Analytics, EU – Baltic States, Financial Services, Latvia, Legislation, Taxation

She rejected the European Commission’s concerns about possible negative impact of the Latvian tax reform on health care and social assistance. "The first months have passed and we already see positive results. Tax revenues in the first two months have risen by EUR 6.4 million," said the minister, underscoring the rise in revenues from personal income tax and social contributions.

She also said that one of the main goals of the reform was curbing shadow economy. At present the number of people receiving wages lower than the minimum wage has dropped by 22.7%, suggesting a considerable reduction in unreported wages, the minister said.

The ministry will continue work to explain and prove the positive effects of the reform to the European Commission. "We do not see any negative impact. We are satisfied with the reform," she said.

The European Commission in its report on Latvia said a major tax reform leaves little room for discretionary spending in other areas. While the cost of the tax reform is expected to weigh on the fiscal position in 2018-2019, the government deficit is set to remain at around 1% of GDP. At the same time, the intention to stick to the current tax policy for the coming three years will limit the available public resources for crucial needs in healthcare and social assistance.

The European Commission noted that Latvia currently enjoys strong economic growth and it has undertaken a number of reforms in key areas. Latvia's economy is on overall strong footing with solid productivity growth, but rapid wage growth carries some risks. Latvia has implemented a major tax reform and is pursuing reforms in other key areas like healthcare, education and public administration. While these reforms aim to address some of the key challenges identified in this report, their effectiveness varies.

According to the report, Latvia's poor health outcomes are linked to the low public financing of healthcare and lower efficiency than in other countries. Prioritizing resources for health in 2018 and 2019 is expected to expand access to services. However, public spending plans for 2020 remain well below the EU average and reforms to boost efficiency have only just started. State-funded health services are set to be linked to the payment of social contributions from 2019. Population groups excluded from the full access to public services can opt-in by making voluntary health contributions. As a result, part of population stand to lose access to the full basket of healthcare services.