Latvian watchdog warns to cut budget expenses

Riga, Latvia ((Ivan Zanotti Photo, CC BY-NC-ND)

The Latvian Fiscal Discipline Council pushed the government to decrease the budget deficit in 2019. In the first draft the deficit was 0.7 per cent of GDP, in the final version 0.3 per cent of GDP.

But despite government plans to decrease budget expenditures the Fiscal Council finds the government’s effort insufficient to ensure that fiscal indicators are consistent with sustainable development needs and overcome pro-cyclical fiscal stance. The Council suggests in its statement that the government should develop and approve an additional regulations for the treatment of compulsory (non-discretionary) expenditure and revenues, as well as one-off measures in the calculation of fiscal conditions.

According to the Fiscal Council’s estimates, the general government budget balance for 2019 should reach a surplus of 0.2 per cent of GDP. However, without applying the deviation to the budget balance to implement health care reform, the budget surplus in Latvia would be 0.7 per cent of GDP, similar to Lithuania and Estonia. Latvia is the only Baltic country that plans to have a budget deficit this year. Estonia has a surplus of 0.5 per cent of GDP, Lithuania has surplus of 0.4 per cent of GDP.

Jani Paltais, head of the Fiscal Council, told LETA “While Latvia keeps speaking and dreaming about a balanced budget, Lithuania and Estonia have a budget surplus. Such a situation is not acceptable, also because Latvia’s economy is growing steeper than the economy of its neighbors”.

Describing this year’s government budget as a “technical budget”, Prime Minister Krisjanis Karins emphasized that taxes and the budget deficit will not be increased this year and that the commitments made by Latvia’s previous government, such as pay raises to medics, law enforcement employees and judges, will be met.

Mr. Platais pointed out that “government measures to reduce shadow economy in the future might not compensate for all budget needs, with the current policy, in the future the budget consolidation risks increase which means that budget expenditure should be cut”.

The budget framework for 2019 has been drawn up, assuming that the Latvian economy will grow by 3 per cent this year. According to the budget framework, Latvia’s consolidated spending is expected to increase by EUR400m to EUR9.4bn. Consolidated budget revenues are projected to grow by EUR400m to EUR9.2bn.

But the Fiscal Council is not satisfied and stressed that in spite of the decision not to increase state budget expenditures, the total amount of the state budget expenditures has significantly grown in 2019 compared to MTBFL for 2018-2020, as well as the Draft Budgetary Plan, which was submitted for evaluation to the European Commission in October 2018.

“The deficit budget in the context of rapid economic growth is not in line with long-term development interests and accumulates problems that will require painful consolidation measures to cope with the economic slowdown. Part of the rapid economic growth in recent years has been at the expense of fiscal discipline requirements. This explains the faster economic growth in Latvia compared to Lithuania and Estonia, where the budget is prepared and executed with surplus,” the Fiscal Council wrote.

The Fiscal Council positively evaluated the improvements in the government’s fiscal risk declaration, including for the first time the quantified assessment of fiscal risks associated with the operation of public capital companies. “However, the Council underlines the need to assess the risks of possible deviations from the fiscal policy objectives due to difficulties in assessing the start-up of the economic downturn or in the performance of the financial sector, including in the event of insufficient progress on the implementation of Moneyval recommendations,” the Fiscal Council wrote in its statement.

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