Wednesday, October 19, 2005

Latvia Grows Even Faster Than Estonia

This may appear finicky, but I feel I should correct Johnny Munkhammar in his post about the two new EU member states Slovenia and Estonia, but only for the reason of strengthening the argument that he made. He correctly cites a The Economist article (not online for non-subscribers) where it is pointed out that while Slovenia is still the richest of the new member states it is growing far slower than Estonia, with Slovenia having a 4% growth rate (Actually it's 4.7% but that error can be traced to the quoted The Economist article) and Estonia a 9.9% growth rate. This may prompt Slovenia to lower taxes to the Estonian 24% flat tax level.

However it is actually as Munkhammar claims (Again this error can be attributed to the article)not the case that Estonia's 9.9% growth is highest in Europe, neighboring Latvia had a incredible 11.6% growth rate! . This however only strengthens the case for Estonian-style low tax, low government spending policies as Latvia have in fact a slightly lower level of government spending and a flat tax rate only slightly higher than Estonia at 25% (The corporate income tax is only 15%).

While some of the growth can be attributed to their low initial income level and while there are also some inflationary excesses, the examples of Estonia and Latvia clearly shows how low taxes promote growth. Incidentally, the third Baltic country, Lithuania came in third among EU countries at 7.1%. Lithuania have a similar level of government spending but its flat tax is higher at 33% (The corporate income tax is only 15% however).

Latvia's high growth rate means that in the future, latvians will not feel the need of working in construction sites in Sweden, where unions have not exactly been very welcoming.

The error from The Economist quoted by Munkhammar is still a lot closer to the truth than a ridiculous claim from Swedish finance minister Par Nuder about Sweden having the highest growth rate in Europe , when it is more like 16th highest among EU members (Were we to include non-EU members Sweden would fall even further behind) as all 10 new member countries as well as 5 of the old ( Ireland, Greece, Spain, Luxembourg and Denmark) have higher growth.


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