Seeing what is happening in Latvia’s stagnant economy, how the predicted tax revenues are being met or, to be more precise, not being met and what is happening with the state’s finances in general, the Ministry of Finance has prepared the annual Stability Program.
And the scene is poignant. It is calculated that, for example, next year the so-called fiscal space, or additional available money that could be redistributed to various needs, is in the red. Almost 300 million euros. In order to get even “to zero”, either spending should be reduced or taxes should be raised. The government is planning a different path.
The Fiscal Discipline Law adopted more than 10 years ago is in force in Latvia. Its basic purpose is that those in power do not get carried away with, so to speak, gas-in-the-floor politics and that public spending is at least somewhat in balance with actual financial capabilities. This legal act has been amended only once – back in 2014, and even then only to technically replace “lats” with “euro” in the text. Now the Ministry of Finance intends to open up the law in its essence and increase the permissible structural deficit ceiling from 05.00% to 1% of GDP.
In essence, the reins of austerity would be let looser. This would reduce this fiscal space gap to around 50 million euros. It is important not to violate the set deficit goals this year.
“Currently, compared to the rest of the European Union member states, which are quite seriously reducing their expenses and already spending hundreds of millions of euros there, Finland, Estonia, Belgium, Latvia are in a relatively good position,” explains Finance Minister Arvils Asheradens (JV).
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“If the government maintains discipline and does not increase its spending, then next year we can get a semi-neutral result and we can avoid cutting government spending.”
The Bank of Latvia also recognizes that the situation is currently difficult. Brussels rules allow the government’s proposed move.
“We no longer have inflation when tax revenues are diverted, but there is no economic growth yet. And on the expense side. We have a number of expenses that may still be necessary. Health, we have “Rail Baltica”, we have previously unfinished European Union fund projects. All this will have to be financed. Against this background, the deficit is growing, and the national debt is approaching the 50% mark. In the short term, if we know who needs it, it would be acceptable, but in the long term there should be a plan to reduce the deficit,” says Baiba Brusbärde, economist of the Bank of Latvia.
Latvia’s national debt has never reached 50% of GDP, even during the financial crisis. The Fiscal Discipline Council admits that this is the very, very maximum. Some kind of safety cushion should be kept for crises.
“There are economic views that by increasing the budget deficit without special restrictions, much higher growth can be achieved. In principle, there is nothing wrong. It’s just that if we look at Estonia, their debt is twice as low, but the growth is much more impressive,” says Inna Šteinbuka, chairperson of the Fiscal Discipline Council.
The government will decide on possible amendments to the Law on Fiscal Discipline on Tuesday.
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Tags: Economic turmoil government plans loosen reins statutory austerity
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