Fiscal Council: EU funds delay could have a negative impact on the budget execution results  16 February 2017

On 16 February 2017  the Fiscal Discipline Council (Council) endorsed the Ministry of Finance’s (MoF) macroeconomic projections that will be used as the basis for drafting next year’s budget. An early review and endorsement of the MoF’s macroeconomic projections by the Council has been agreed upon to support the effort of the Government during the preparation of annual documents - the stability programme and the medium-term budget framework.

“In general, we view the MoF’s macroeconomic forecast as realistic. At the same time, the Council points to the significant risk factor that may affect the development of Latvia’s economy and, consequently, budget outcomes in 2017 and subsequent years: the construction industry has been weakened as a result of the extremely low activity in 2016, which is largely due to delays in the inflow of EU funding into the economy. First, there is no certainty that the delay will not continue in 2017. Second, it is unclear whether, as EU funds finally become available, the industry will be able to immediately start implementing projects of the appropriate scale – this risk might materialize in 2018. Part of the labour force from the construction industry have moved abroad, as evidenced by the rapid increase in the export of construction services in the last quarters. If the recession in the construction and investment sectors continues, it will be reflected in the overall economic growth and have a negative impact on the budget outcomes," says the leader of the Council’s GDP working group Martins Kazaks. "But, given that in most of the Latvia’s export markets demand appears to be stable, and the prolonged period of deflation is over, in the next few years we can expect a more rapid nominal GDP growth than in the past."

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