EU Joins IMF in Criticizing Latvian Cuts to Tax, Social Spending

The European Union’s executive arm joined the International Monetary Fund in criticizing Latvia’s decision to lower taxes and trim social spending in the bloc’s most unequal country.

Reductions in income and value-added taxes were carried out without consultation, the European Commission said in a report published today on its website. Cuts in minimum benefits for the Baltic nation’s poorest violated previous accords with the EU and were implemented with no substantial analysis, it said.

The report is part of a second review since Latvia exited a 7.5 billion-euro ($10 billion) bailout, taken as the economy shrank by about a fifth in 2008-2009. Gross domestic product has since rebounded, growing for a ninth quarter between July and September, while the government has cut the budget gap to as low as 1.2 percent of output in a bid to adopt the euro in 2014.

The commission’s assessment is “overall positive but also raises important concerns,” according to the report. “Better economic and budgetary results, coupled with the end of close surveillance under the balance-of-payments support, have led to some complacency, a relaxation of efforts and a lack of steadfastness of the authorities.”

The cuts in minimum benefits may “maintain an uneven system with negative impact on benefit coverage and adequacy” and were implemented with “no substantial prior analysis on the impact on poverty and incentives to work,” the commission said.

Decisions to reduce benefits and decentralize financing have been criticized by the IMF, which said social-spending cuts risk widening the EU’s worst inequality, stoking the fastest emigration in a decade and denting economic growth.

The economy may have expanded 5 percent last year, better than an initial 4.3 percent forecast, while the budget deficit has continued to beat expectations, the commission said.

To contact the reporter on this story: Aaron Eglitis in Riga at aeglitis@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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