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.