Skele's way to save the day

Mr Andris Skele, once the prime-minister of Latvia and the founder of the currently ruling Tautas partija (Folk's party), delivered a speech yesterday at the ceremony of awarding the Spidola prize in the field of economics. During this speech he has presented another set of suggestions on improving economic situation in Latvia. I will not consider all his peculiar solutions; however, two of them seemed quite interesting for me to present and to analyze.

Firstly, Mr Skele suggests a law that allows people who store their taxable income in banks for more than five years receiving an income tax reduction. This reduction would proportionally increase with respect to the storing time. According to Skele, this scheme could become an amortisation for the income tax from physical persons using bank deposits. I am now wondering who could benefit from such law? On the one hand, economic intuition behind the suggestion should go in this direction: income is stored in banks; therefore it is not spent. When it is not spent, demand and investments decrease. By decreasing them, we decrease the necessary output along with inflation going down. Therefore, economic growth goes down allowing stabilisation. Thank you Mr Skele for such elegant way to stop the inflation in Latvia. There is only one "but". How many people are there in Latvia who hold their taxable income in banks for more than five years and whose income tax reduction could be substantial enough to encourage them doing it? Here I don't mean an average Latvian family with a gross income of 800 LVL according to the Statistical Bureau of Latvia. Their taxable income is taxed on the spot and should not therefore be taken into consideration. I believe the law could be very useful for wealthy people like Mr Skele himself, who do not survive on their wages but have many sources of income, dividends from shares for instance. They can allow depositing their income in banks for a longer time without any inconveniences. Normally, they would receive only bank interest for the sum deposited but with the proposed law they will receive also a tax reduction meaning more money is left on their account. It works like additional interest. Clever isn’t it. Let’s help rich people to become even richer! Experts suggest the inflation in Latvia comes from increased consumption of an average person who has more available credit possibilities. I wonder how a “seeming” reduction of wealthy people's income in economic cycle can solve this problem? Probably, one should ask Mr Skele for a more popular explanation.

Secondly, in his speech Mr Skele stands strongly resolved against importing cheap labour force into Latvia, emphasizing the state should think more about high value added production development. The idea is not new and is probably offered by every politician who believes people know about economic theory not more than about a titumbu tribe. I will leave out the topic of importing cheap labour force in my considerations as it brings many other additional problems to be solved. Let it be done by competent experts. I would like to comment on the second part of the suggestion, namely on high value added production development. The production itself, especially high value added, does not come from nowhere. Basically, it has three sources. First, one can develop already existing production possibilities. This means the state has to help those producers who try to modernize and increase their export. Again I omit here how exactly this could be done – by lowering taxes, providing more favourable credits for modernisation or doing something else. Unfortunately, at the moment Latvia cannot provide even Europe with something very high value added, except for brain drain. Second, one takes an existing production process, buys the patent if it is patented, and sets up production at home. This approach has at least two drawbacks – high initial costs and competition pressure. I believe this scenario is not very favourable for Latvia as it is importing already twice as much as exporting. The state could better concentrate on the plan “C”, which is the third source of high value added production development. It is innovation. Home produced innovation to be precise. Unfortunately, at the moment Latvia is not standing out in the crowd with its achievements in this field. In December 2006 the country was ranked 24 among 25 EU member-states in the European Innovation Scoreboard. Innovation itself can come from talented people in scientific institutions or people suddenly struck by bright ideas from above. In both cases, they need only one – financial support from the state or investors. By the way, the last category can also come from abroad, offer good money for the idea and “steal” it together with the inventor from Latvia. I believe Mr Skele could elaborate more on how to keep this real potential in Latvia rather than merely stating that Latvia needs more production.

To conclude, let's welcome once more the achievements of PR in Latvia. Until the new government is formed leaders of the ruling coalition will persuade the voters many times more that they are still the best at resolving the crisis.