Fiscal Council: Latvia's Stability Programme 2019-2022 does not foresee a sufficiently tight cut in expenditure for the year  23 April 2019

Fiscal Council: Latvia's Stability Programme 2019-2022 does not foresee a sufficiently tight cut in expenditure for the year

Evaluating the Latvia's Stability Programme 2019-2022 Fiscal discipline council concluded that the government did not envisage a sufficiently rigorous fiscal policy stance.

"The proposed Latvia's Stability Programme for 2019-2022 does not indicate that the government is going to improve the situation by creating a medium-term budgetary framework for 2020-2022. Although the improvement of the budget indicators is compared to the previous plans, these efforts cannot be called as sufficient as Latvia's budget deficit is considerably higher than in other Baltic countries, where for several years now the state budget has been created with a surplus," says Jānis Platais, Chairman of the Fiscal discipline council.

The Fiscal discipline council on Tuesday, 23 April, published its opinion on the Latvia's Stability Programme for 2019-2022. This Council report has been sent to the Saeima, the Cabinet of Ministers and the Ministry of Finance, as well as published on the website of the Council and the Ministry of Finance.

The Council noted that the government is creating a fiscal safety reserve for 2020-2022 at the minimum requirements of the Fiscal discipline law. The Council calls for the reserve to be set for all years in the medium-term budgetary framework law without additional reservations that the reserve could be used to cover additional budgetary needs.

According to the Council, Latvia's government budget balance in 2019 and 2020 will be largely determined by the fact that the European Commission's authorized budget deficit deviation will end in 2020 due to structural reforms in health care. The Council notes that this derogation, as well as the approach of the Ministry of Finance to the use of tax reform in the calculation of fiscal indicators, makes a difference between the budgetary indicators of Latvia and the other Baltic States: Latvia is experiencing a significant deficit, while Lithuania and Estonia have a surplus.

As the Council points out, the tax reform has introduced at least two adjustments to Latvia's fiscal policy spectrum. One of them is the reduction of the tax burden, which removes Latvia from the goal of collecting tax revenue in the amount of one third of the gross domestic product. Secondly, while the reform envisages some revenue cuts being temporary, the Council cannot accept that the Ministry of Finance has removed the impact of the tax reform in the calculation of fiscal conditions.

"Instead of reducing budget expenditures due to reduced revenue because of the tax reform, the Stability Programme expects expenditure to increase. It creates a dangerous precedent that a similar one-off effect can be attributed to additional spending on education, research and infrastructure. The Council therefore calls on the government to correct this approach," emphasizes Andžs Ūbelis, Member of the Fiscal discipline council.

The Council estimates that the negative fiscal space in 2020 is 112.2 million euro.

The Council's calculations also show that significant deviations from the requirements of the Fiscal discipline law have developed from 2013 to 2018. In the recalculation, the Council identified an accumulated deviation from the target of 2.6% of GDP.

The Council also draws attention to the fact that its independence and the high quality of its functions can be jeopardized if restrictions are put on the proper functioning of the Council Secretariat.

"The Council calls on the legislator to make the necessary amendments to the laws and regulations in order to prevent the interpretation of existing legislation by the Ministry of Finance and the State Audit Office leading to a complete paralysis of the work of the Council, since it is impossible to provide independent analytical support for the preparation of Council decisions," says J.Platais.

The Latvia's Stability Programme is a medium-term policy document that describes Latvia's fiscal policy. The Stability Programme is aimed at implementing a rigorous and sustainable fiscal policy and ensuring macroeconomic stability.

Since February 2016, the Ministry of Finance's macroeconomic forecasts used as a basis for medium-term public budget planning are submitted to the Fiscal Council for assessment and approval. Forecasts are approved twice a year: the Stability Programme is being developed, as well as the development of the current medium-term budgetary framework.

Fiscal discipline surveillance interim report available here.