Friday, June 12, 2009

Complete craziness

Latvian government is having to choose between several ways to balance the budget, which all look equally crazy. The first proposal, on Monday:
  • 20% cut in all public sector salaries (on top of earlier 15-35% cuts);
  • VAT increase from 21% to 23%;
  • introduction of progressive income tax, starting with income of 300 lats/month (430 euros/month!) which would be taxed at 29% (instead of current 23%) plus the social security tax;
  • the income tax on incomes above 800 lats/month (1150 euros/month) would increase from 23% to 40% (also not including the social security tax);
  • many smaller cuts and tax increases.

The second, yesterday:

  • no tax increases, except for alcohol tax, but
  • 40% cut in public sector salaries (on top of earlier 15-35% cuts);
  • 10% cut in retirement benefits;
  • many smaller cuts.

Either way, it's crazy. Crazy tax increases or crazy salary cuts.

And the craziest of all things. Either of those two proposals only brings Latvia to a budget deficit of 5-6% of GDP. Next year, more cuts or tax increases will be needed. Can a country run out of salaries to cut or taxes to increase?


Philippe said...

One of the main topics discussed in monitoring reports on Latvia during the pre-european accession run was the existence of a huge grey economy (from undeclared workers up to complete illegal markets working in the open).
Some measures taken under international pressure, the salaries rise and the need for tax recovery drove away a part of these practices. Nevertheless the so called "brown envelopes" (workers declared at the minimum salary and getting the remain of their pay in cash in a brown enveloppe) kept on going. Last year the VID (Latvian IRS) even started an awareness and delation campaign titled "" (literaly ""). The idea being that you are a moron if you get your pay this way. The fun part is that by typing this in your browser, you get to an official government webpage.
Anyway, this practice still exist and one of the Latvian national sports (even more than ice hockey) is tax evasion.

So it must be quite tough for the government to choose between measures, especially as they all give the same result: the real tax recovery rate is plumetting. On one hand because of businesses' closures and layoffs, on the other, because the grey economy is resurfacing. And it is not the 4 days week (in order to reduce the agents' pay) that will allow the VID to be more efficient on that front.

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