The Fiscal council urges not to forget the safety reserve during times of economic growth 24 August 2017
On 24 August 2017 the Fiscal discipline council (Council) informed the media about the endorsement of the Ministry of Finance’s macroeconomic forecasts, and indicated that they are realistic. However, the macroeconomic forecast confirmed the suspicion that the economy is heating up. This requires cautious fiscal policy (the establishment of fiscal reserves and the reduction of public debt), rather than fiscal expansion. The Council notes that the Government consistently uses all the available options to deviate from the budget deficit target stipulated in the Fiscal discipline law – 0.5 of GDP.
The macroeconomic environment is favourable for all, but the conditions in the labour market are especially favourable to workers and job seekers. This suggests that the labour market may be heating up and there may be potential difficulties in attracting employees. Remuneration in the public sector may also be a problem. The limited resources available may create a wage gap compared to the private sector and hamper the ability to attract employees in the near future, argues Jānis Platais, Chairman of the Council. Macroeconomic risks should also be considered, because the economy may start to cool down after heating up.
Council member Andžs Ūbelis notes that: It is necessary to significantly improve the Statement of fiscal risks. The impact of all risks should be assessed both qualitatively and quantitatively. The existing format of the Statement is quite mature, and this is a good time to revise it in line with the most recent fiscal risk assessment methods. The wide application of the symmetry principle should be reconsidered. It is assumed that something that increases the budget deficit in one year may result in additional revenues in the next. Experience teaches us that this is not quite the case – if there are savings, they are used up.
Despite the favourable economic conditions, the Government has decided not to establish a fiscal safety reserve for 2019 in order to reduce the deficit (0.5 of GDP), which was caused by the tax reform. This decision runs counter to the principles of countercyclical fiscal policy, stresses Andžs Ūbelis.