Analytics, Financial Services, Inflation, Latvia, Legislation, Taxation

Dombrovskis expressed hope that the proposed one-percent VAT reduction will allow to reduce inflation by 0.5%. If not kept in check, inflation tends to spin out of control in no time, said the prime minister.

Dombrovskis declined to mention specific mechanisms to compensate the planned personal income tax rate reduction to local governments. One of the most likely options is to change the distribution of personal income tax revenue. This possibility, however, must still be discussed, since it will depend on non-taxable minimum and tax deduction changes, writes LETA.

The planned tax changes are supported in principle by the international lenders, who want Latvia to continue to observe fiscal discipline and follow their advice. Latvia's budget deficit will reach 2.1% this year and 1.4% in 2013, said Dombrovskis.

As reported, yesterday, the government agreed that the value added tax rate would be reduced one percentage point on July 1 this year, from the current 22% to 21%, whereas personal income tax will be reduced five percentage points in the next three years, from the current 25% to 20%. However, the final decision will be up to Saeima.