Reforms should be implemented without undermining deficit targets  12 April 2016

Today, the Fiscal Discipline Council published its opinion on Latvia's Stability Programme for 2016-2019. This report has been submitted to the Parliament, the Cabinet of Ministers and the Ministry of Finance, and published on the websites of the Council and the Ministry of Finance.

"Though the Government broadly respects prudent fiscal policy goals and has set ambitious targets for coming three years, the Council notes minor deviations from the requirements of the Fiscal discipline law: the Council does not support conducting a structural reform in the healthcare sector at the expense of increasing government debt. Consequently, the assessment for the structural balance for 2017 should be improved by 35 million euro (0.13% of GDP), for 2018 – by 116 million euro (0.4% of GDP), and for 2019 – by 106 million euro (0.3% of GDP)," the chairman of the Council Platais informs. The Council calls for integrating these recommendations when preparing the medium term budget framework in the autumn.

The Council's opinion does not negate the necessity of implementing structural reforms. "The need to implement structural reforms is substantiated by the fact that Latvia’s current economic growth potential, despite the growth rate being one of the highest in the European Union, is insufficient to converge to average European Union levels in the foreseeable future," says Council member Morten Hansen. "To implement the necessary structural reforms and ensure adequate support for infrastructure investment, and improve the economic potential, a strong fiscal position and a bold government strategy is essential."

"Undoubtedly, structural reforms are essential for the development of Latvia’s economy. However, currently, when the economy is broadly balanced, increasing government debt to implement structural reforms is not acceptable. The Council is concerned that the latest government debt and deficit projections for the coming years have increased compared to previous budget documents. This creates the risk that there will be insufficient reserves when the economy enters a recession,” Council member Mārtiņš Kazāks explains.

The Council reiterates the necessity to establishing the fiscal safety reserve. At the same time, the Council notes a number of long-term fiscal risks that are related to the number of working age population not contributing adequately to the social insurance schemes, and the public healthcare system facing increased demand for services.