Budget, Financial Services, Latvia, Legislation

During the committee's meeting today, the Finance Ministry presented the new model for equalization of municipal finances, which was approved by the committee and will now be considered by Saeima. Local governments' representatives invited to the committee's meeting also expressed support for the bill.

Jelgava Mayor Andris Ravins (Greens/Farmers) indicated that a compromise good for all sides would hardly be possible to arrive at, but the new model of equalization of municipal finances needs to be approved as urgent by the parliament.

Saeima Budget and Finance Committee's Chairman Karlis Sadurskis (Unity) said that, in the committee's opinion, the bill should come into force in 2016, therefore he would ask Saeima to review the bill in the first reading as urgent, so MPs would be given one month for submitting their proposals for review of the bill in the second reading.

For the new law to come into force in 2016, Saeima has to pass it until the summer.

Under the new law, incomes of the less wealthy local governments will be brought closer to those of the wealthier municipalities, the Finance Ministry informs.

The current system is overly complicated and does not ensure balanced distribution of financing among the local governments, and there are several flaws that need to be corrected. For instance, the proportion according to which funding is distributed between the largest cities and regional governments is imprecise, and the system is not encouraging local governments to stimulate economic activity.

Therefore, the Finance Ministry wishes to simplify and streamline the municipal funding equalization system, with the objective of bringing local governments with lower incomes up to the level of Greater Riga Region municipalities. The ministry emphasizes that local governments' incomes must not decrease as a result of the new system of equalization of municipal finances.

In the Finance Ministry's opinion, the poorer local governments must be helped to earn more, as a result they will require smaller subsidies from the donor municipalities.

The new system of equalization of municipal finances is based on revised principles for the evaluation of demographic criteria, local government's average incomes, proportionate distribution of subsidies from the state budget so as to bring local governments closer to those with the highest incomes per capita.

The new system also takes into consideration the projected personal income tax revenues, property tax revenues, macroeconomic forecasts. It is planned that once the new system comes into force in 2016, incomes for none of the local governments will decrease.