The budget deficit will increase significantly and reach 2.9% of the gross domestic product

This year, the government’s budget deficit will increase significantly and reach 2.9% of the gross domestic product (GDP), approaching the Maastricht limit of 3% of GDP, according to the Latvian Stability Program project for 2024-2028 prepared by the Ministry of Finance (FM), which will be viewed on Tuesday the government.

The FM informs that the year 2024 is characterized by the recovery of growth, a rapid decrease in inflation, the stabilization of energy resource prices, a stable labor market and, in general, indicates the resilience of the national economy against external economic shocks. Although the budget deficit of the general government is close to the 3% of GDP limit, most of it is made up of one-time expenses related to the internal and external security of the country.

At the same time, the structural deficit is close to the limit of 0.5% of the GDP, and therefore the national debt is sustainable, says the FM, noting that investments in the field of internal and external security are necessary – both to ensure the safety of the country’s citizens and to create the necessary conditions for economic development.

According to the forecast of February 2024, Latvia’s GDP will increase by 1.4% in 2024, while in 2025, economic growth is expected to accelerate to 2.9%. The GDP growth forecast for 2024 has been reduced by 1.1 percentage points, but the forecast for 2025 has not been changed. In the next three years, economic growth will slow down slightly, reaching 2.5% in 2026 and slowing down to 2.3% by 2028.

Along with the rapid drop in the prices of energy resources and other raw materials in the world markets, which has a stabilizing effect on the prices of other goods as well, as well as the strict inflation control policy implemented by the European Central Bank (ECB), the Latvian inflation forecast for 2024 has been reduced to 1.6%.

In the no-policy scenario, the general government budget deficit is predicted to be 2.7% of GDP in 2025, 2.2% of GDP in 2026, 2% of GDP in 2027 and 1.7% of GDP in 2028. . Revenue dynamics dictated by weaker growth and inflation, rising wages in the public sector, rising health spending and the need to rapidly and substantially increase spending on internal and external security have had an impact on the deficit.

The FM notes that the level of the 2024 deficit is not a surprise, as a deficit of 2.8% of GDP was already planned when the 2024 budget was developed.