvia or Lithuania, and it was no coincidence that at one point Estonians diligently went to Latvia to buy alcohol, which effectively meant more consumption tax revenue for the Latvian treasury.
According to Nesinova, the largest portion of tax revenue in Latvia’s overall budget for 2022 came from mandatory state social insurance contributions and value-added tax. In Lithuania, the largest portion was derived from VAT, whereas in Estonia, VAT and excise duties dominated.
The mandatory state social insurance contributions generated the most tax revenue in Latvia in 2022, with EUR 3,667.2 million, followed by the value-added tax with EUR 3,558.7 million, personal income tax with EUR 2,262.5 million and excise duties with EUR 1,110 million.
VAT produced 5,736.4 million in Lithuania, an increase of EUR 1,027.7 million, or 21.8%, over 2021. Personal income tax brought in EUR 5,118.4 million, a EUR 929.8 million, or a 22.2%, increase over 2021, while excise charges came in EUR 1,669.4 million, an EUR 11.5 million, 0.7%, increase over 2021. The increase in value-added tax revenue in 2022 is primarily due to inflation, which has reached historic levels in the previous 25 years.
Nesinova also highlighted that Lithuania received EUR 1,592.4 million in enterprise income tax, Estonia earned EUR 665.6 million from this, while in Latvia, this tax brought only EUR 378.8 million to the state coffers.
“The cause of this is the difference in the forms of enterprise income tax, because in Latvia and Estonia, the tax is only charged when the company pays out dividends or engages in transactions that are subject to this tax, and only in the corresponding amounts,” Nesinova explained.
She also pointed out that last year Lithuania received larger amounts in advance enterprise income tax payments, which Latvia had not had since July 1, 2018.
The 2023 budgets approved by the Baltic governments show that Lithuania intends to be the biggest spender this year, at more than EUR 18.6 billion, an increase of EUR 3.6 billion compared to 2022.
The Estonian government has plans to do the same, with almost 16.8 billion euros in spending this year, EUR 1.7 billion more than in 2022. And only Latvia is planning to cut its spending by EUR 1.15 billion in 2023, down to EUR 14.67 billion.
“Interestingly, over these five years Lithuania’s government will have doubled its spending. For Estonia, this amount will have increased by almost 54% and for Latvia by 27%,” Nesinova said.
She highlighted that in 2022, Latvia spent a total of EUR 965.8 million on COVID-19 assistance measures out of the EUR 1,623 million planned and a total of EUR 604.7 million on energy assistance measures out of the EUR 836.1 million planned; meanwhile, the 2023 approved plan for energy assistance measures sets the figure at EUR 621.6 million.
While tax revenue is the main source of income for all the governments, enabling them to cover the overall needs of all of their citizens, it is not the only such source: there are also the gains from public capital, and EU membership means access to the EU Structural Funds. If all of that is not enough, then the countries have to borrow. This is what Estonia, Lithuania and Latvia are all planning to do.
“There are essentially very few governments in the world that can get by without borrowing,” she said. (ERR/Business World Magazine)
