Press Release on Surveillance Report 2020  10 October 2019

Fiscal Discipline Board: Government has to consider bigger safety cushion for stability in future

 

The size of the budget deficit planned for next year is in line with the European Union fiscal discipline requirements. However, Latvian Fiscal Discipline Law is stricter than in the EU’s, so the Fiscal Discipline Council points out that spending in the 2020 budget should be € 94.6 million lower than the Finance Ministry proposal. This was emphasized by Council member Mrs. Inna Šteinbuka at a press briefing on Thursday, commenting on the Council's latest fiscal discipline surveillance report.

 

The Council welcomes the creation of a fiscal buffer of 0.1% of GDP in 2020, 2021 and 2022, which is in line with the statutory minimum reserve. However, given the external and internal risks, it may be necessary to increase the reserve in the future, highlighted Mrs. Šteinbuka.

 

“The Council welcomes the fact that Latvia has lower budget deficit than the EU average and that the current government as a whole also shows a good understanding of budgetary discipline. However, given the projections for a possible slowdown in growth, the government needs to think about the need for a larger budget reserve, or a cushion for a more stable future,” Mrs. stressed Šteinbuka.

 

In June this year, the Council endorsed the MoF macroeconomic projections. However, due to recent economic risks, the Bank of Latvia and other influential forecasters (Swedbank, SEB) in their recent announcements have lowered Latvia's economic growth forecasts for 2019 and 2020.

 

The Council believes that in order to prepare for possible slower economic growth in good time, the government needs to be more proactive in their countercyclical activities.

 

"The government's initiative to review unemployment benefits in the face of high labor demand is generally positive and commendable, though somewhat overdue," Mrs. Šteinbuka added.

 

According to the Council, the tax reform implemented in 2017 resulted in a loss of tax revenue of around 1% of GDP per year.

 

“The impact of the tax reform should be considered over several years. Since the introduction of the reform, certain tax revenue streams have continued to decline, especially from corporate income tax. These missing resources could have been used to implement various national priorities. Further implementation of the priority objectives in education, health care and other areas will only be possible if structural reforms are implemented, productivity and export capacity increased, investment environment improved, innovations encouraged, etc.” Mrs. Šteinbuka pointed out.

 

As stated in the report, the Council agrees with the government's position not to rush the next tax reform.

 

Mrs. Šteinbuka stressed that special attention should be paid to funding requirements for public health and social protection measures, given the aging population and the worsening of the demographic situation and the related long-term negative impact on the fiscal situation in the country.

 

The Council welcomes the government's efforts to reduce income inequality among low-paid workers by raising the non-taxable minimum faster than planned. At the same time, the Council notes that scarce resources in the budget limit the scope for more rapid improvement in the social benefits system for the most deprived.

 

The Council also welcomes the administrative-territorial reform proposed by the government, which should result in a more rational use of limited state and municipal funds.

 

The fiscal discipline surveillance report is submitted to the Saeima and the Cabinet of Ministers. It is available on the FDP website.