At its meeting on 3 October, the council of the Latvian Association of Local and Regional Governments (LPS) considered the draft 2025 budget and the budget framework for 2025-2027. The requests made by local authorities regarding funding for next year have been heard and several solutions proposed. A compromise agreement was put forward at the council meeting on the allocation of local authority revenue, setting the proportion of personal income tax (PIT), the largest source of revenue for local authorities, at 78% for local authorities and 22% for the state budget in 2025. It is also proposed to increase the local government financial equalisation (PFI) grant by 14 million euros.
The existing PFI arrangements will be retained in 2025. All local authorities are projected to see an average increase of 10.3% in equalised revenue in 2025 (together with funding for local authorities on the European Union (EU) external border) compared with the amount planned for 2024. The proposal drawn up by the Ministry of Finance ensures a regionally balanced increase in funding for all local authorities, including a proposed further increase of half a million euros in the grant for the five local authorities on the EU external border - Alūksne, Augšdaugava, Balvi, Krāslava and Ludza counties. The grant, amounting to 2.5 million euros in total, will thus be distributed in proportion to each local authority's length of external border in kilometres.
It is proposed that any PIT revenue in excess of the forecast be directed towards repaying the borrowing commitments taken on by local authorities. This solution meets the requirements of the EU directive and the new economic governance model. As a result, a local authority's commitments and loan interest payments will fall, and its scope for obtaining new loans will increase. For new loans from the state budget, meanwhile, it is proposed that no servicing fee be applied. This means that local authorities' interest payments would fall by 0.25%.
It was also decided that the assessment of the 2.6% increase in the payroll fund will not apply to changes that are set by the state and directly affect local authority budgets, including teachers' pay and changes to the minimum wage. A local authority will be able to set an economically justified exception by decision of its council.
In the context of the 2025 state budget, agreement has also been reached on 100% PIT guarantees for local authorities, including a more precise breakdown by quarter. The parties have likewise agreed on the limit on and conditions for local authority borrowing and guarantees. The minutes also include an agreement on setting the coefficients used in calculating the housing benefit and on funding for the maintenance and construction of transit streets.
Local authorities are forecast to see an annual increase in tax revenue and in compensation for tax changes, including a projected increase of 235.8 million euros for 2025 compared with the 2024 plan. In connection with changes to tax policy under the decisions adopted by the government, it is proposed that local authorities be fully compensated for changes in PIT revenue by providing an additional state budget grant to local authorities for carrying out their autonomous functions. At the same time, the government plans to continue guaranteeing local authorities the full delivery of the PIT forecast. Local authorities are therefore assured of a permanent, stable and predictable revenue base in 2025, which will provide the financial resources needed to carry out their functions and meet their commitments.
The overall borrowing limit for local authorities for 2025 and the medium term has been increased by 50 million euros, and the purposes for which borrowing is permitted have been broadened. Implementation of EU fund and Recovery Fund projects remains the main borrowing priority over the medium term. Investment projects for land drainage systems and urban rainwater and sewerage systems have been included in the minutes as a new borrowing purpose.
The 2024 borrowing purposes and their conditions are retained so that local authorities can continue to implement investment projects in educational institutions for the delivery of sustainable primary and secondary education and the reorganisation of the school network, infrastructure investment projects in pre-school educational institutions, purchase transport for carrying pupils and carry out road construction projects, as well as for functions related to strengthening security. Borrowing for the construction of a new school will be possible without local authority co-financing. It is also proposed to agree on the conditions for deferring the principal of 2025 loans.
In future, local authorities will have broader scope to use borrowing for their priority investment projects in line with each authority's development plan. Borrowing may be used to continue and complete projects already started and may be combined with projects funded by EU funds and the Recovery Fund. For these projects, local authority co-financing has been reduced from 15% to 10%, and each local authority has access to a total borrowing amount of 1.5 million euros, while Rīga, as the capital city, has access to 6 million euros.
The council meeting was attended by Prime Minister Evika Siliņa, Minister of Finance Arvils Ašeradens and Minister for Smart Administration and Regional Development Inga Bērziņa. Once signed, the minutes will be appended to the 2025 state budget and the budget framework for 2025-2027.
Approval of the draft state budget for 2025 and the budget framework for 2025, 2026 and 2027 by the Cabinet of Ministers is planned for 14 October this year. The package of legislative proposals on the 2025 budget is due to be submitted to the Saeima on 15 October this year.