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Latvia faces fiscal consolidation in 2016: ministry

Xinhua, May 12, 2015 Adjust font size:

The Latvian government will have to take fiscal consolidation measures worth 0.4 percent of gross domestic product (GDP) as it draws up next year's budget, its Finance Ministry said Monday.

"Consolidation worth 0.4 percent of GDP will have to be carried out while drafting the 2016 budget," Nils Sakss, director of the Fiscal Policy Department of the Latvian Finance Ministry, said, referring to the European Commission's forecasts released on May 5.

"The government will have to choose between a bad and an even worse option," Sakss said.

Consolidation can be ensured by cutting expenses and increasing revenue and both measures can be combined. "If it is decided to reduce expenditure, each line ministry would have to cut expenses by 5 percent on average," Sakss added.

If the government opts for increasing budget revenue, there are only three taxes that have a significant fiscal bearing: personal income tax (5.5 percent of GDP), value-added tax or VAT (7.7 percent of GDP) and social security contributions (8 percent of GDP).

The Finance Ministry believes a 1 percent VAT hike would be the most effective measure ensuring a consolidation effect of 0.3 percent of GDP.

"Combating the shadow economy can help increase budget revenue only to a certain extent and these possibilities have largely been exhausted already in the 2015 budget. As we see, any decisions that will be taken this autumn will be painful and unpopular," the ministry official said.

Latvian Finance Minister Janis Reirs told Baltic News Service that given the complicated geopolitical situation, Latvia has to become more prudent in spending its budget funds.

"In this situation, I would like to repeatedly urge ministries to primarily consider structural reforms instead of asking for additional funding because the drafting of next year's budget could take place in the shadow of consolidation," Reirs said.

He added, however, that the fiscal consolidation Latvia faces in 2016 will not be as drastic as the one Latvia had to carry out during the financial crisis. Endit