Estonia is the smallest of the Baltic States, while its national budget revenue and spending are the highest of all three countries - although Lithuania is set to overtake Estonia in both of these indicators in 2023. Latvia is in the middle of the Baltics, both geographically and in terms of how much its government earns and spends. This is the picture presented by a study of tax revenue, total national revenue, and total national spending in the Baltic States conducted by AS BDO Latvia.
The Baltic States share a common past, having gained their
independence from the USSR in 1990, which sets a starting point for them that they all share. However, the size of their wallets has been showing fairly significant differences over the last five years. A comparison of inflation rates in January 2023 shows that the inflation rate was 21.5% in Latvia, the highest level among the Baltic States. Estonia’s was the lowest at 18.6%, and Lithuania’s was 20%. In 2022, Latvia’s unemployment rate was above the EU average and the highest among the Baltic States, peaking in the first quarter of 2022, when the unemployment rate in Latvia reached 7.3% and exceeded the EU average by 0.8%, while Lithuania and Estonia had an unemployment rate of 6.4% and 5.5% respectively.
Estonia expects to go up
Svetlana Nesinova, senior tax consultant at BDO Latvia, pointed out that a country’s tax revenue depends on the capacity of its economy, its tax policy, its business environment as well as credit availability. “The COVID-19 pandemic had an impact on tax revenue in 2020, as all three Baltic States saw a slight but real year-on-year decrease in their tax revenue,” Nesinova explained. She noted that 2023 offered an unusual picture in terms of tax revenue forecasts, as compared to 2022. Specifically, in their budgets for this year, the governments of Lithuania and Latvia predicted and included less tax revenue than
what they generated in 2022. In its budget for 2023, the Estonian government plans to raise almost 1.7 billion euros more in tax revenue than it did last year. “We expect to draw conclusions about what the real situation is in early 2024. At that point, we will also be able to give accurate answers to questions about the extent of the recession expected in Latvia and Lithuania, especially if Estonia plans to grow,” Nesinova said. She also emphasised that although Estonia got more tax revenue, the rates for a number of its taxes were lower than their equivalents in the other Baltic States. “The base rate of value-added tax in Estonia is 20%, while in Latvia and Lithuania it is 21%. The individual income tax rate is also 20% in Estonia, although in Latvia, it is the lowest rate,” Nesinova noted. She pointed out that Estonia has higher excise duty rates than Latvia or Lithuania, and it is no coincidence that at one point Estonians diligently went to Latvia to buy alcohol, which effectively meant more consumption tax revenue for the Latvian treasury.
Similar revenue structure
The BDO Latvia senior tax consultant indicated that the biggest share of tax revenue in Latvia’s overall 2022 budget came from mandatory state social insurance contributions and VAT. VAT generated the biggest share in Lithuania, and in Estonia it was VAT and excise duties. In Latvia, the mandatory state social insurance contributions produced the largest amount of 2022 tax revenue, at 3,667.2 million euros, followed by VAT with 3,558.7 million euros, and then personal income tax with 2,262.5 million euros, and excise duties with 1,131.0 million euros. In Lithuania, VAT generated 5,736.4 million, which is 1,027.7 million, or 21.8%, more than in 2021. Latvia’s southern neighbour earned 5,118.4 million euros through personal income tax, 929.8 million (22.2%) more than in 2021, while excise duties brought in 1,669.4 million, which is 11.5 million (0.7%) more than in 2021. The increase in value-added tax revenue in 2022 is mostly due to inflation, which reached a level unprecedented in the last 25 years. Nesinova also highlighted that Lithuania received 1,592.4 million euros in enterprise income tax, Estonia earned 665.6 million euros from this, while in Latvia, this tax brought only EUR 378.8 million to the state coffers. “The cause of this is the differem in the forms of enterprise income tax, because in Latvia and Estonia, the tax is only charged when the company pays out dividends or engages in transactions that are subject to this tax, and only in the corresponding amounts,” Nesinova explained. She also pointed out that last year Lithuania received larger amounts in advance enterprise income tax payments, which Latvia has not had since 1 July 2018.
Lithuania will spend more
The 2023 budgets approved by the Baltic governments show that Lithuania intends to be the biggest spender this year, at more than 18.6 billion euros, an increase of 3.6 billion compared to 2022. The Estonian government has plans to do the same, with almost 16.8 billion euros in spending this year, 1.7 billion euros more than in 2022. And only Latvia is planning to cut its spending by 1.15 billion euros in 2023, down to 14.67 billion. “Interestingly, over these five years Lithuania’s government will have doubled its spending. For Estonia, this amount will have increased by almost 54%, and for Latvia, by 27%,” Nesinova said. She highlighted that in 2022, Latvia spent a total of 965.8 millior euros on COVID-19 assistance measures (out of the 1,623.0 million euros planned) and a total of 604.7 million euros on energy assistance measures (out of the 836.1 million planned); meanwhile, the 2023 approved plan for energy assistance measures sets the figure at 621.6 million euros.
Baltics running a deficit
While tax revenue is the main source of income for all the governments, enabling them to cover the overall needs of all of their citizens, it is not the only such source: there are also the gains from public capital, and EU membership means access to the EU Structural Funds. If all of that is not enough, then the countries have to borrow. This is what Estonia, Lithuania and Latvia are all planning to do. “There are essentially very few governments in the world that can get by without borrowing,” Nesinova said.
Tax revenue (billion euros) Latvia Lithuania Estonia Total revenue (billion euros) Total spending (billion euros) Population, as of 31 December (million)
* As specified in the approved national budgets Source: BDO study based on the websites of the Ministries of Finance of Estonia, Latvia and Lithuania, and the official statistics portals of Latvia Lithuania, and Estonia.