Surplus in tax revenues in first half of 2022 in Latvia

In the first five months of 2022, the state-administered tax revenue plan was exceeded by 13%. The surplus was driven by the rapid recovery of the economy, price increases and also by inflation. Entrepreneurs are calling for a reduction in labor taxes and value-added tax (VAT), but it is uncertain whether now is the right time to do so, Latvian Radio reported on July 4. 

The tax revenue plan has been exceeded by 13% in the five months of the year, while the general government revenue increased by 16.7% compared to last year, said Natalia Fiļipoviča, deputy director of the State Revenue Service (VID) Taxpayer Conduct Analysis Board.

“Tax revenues have increased in all tax positions. With VAT, the value of the service provided by our merchants has increased even by 99.6% and the declared tax actually increased by 21.8%,” said Fiļipoviča. “But a huge weight here is also on the rise in inflation. Especially when we look at customs duties, for example, we see that the volume of the natural unit for imports has decreased, but there has been an increase in statistical value, which means that price growth has played a very important role."

Citadele Bank economist Mārtiņš Āboliņš confirmed that tax revenues in the government budget increased mainly due to inflation and rapid economic growth.

“The situation in the economy is better than expected. In the first quarter, growth was above 6% and some concerns related to the Russian invasion of Ukraine have had a very small impact on the economy so far,” said Āboliņš. “The other factor, of course, is inflation. We see people fearing inflation to some extent, thus spending more money and not saving.”

Some entrepreneurs believe the tax system should be changed. Board member of Karavela fish processing company Andris Bite said that Latvia still has the largest labor taxes in the Baltic, and if these taxes are reduced, every worker will benefit. There is also a lot of talk about reducing VAT, but entrepreneur Bite does not support it.

“VAT adjustment is not an aid for businesses, it is more social aid – creating an opportunity to purchase goods or preventing their prices from rising so much,” said Bite. "I am not a supporter of such a tax cut, because, in a crisis that is clearly ahead of us in the coming autumn and winter, I think we need to move towards targeted aid. [..]."

Economist Mārtiņš Āboliņš agreed that support for the population should be targeted in order to reach the disadvantaged population.

“Tax cuts are not effective in this respect [..]. At the moment, it is certainly a priority to address heating tariffs, support for lower-income citizens,” said Āboliņš. “The planned budget deficit this year in Latvia is actually one of the largest in the European Union, we also had a large budget deficit last year, plus we see that interest rates have started to grow, so that the moment we could borrow free, at a rate of 0%, is over [..]. Consequently, additional borrowing also means higher service costs in the future. It is important that these borrowings do not go unchecked and we do not continue to create large deficits."

Last year, Latvia's government budget deficit was 7.3% of gross domestic product. Although tax revenues increased in the first half of 2022, they are likely to decrease by year.

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