On Thursday, October 8, the Parliament of Latvia referred to commission the budget 2016 draft legislation and a number of associated draft laws.
Budget expenditures have been planned at the level of 7.65 billion euro, income – around 7.37 billion euro.
But in our situation the difference between ‘Income’ and ‘Expenditure’ items is more important than the number of billions put there. Alas, Latvia still has not learnt to live up to income.
In percentage terms the difference between the earned and spent at the domestic level seems not too big— about 1% of GDP. All the more so as the Maastricht criteria applicable for the euro zone states allow to have the state budget deficit up to 3% of GDP. But in absolute figures the budget deficit by Latvian standards is rather big - 280 million euro. By this sum the state will have to increase internal and /or foreign debts to make the ends meet next year.
And the general trend doesn’t have everyone smiling – if Latvia closed the year 2013 at deficit, which was by 0.3% of GDP lower than the target goal, then in 2014 worked according to the forecast, but in 2015 a full state budget deficit can exceed the planned one by 0.4% of GDP. Good purposes dash against economic realia.
It seems that the government of Straujuma shuffled off the budget problems burden on its reliefs. Now we will spend, but by 2018, in line with the plans of the Cabinet of Ministers, a balanced budget will be created.
Apart from the political will an economic basis is necessary for this purpose. According to the forecasts of the Ministry of Finance Latvian GDP next year would go up by 3%. But there is one alarming index, which might cross out the declared 3 percent growth— this is deflation, which made up 0.5% (September 2015 against September 2014). Falling prices are good for ordinary people, but eventually the general budget income grows insufficiently fast. Besides, rising inflation incites activity of consumers – buy today as tomorrow things will be more expensive. But when population does not hurry to spend money, the optimism of business people sinks as well, they do not invest in business development and, as a result, economy slows down.
Problems with tax collection rate are worth of a particular note: to spend something the government needs to collect something into treasury. But summarising the results of 8 months of this year VAT collection rate is behind the plan by 3.3%, corporate income tax – by 0.5%, but the general tax proceeds appeared to be lower of the planned ones by 0.3%.
Apart from chronic problems with shadow economics in this year there is a certain reason for falling tax levies. Precisely: tax shortages are connected with dramatic oil price downturn and subsequent decline in price marks at Latvian fuel filling stations. In other words, in this year the taxable base has gone down rather unexpectedly and quite significantly. The government, although, has already shaken legs and raised the oil excise tax in order to compensate shortage.
By the way, the FFS chains appeared to be more ‘decent’, then the supermarket chains. So, milk purchase prices dropped by half this year. But dairy products in shops remained at the same price level as before. Also therefore VAT preferential rate is still denied to food industry – there is a reasonable apprehension that the tax allowance would result in the mark-up of profit of co-owners of milk plants and sausage making shops rather than in cutting expenses of general consuming public.
In general, we have to state that even 1 percent state budget deficit by no means guarantees its implementation. All the more so as the target set for the government is to liquidate this deficit within a couple of years.