By August, 8.2 billion euros should have entered the state budget in various taxes, according to the State Revenue Service (VID) data. But comparing the plans to the actual result, more than 94 million are lacking. And that is with the fact that the personal income tax, social contributions and gambling tax were collected even slightly more than planned.
The situation deteriorated further in the summer months, when in July only two taxes (income and gambling) were no longer in line with the plan, slightly exceeding it. The VID says that the insufficient revenue from value-added tax (VAT) is particularly pronounced. “We were 166 million short by the time the plan was implemented,” says Inga Mukāne, director of the VID tax payer behavior analysis and forecasting department.
Fluctuations in tax revenues may and depend on seasonality, but this year the worse situation has already started. “It couldn't be said that there's something exceptional right now, but we're seeing that starting point in 2024 has already been in that lower position compared to previous years,” she adds.
The overly optimistic expectations were based on better economic forecasts and past years' experience. In 2022, for example, the value-added tax contributed nearly half a billion more than hoped. Last year also brought good results and an additional 86 million came in to the planned VAT revenues. This year, the Ministry of Finance hoped to charge another 217 million more than last year but was met with reality.
"Not even behind the plan, but lagging behind the figures against the previous year. This seems more important to me,” admits Finance Minister Arvils Ašeradens (New Unity).
"In the first six months, the lag was 4.6%, now it is 5%. Well, we are trying to analyze the situation."
One of the main reasons is that in previous years, a higher cost load for the residents contributed to the budget. For example, heating and electricity prices were very high so they generated bigger budget revenue. This year, in the electricity and heating industries, there has been a VAT contribution 99 million or 33% smaller than previously, VID data show.
There are some sectors where VAT was paid more than last year, but these do not compensate for the overall drop. Mārtiņš Kazāks, President of the Latvian Central Bank, admits that at the end of 2023, a better situation was still expected for this year.
"The first is that economic growth is weaker than forecast. This is largely because our export markets are weaker, this is dragging the economy down. The other thing, of course, is that uncertainty has persisted. We see that people's purchasing power has recovered, wages are rising faster than inflation, and there is more money in their wallets, but people are choosing to either spend it abroad, so it doesn't show up in our revenues or to save it," explains Kazāks.
Next year, however, the national budget is again set to increase VAT, with the hope of collecting €229 million more than this year. However, it is not yet clear whether the higher tax revenue could also be based on a higher VAT rate. The tax reform discussions have only revealed plans for payroll taxes, where the overall burden is to be reduced.
Kazāks says: "This benefit has to be weighed up. At this point, we should focus on where the tax burden is higher than in the neighborhood. And that is low and middle-income. And there, if the gain from a reduction in labor tax is greater than the loss from an increase in VAT, then I think it is a step worth taking."
The Finance Minister avoids giving a concrete answer on the VAT hike, except to point out that there are challenges to reconciling next year's budget, given the funding needed for defense.
