Fiscal sustainability should be borne in mind when raising expenditure on health care and social protection  18 December 2017

Fiscal sustainability refers to the ability of a government to maintain its current revenue and expenditure policies, without failing to meet its commitments and obligations, or leading to an unmanageable growth of public debt. Analysis conducted this year indicates that both the provision of public services and public debt service will create challenges.

This year's Fiscal Sustainability Report, in which the Fiscal Discipline Council (Council), in cooperation with experts from the Institute of Economics, Latvian Academy of Sciences, analyses the possible development of the Latvian economy in the period between 2017 and 2037. The Council contends that, even without exceeding the 60% of GDP threshold, a high level of public debt threatens fiscal sustainability. Although low interest rates have helped to keep interest expenditure low, the persistence of deficit spending is not indicative of responsible fiscal policy and  is at odds with the principles of the Fiscal Discipline Law, which foresees a balanced budget over the economic cycle.

Council Chairman Janis Platais explains: Although the economy is currently experiencing a period of growth, it is cyclical in nature, which means that periods of economic growth may be punctuated by economic downturns or even crises. In view of this, efforts should be made during periods of growth to avoid budget deficits in order to better prepare for sudden economic downturns or periods of economic turmoil.

The Council notes that, although the current budget deficit and level of public debt are in line with the requirements of the Maastricht Treaty and the Fiscal Discipline Law, vigilance should be maintained. Latvia is a small and open economy that is sensitive to sudden economic shocks.

Sandra Jekabsone, expert of the Institute of Economics, states: In Latvia’s case, the greatest threats to fiscal sustainability are related to the demographic situation, as well as to relatively low productivity and weak investment dynamics that may have a negative impact on potential output. Moreover, it should be noted that, as living standards improve, health care and social protection will require additional funding to meet public expectations.

The fiscal sustainability report was based on the assumption that the expenditure level on health and social protection will gradually move towards the EU average. Estimates show that the convergence rate may lead to a deterioration of the general government budget balance and puts public debt on an upward trajectory.

Fiscal sustainability report, summary presentatio video and audio commentaries available here.