The planned round of tax hikes in Estonia will boost the competitiveness of Latvian businesses, say political leaders in Estonia’s neighbor to the south.
As in Estonia, Latvia’s economy is not doing too well overall.
While GDP was slightly up compared with last year, it fell by just over 1% between the first and second quarters of this year, and modest growth forecasts did not materialize.
However the ruling New Unity-Greens and Farmers Union-Progressives coalition in Latvia is not rushing to follow Estonia’s lead in quickly raising taxes, ERR’s Latvia correspondent Ragnar Kond reports.
While defense spending is a priority, as it is in Estonia, Latvian politicians are also stressing the importance of public welfare, and enhancing the export capabilities of businesses.
Latvia’s VAT rate is currently 21% and is not expected to change – compared with Estonia’s rate of 22% as of this year, rising to 24% next year.
The coalition sees the taxation of banks and support for mortgage borrowers as the optimal solution in getting out of the downturn.
Greens and Farmers’ Union party chair Harijs Rokpelnis said: “The defense sector is a priority in Latvia’s budget for next year.”
“It is the only area guaranteed to get the required funds. Right now, we are considering taxing high profits of banks if they do not channel more loan money into economic development. We are searching for solutions,” Rokpelnis continued.
“The goal is to cut labor taxes. Of course, we also need to think about balancing the budget, in order to ensure tax revenues remain stable. Changing the VAT rate is not currently on the agenda,” he added.
An analysis of Latvia’s consolidated state budget shows a surplus of EUR 600 million in the first half of the year, compared with a deficit of EUR 140 million during the same period last year – an increase in revenue rendered possible thanks to EU funds.
While the tax take fell short of projections by 0.5%, overall it was more than 7% higher than 2023’s figure.
Social and personal income tax revenues exceeded plans, and VAT revenues were lower.
The gap between public and private sector salary rises has widened also.
The average salary increase in Latvia as a whole is 9%, but whereas for public sector wages alone the figure is 15%, in the private sector it is just 6.5%.
Rokpelnis added: “Latvia also plans tax changes with the aim of boosting competitiveness. Currently, for example, the tax environment for exporting companies in Estonia is more favorable than in Latvia. So, we are considering changes in that direction.”
“Estonia’s recent decision to significantly increase taxes is naturally beneficial for Latvia. However, I advise Estonians not to worry, as Latvia is currently lagging behind other Baltic states in terms of competitiveness. We hope to become more competitive and for our companies to be more successful especially considering your country’s decision,” he went on.
Latvia’s gasoline and diesel excise duties are currently the highest in the three Baltic states, but these are expected to fall below those of neighboring countries next year. (ERR)