Press Release on Budget for 2020 Preparation  21 August 2019

The Fiscal Discipline Council (Council) generally commends the work of the Ministry of Finance in preparing the 2020 budget framework, which began in government on Tuesday. However, the impact of the tax reform remains substantial and the compensatory measures are inadequate. Therefore, the Council considers that, in line with the requirements of the Fiscal Discipline Law (FDL), next year's budget expenditure should be reduced by EUR 94 million in comparison to the draft budget presented. This opinion was presented to the Cabinet of Ministers on Tuesday by the Chairman of the Council, Janis Platais.

 

“The fiscal targets planned by the Ministry of Finance are primarily focused on meeting the requirements of the European Union's Financial Stability and Sustainability Pact. However, the Council believes that next year's budget planning should respect Latvian fiscal discipline standards, which are generally stricter”, emphasizes Janis Platais, Chairman of the Fiscal Discipline Council.

 

According to the Council, the current proposed budgetary framework is considered to be in line with the requirements of the Fiscal Discipline Law, but the eligible expenditure for 2020 is increased by the impact of the tax reform of € 94 million. The Council has previously considered the one-off nature of the tax reform to be incompatible with the requirements of the Fiscal Discipline Law.

 

The Council is also concerned that the principle of countercyclical fiscal policy set in FDL is currently ignored by insufficient savings in 2017 and 2018 when economy was booming, and by an insufficiently tight fiscal policy in the 2019 state budget. According to the Council, the rapid economic growth in 2017 and 2018 was stimulated by additional fiscal impulses such as the European Fund project cycle, tax reform and deviations from the structural balance target agreed with the European Commission.

 

"Since the Council's approval of the Ministry of Finance's macroeconomic forecasts that is used for budget preparation in June, several downside risks have emerged: slowdown in Latvia's GDP growth in the second quarter, sluggish economic growth in Latvia's export partners, increasing uncertainty about Brexit, tariff wars, and others. In addition, the problems in the financial markets and Latvia's ability to convince its partners of the achievements in implementing the Moneyval recommendations also pose risks. These risks form a good basis for next year's budget to be subject to tighter fiscal discipline”, emphasizes Jānis Platais.

 

The Council supports the government's decision to establish a fiscal security reserve in amount of 0.1% of GDP in 2020 and within the medium-term budgetary framework, as required by the Fiscal Discipline Law. The Council considers this provision to be sufficient for the current situation.