Fiscal council points to the challenges to reach a balanced budget  5 February 2019

Fiscal council points to the challenges to reach a balanced budget

Today, the government has started work on the state budget for 2019, examining economic development trends and the main parameters of public finances. After reviewing the report prepared by the Ministry of Finance, the Council concludes that the new government from the previous government has received the heritage with serious fiscal policy challenges. Already in the past, the Council noted a tendency for budget expenditure to grow at a much faster rate than fiscal conditions allow.

The Latvian budget in 2018, according to the calculations of the Council's experts, has been executed with a significant deficit. Also for 2019 the budget is planned with almost 200 mill € deficit (-0.64% of GDP). While the rest of the Baltic States were able to make their national budgets with surplus of 0.6% of GDP in 2018, continuing in 2019. Lithuania has planned a surplus of 0.4%, while Estonia has a surplus of 0.5% of GDP for this year.

Unfortunately, in its report, the Ministry of Finance has not fully updated data on the economic cycle assessment. With GDP growing at a faster pace than forecasted, in preparation of the budget plan for 2019 the signs of overheating intensifies, which is also being confirmed by the economic heat map published by the Council. The Council's experts estimate that the structural balance for 2019 has deteriorated by 0.2% points compared to the October 2018 estimate. In order to avoid further deterioration of the structural balance, additional revenue measures or expenditure cuts of 62 mill € in 2019 should be considered in addition to the calculations of the Cabinet of Ministers.

The Council confirms that the tax reform has given additional stimulus to economic growth, unfortunately, by exacerbating overheating trends and creating substantial tax revenue cuts. Currently, the government's medium-term plans do not show a move towards 1/3 of GDP as a tax-to-GDP target as opposed to trends in the other Baltic countries.

The government foresees vigorous measures to limit the shadow economy, but the currently planned negative fiscal space does not allow assessing the compliance of plans with the Fiscal Discipline Law. On 7 February Fiscal Discipline Council will hear from the Ministry of Finance information about the fiscal framework for 2019 and the explanation of the compliance of the tax reform with the status of one-off measures and will include its conclusion in the monitoring report to be submitted to the Saeima together with the draft state budget.