Estonian finmin: Latvian tax decisions were made not looking very far ahead

Jürgen Ligi

PHOTO: Mihkel Maripuu / Postimees

According to Estonian Minister of Finance Jurgen Ligi he understands Latvian Prime Minister Valdis Dombrovskis, who admitted on Wednesday that the government's previous decision to lower personal income tax by 2 percentage points was a mistake, and believes that the decisions were made taking into consideration only short-term forecasts.

«I understand the Latvian prime minister since I felt the same even when they were lowering the taxes -- the Latvian state budget was in a serious deficit,» Ligi told BNS.

According to Ligi it seemed that Latvia made its decisions based on a very short-term view, not focusing on the long-term plan but on improving receipts.

«But lowering income tax is in itself definitely the right step from the viewpoint of competitiveness and investments. It is the tax that restrains economy the most, especially in the case of corporate income tax,» Ligi added. «Since they don't seem to be wishing to raise the corporate income tax from 15 percent and at the same time want to lower the other workforce tax, the social tax, the principled reappraisal is perhaps even more important than the implemented change itself,» the minister said.

At present the Latvian Finance Ministry has drawn out three possible scenarios. The government seems to back the one according to which the social security charge of the workforce would be lowered from 11 percent to 10 percent at the beginning of 2014, and the personal income tax would stay at 24 percent and would be lowered by 1 percent a year for two years.

The tax-exempt income will probably be raised from 45 to 98 lats. The impact of this scenario on the budget would be 26.1 million lats.