Latvian government cuts VAT to keep inflation in check

22.08.2012, 13:10

Despite the troubles in the Eurozone, Latvia remains dedicated to its goal of introducing the euro in 2014, writes news2biz LATVIA.

In order to help Latvia meet the Maast-richt criteria, the government cut VAT from 22% to 21% on 1 July, hoping that this would help keep the inflation down.

Now the Latvian statistics office Centrala statistikas parvalde has revealed the inflation figures for July, showing that the cut indeed has had some effect: the retail prices are down 0.5% m-o-m; previously, the drop was in the neighbourhood of 0.1-0.2%. The y-o-y results are down to 1.7% from 1.9%.

Still, even the government has mixed opinions on how well the cut has worked. The Latvian Ministry of Finance believes that the cut has indeed worked, pointing out that
m-o-m inflation in Lithuania and Estonia stood at 0% and 0.2%, respectively.

The ministry estimates that the cut could theoretically lower the inflation by up to 0.7%, but the realistically attainable figure is about 0.3-0.4%. It also notes that the VAT cut may keep price growth lower even for the next months. As to the ultimate goal – meeting Maastricht criteria – the ministry believes that the inflation will continue to fall and Latvia will reach the criterion in spring 2013.

All the optimism notwithstanding, much of the drop can be explained with the usual seasonal changes. Vegetables showed a 7.3% price drop, due to the new harvest hitting the market. End-of-season sales helped drag down clothing prices by 5.9% and footwear prices by 6.3%.

In comparison, PM Valdis Dombrovskis also agrees that the cut has worked as an anti-inflation measure, but it has not brought prices down as fully as possible. The government had signed a co-operation memorandum with Latvian retailers, pledging to cut the prices accordingly, but Dombrovskis admits that not all retailers have fully followed it.