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EC: Latvia’s tax structure does not contribute to growth

«Latvia’s economic growth will be relatively rapid, but income inequality is a major problem that needs to be prevented,» concluded the European Commission in the latest report on economic development of member states.

EC states that the weakness of investments in the country is influenced by the reception of EU funding and other external factors, including local economic policy, as uncertainty regarding the possible tax reform continues, investments are not protected sufficiently enough in the event of insolvency and the proportion of the grey economy is too high.

«Latvia’s consumption costs are improved by dynamic wage growth, which has significantly increased GDP growth,» EC notes.

EC values that Latvia’s external trade deficit is small in spite of the fact that the current situation in many important partner countries is weak and that the trade balance is expected to worsen slightly this year and the next.

EC emphasizes that emigration and lack of skilled labour force limit labour force accessibility, which is further impacted by low birth rates. Such trends create additional pressure on state resource and healthcare services, noting: «Unemployment is most common among low-qualified people and countryside residents.»

The report mentions that inequality is an important factor that influences the labour market: «The tax and benefits system in Latvia is less efficient when compared with other EU member states. Major tax burden on small wages does not motivate people to get official jobs. The weakness of social service provision affects labour force quality in the level of education, skills and health. In the end, weak social protection creates a high unemployment level, especially among disabled people and seniors.»

The commission has concluded that Latvia’s progress in completion of recommendations provided to the country in 2016 has been limited. Nevertheless, much progress has been accomplished in the consolidation of research institutions, strengthening of private sector stimuli, tax collection, improvement of vocational education, involvement of social partners and support of social aid recipients when looking for a job.

Limited progress has been noticed in the reduction of the tax burden on small wage recipients, improvement of social aid provision, expansion of healthcare accessibility, prevention of conflicts of interest and application of a single and unified legislative background for all state sector employees, as stated in the commission’s report.

EC concluded that Latvia’s tax structure does not contribute to growth, although some progress has been accomplished in this field. Some progress has also been achieved in the return of unemployed people to the labour market. Progress there remains slower when compared with other member states. With that, EC expects Latvia to come up with new support activities for low-qualified unemployed people with special needs this year.


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