Fiscal Council: budgeting process for the next year expected to be complicated due to disrupted economic growth  10 June 2016

On 10 June 2016, the Fiscal Discipline Council (Council) endorsed the Ministry of Finance’s (MoF) macroeconomic projections that will be used as the basis for drafting Latvia’s medium term budget framework (MTBF) 2017-2019. Early review and endorsement of the MoF’s macroeconomic projections by the Council has been agreed to support the effort in the Government in preparation of annual documents - the stability program and the MTBF.

“Downward revisions of the growth forecasts for Latvia’s economy compared to previous forecasts continue. This situation currently applies not only to Latvia; most of the countries worldwide experience decline in forecasted economic growth,” the Head of the Council’s GDP working group Martins Kazaks explains. Broadly, the Council does not object that the current macroeconomic forecast developed by the MoF is used as a basis for drafting the next three-year budget framework. Meanwhile, the Council evaluates the projections as optimistic. The main risks are related to the MoF assumption of rapid absorption of the EU funds already in 2017, which would contribute to GDP growth by encouraging investment. However, as past experience suggests, the EU funds have a tendency to flow into economy closer to the end of seven year programming period, which in the current period would be in 2018-2022.

The significant downward revision of the gross domestic product a will certainly create problems while preparing the budget for 2017. However, the new economic assessment is more realistic compared to the forecast just a few months ago. The new assessment points to the complicated economic environment and the need to strengthen the potential of economic growth.

The Council endorsed the MoF’s forecast for real and nominal GDP growth, potential GDP growth and output gap, inflation and GDP deflator.

Full report about the macroeconomic projections will be published till 17 June 2016.