Tuesday, June 09, 2009

Post-election "surprise" -- another 500 million LVL cut

In a "surprise" move after Saturday' s municipal and European Parliament elections, the Latvian government announced that it would have to cut an additional LVL 500 million from the state budget and raise some taxes. Finance Minister Einars Repše said that, for all practical purposes, "nothing" had been done up to now to reduce government spending in line with the requirements of the International Monetary Fund (IMF) and other lenders.
The latest round of cuts proposed by the Finance Ministry crosses some "red lines"  by cutting pensions by 15 % and eliminating so called supplementary pension payments (for years worked). This, according to documents leaked to the daily newspaper Diena.
According to the Diena story and other media reports, the government is also proposing eliminating the minimal income tax deduction of LVL 90 per month and reducing the public sector minimum wage to LVL 140 (from the current LVL 180?). The austerity package would also raise the excise tax on beer and impose a capital gains tax as well as make the presently flat income tax progressive.
The cuts will almost certainly contribute to the drastic decline in purchasing power (retail sales have been plummeting, shopping centers have cut back opening hours) and will accellerate the wage-cut, tax revenue spiral (people with lower salaries pay lower taxes under ideal conditions and, in Latvia, many in the private sector will move into the gray economy paying little or no taxes on "unofficial" cash remuneration).
Raising taxes can only have a significant impact on state finances in a stable or growing economy, but Latvia's GDP appears to be heading for a decline of 18 - 25 % this year, with sharply rising unemployment (and the  drain on state funds this creates), so any tax changes will have no effect. With deflation setting in and property prices plummeting, it is hard to imagine how anyone could record a capital gain. This tax reform is several years too late. If a capital gains tax is adopted according to Western models, there should be a provision for offsetting losses, so that the next few years of near-depression and economic collapse should provide an opportunity for accumulating losses against future gains that may pick up again toward the middle or end of the next decade.


mxz said...


Mr.Key said...

It's all right. Latvian journalists simply forget that once they called for government to cut costs and pointed to overwhelming spendings. For example I remember how much expensive websites were created for numerous agencies, not to mention numerous strategies and concepts nobody really implemented ever. Now people got what they called for.. dramatic cuts, hard shock for those who never liked to learn to work in a useful way. But.. hey, seems that behaivor is still the same - journalists and their readers just look for the bad. They simply like bad things. They are addicted to them. They grab somethning bad and then dance around it. Why? I have no idea.. nobody wrote how good and simple it is to earn money when we had good (?) times. Then journalists wrote about high costs, how hard it is to employ good people, etc. Of course, it's easier to get attention by screaming out loud how bad it is around here. .. Is it? Maybe it was!?

True fact is that there is no crisis in Latvia. This is a big moment of truth for all of us. Awakening! Finally! A few months and we are in the situation where growth is the only option!

Guess what!? Then we experience steady growth.. I am very well sure about it. Sorry for those people who trust media.. anybody with open and positive mind sees a lot of opportunities here.. thats not a secret that Latvian mainstream media never educates people how to live good.. simply because the staff is itself formed by people, often those who see employment as the only option in their lives. Why to expect bright news from such people? Well, media is treated as 4th power, isn't there a problems in Latvia's 4th power? There are a lots of problems there. Think and analyze and believe yourself..