Interest payments on the national debt are also growing quite rapidly / Article

The Fiscal Discipline Council indicated that the period of high uncertainty will continue in the world, in Europe and in Latvia. The Council 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 the gross domestic product, because it is necessary to maintain a safety cushion for a potential crisis, which always comes unexpectedly. Unfortunately, in the current scenario, the national debt may already be close to 50% in 2028,” stated Inna Šteinbuka, Fiscal chairwoman of the disciplinary council.

The forecasted 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, the Council of Fiscal Discipline pointed out.

The Council also drew attention to the delay in investment from the private sector. Growth in exports, which, along with investments, is critically important for Latvia’s economy, has still not resumed.

Taking into account the reduced inflation and low economic growth, the FID emphasized that it will not be easy to achieve the deficit of 2.8% and the structural deficit of 0.5% of GDP provided for in this year’s budget law. The Council calls on the government, in the event of a worsening of the base scenario, to save the saved funds as much as possible in order to achieve the budget balance targets set.

Regarding the government’s priority to significantly increase defense spending, FID, 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 Council has repeatedly emphasized and maintains the opinion that one-off 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, FID believes that changes in the tax system will not radically improve the competitiveness of companies, economic growth or the financial position of the country.

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.