Failing to reach an agreement, ruling coalition in Latvia puts tax talks on hold

Failing to reach an agreement, ruling coalition in Latvia puts tax talks on hold

With the New Conservative Party (JKP) stressing the need to increase non-taxable minimum to EUR 500 in 2021, five coalition parties have decided to put talks on planned tax changes on hold.

A survey among coalition parties revealed that JKP has an opinion different from other coalition partners about changes to the tax system. According to JKP, the non-taxable minimum should be raised to EUR 500 next year. Other coalition parties, on the other hand, consider this proposal as fiscally overweight – it would require EUR 120 million from the 2021 budget, which would put at risk commitments such as raising wages for doctors and teachers. Coalition partners are prepared to discuss a more moderate approach towards raising non-taxable minimum starting from next year. For JKP this was one of their pre-election promises programme 3×500, the failure to complete which is often mentioned by opposition politicians.

JKP politician Gatis Eglītis admits talks about the tax reform have slowed to a halt. He reminds the coalition has conceptually agreed on the need to secure additional finances for healthcare. «There aren’t any objections against the fact that healthcare requires more money. But we do not like the approach that almost nothing, except for healthcare and minimal social fees, done in the tax reform since last summer,» said Eglītis, stressing that Finance Ministry’s parliamentary secretary Atis Zakatistovs’ led work group has discussed topics like non-taxable minimum.

Eglītis believes raising non-taxable minimum to EUR 500 would help protect residents working in alternative tax regimes. He is dissatisfied with Finance Ministry’s position in the matter for non-taxable minimum increase, because the ministry believes the amount is too large and the budget will not be able to pull it off.

“We can see there is a good opportunity to do this, because Brussels no longer supervises the budget. If we want to fix something in the budget before strict supervision commences again, this needs to be done now and in full. We can do this in one swoop,” said the politician. Eglītis said JKP was very actively involved in all talks related to the tax reform. However, according to him, other partners should listen to what is important to JKP.

According to Finance Minister Jānis Reirs, work on tax reform has basically stopped because of JKP’s proposed non-taxable minimum increase. He said that in reaction to this situation related to education and healthcare workers’ wages, as well as persons employed in alternative tax regimes, an offer has been made to discuss division of the labour tax and social fee burden in order to form stable funding for healthcare without increasing the tax and social fee burden. The second way was simplifying existing regimes, ensuring that employers are not allowed to employ people without providing social protection.

“Under the current situation we have decided to put the process on hold, because discussions also continue about additional requirements. This means talks are on a pause,” said the minister. Commenting on JKP’s requirement on raising non-taxable minimum, Reirs claims the budget cannot hold it, because the entire financial benefit that has appeared thus far would be reduced to zero and the state would not have additional funding to afford healthcare without expanding the range of taxpayers.

Zakatistovs also admits tax change talks are on hold because of JKP’s request to raise non-taxable minimum to EUR 500 starting next year. The politician believes thereby JKP ignores the government’s commitment to raise wages for doctors, teachers and interior affairs sector’s workers, as well as increase subsistence minimum.

“The feeling is that JKP’s vision is providing rivers of milk and beaches of jelly at the expense of budget deficit. This is fiscally irresponsible. People’s wages have higher priority than rapid increase of non-taxable minimum. But JKP has taken the position,” said KPV LV representative, adding that the fiscal impact of JKP’s proposal is EUR 120 million, which means reducing next year’s budget finances for other needs.

Eglītis agrees that increasing non-taxable minimum to EUR 500 would create a very high impact for the state budget. Nevertheless, he also believes that with reduced labour tax burden people will have more money to spend, making the real impact less than EUR 100 million. “Now is a good opportunity, and other countries in Europe support their economy. We have problems with generosity. For example, idleness benefits were not paid in appropriate amounts. Yes, budget deficit will be higher in 2021, but the wage problem will have been resolved,” said Eglītis.

Saeima deputy Daniels Pavļuts explained the pause with tax change talks by saying that all coalition partners had no unified understanding about a constructive way to resolve important issues.

“Wages of doctors and teachers, funding for healthcare, social guarantees for workers of different tax regime – these are the primary issues problem the coalition and government have to resolve. Resolving them requires a balance between parties’ ambitions and needs,” said Pavļuts.

National Alliance politician Ilze Indriksone admits after multiple talks, during which partners failed to reach a compromise, it was decided to put the process on hold. She does see the opportunity to restart discussions, focusing on review of tax benefits and support of socially unprotected residents.

Indriksone agrees that under easier fiscal discipline it may be possible to attempt to increase non-taxable minimum, but not as rapidly. Considering the complicated discussion process, Indriksone predicts talks about the 2021 budget will not be simple. “If we fail to agree on tax changes, as well as wages for healthcare workers, budget talks will turn out difficult,» said the politician, stressing that politicians are aware and want to resolve the issue of wages for doctors.

Pavļuts is confident that although talks on tax changes are on hold, they will restart soon, because talks about 2021 budget will be difficult without resolving the tax matter. He admits changes to taxes should come to force in 2021 along with the new budget. «In the context of the budget it would be better if tax changes came to force in January 2021, because tax changes could affect composition of the budget,” said Pavļuts.

Latvian Prime Minister Krišjānis Kariņš refrained from commenting on the tax change discussion.

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