The national debt is constantly increasing, the amount of interest payments is also increasing rapidly: “Latvia cannot afford to increase the national debt above 50% of GDP”

The development of the national debt in the coming years shows a growing trend, in addition, the amount of interest payments on the national debt is also growing quite rapidly – from 0.8% of the gross domestic product (GDP) in 2023 to 1.4% of the GDP in 2027 and 2028, according to the interim monitoring report on Latvia’s Stability Program for 2024-2028 states the Fiscal Discipline Council (FDP).

Most read

Numerology and the magic of numbers: how your phone number affects your destiny and when to change it?

Skabeeva rants: Russian propagandists are outraged by Trump’s actions in connection with Ukraine

TV24

“You have to listen, that we’ve messed around.” About injustice and allowances for those pensioners who worked during the Soviet era

Read other posts

Therefore, it is especially necessary for the government to avoid increasing the amount of debt in the coming years, emphasizes the FDP.

In the world, in the European Union (EU) and in Latvia, a period of high uncertainty continues, which makes it difficult to develop and evaluate the Stability Program for 2024-2028. FDP believes that the government must be prepared for adverse geopolitical scenarios, which can further slow down the fragile growth predicted in the base scenario of the Latvian Stability Program and worsen the country’s financial situation.

“Latvia cannot afford to increase the national debt above 50% of GDP, because it is necessary to maintain a safety cushion for a potential crisis, which always comes unexpectedly. Unfortunately, in the current scenario, already in 2028, the national debt may be close to 50%,” says FDP chairperson Inna Šteinbuka.

The fiscal indicators of the stability program result from the macroeconomic forecasts approved at the FDP meeting on February 12 of this year, which, taking into account the stagnation of the economy in 2023, have worsened. The forecast GDP growth for this year is 1.4%, for 2025 – 2.9%, for 2026 – 2.5%, and for 2027 and 2028 – 2.3%. In general, such a growth scenario could not only not reduce, but possibly even further increase Latvia’s lagging behind neighboring countries, admits the FDP.

The Council also draws attention to the delay in investment by the private sector. Investments in competitive innovative projects and human capital are vitally necessary to ensure the migration of labor from low-productivity sectors to sectors with high added value, increase productivity, promote growth and promote the growth of budget revenues, emphasizes the FDP. Exports, which along with investments are critically important for Latvia’s economy, have still not resumed growth, FDP says.

Taking into account the decreased inflation and low economic growth, the FDP emphasizes that it will not be easy to achieve the budget deficit of 2.8% and the structural deficit of 0.5% of GDP provided for in this year’s budget law.

FDP calls on the government, in the event of a worsening of the base scenario, to save the saved funds as much as possible during the execution of the budget in order to achieve the budget balance targets set. The new EU economic regulation, which was approved by the European Parliament on April 23, not only gives member states more freedom of action in determining the spending trajectory, but also provides for more effective sanctions in case of failure to achieve the set goals. Latvia must maintain its good reputation as a country with a responsible fiscal policy, and the set fiscal goals must be achieved, FDP states.

Regarding the government’s priority to significantly increase defense spending, the FDP, without questioning the goal of strengthening defense, is critical of the interpretation of such spending as one-off that does not affect the structural balance. The FDP has repeatedly emphasized and maintains the opinion that one-time measures for the internal and external security of the country cannot be recognized as such.

In connection with the tax reform implemented by the government, the FDP believes that changes in the tax system will not radically improve the competitiveness of companies, economic growth or the state’s financial position. In the opinion of the Council, the weakest stages of economic development are low productivity, lack of labor force and low level of investment. In the field of taxes, it is necessary to strengthen measures to reduce the shadow economy, as well as to simplify the tax system and its administration, thus improving the business environment and encouraging voluntary tax payment. The government faces a serious challenge to design and implement a tax reform that would reduce the tax burden on low-wage earners while simultaneously increasing the tax burden to increase funding for defense, social and other expenditures.

Latvia’s Stability Program is a medium-term policy document that describes Latvia’s fiscal policy. It is aimed at implementing a strict and sustainable fiscal policy and ensuring macroeconomic stability. Since February 2016, macroeconomic forecasts developed by the Ministry of Finance, which are used as a basis for medium-term state budget planning, are submitted to the FDP for evaluation and approval. Forecasts are approved twice a year – when developing the Stability Program, as well as when developing the current medium-term budget framework.

FDP is an independent collegial institution established with the aim of ensuring the supervision of compliance with the conditions of fiscal discipline. Saeima FDP has approved University of Latvia professor Inna Šteinbuk, Riga Technical University Riga Business School faculty member Andrej Jakobson, Estonian Bank Vice President Ulo Kāsik, Citadele Bank economist Mārtiņas Āboliņa, economist Ivars Golst and economist Jānis Priedi.

Themes