In a time when the European Central Bank (ECB) implements measures to slow inflation, European Union (EU) member states have to start reducing budget deficit and move towards tighter fiscal policies, stressed Executive Vice-President of the European Commission Valdis Dombrovskis.
It is important for the fiscal and monetary policy to not end up mutually exclusive. «Additionally, on one hand this goes in context with inflation, but on the other hand we’ve seen interest rates increase significantly in recent months. This means state debt maintenance and budget deficit financing is more expensive. This is one more argument in favour of reducing budget deficit,» said Dombrovskis.
At the same time, he said it is important to maintain support measures during an energy crisis. However, the problem is that
most support measures EU member states have adopted so fare are not focused on groups of residents that need it the most.
A number of support measures do not encourage reduction of energy consumption. This is why Dombrovskis reminds that recommendations issued by the European Commission in regards to energy detail that there are specific volumes of electricity allowed to be supplied to residents for subsidised prices. Anything above this volume will have to be sold at market price. On the one hand, this is aid to groups of residents whose energy consumption is not high, but on the other hand – it maintains the stimulus to reduce energy consumption for those whose consumption is high.
«A similar system is already in place in Latvia. However, the issue remains in making this support more focused. Currently 70% of support measures are unfocused,» said Dombrovskis, reminding that Latvia is not the only country with unfocused support measures.
As for ways to reduce inflation, Dombrovskis said the problem at the moment revolves around high energy prices.
«In many countries support measures were planned to last until the end of the existing heating season. It is likely we will have to review energy price trends and consumption for the next heating season. Only then will we be able to decide which support measures are needed in the second half of the year. This is what the European Commission recommends – these measures have to be time-limited,» said Dombrovskis.
As previously reported, macroeconomic and fiscal outlooks from the Ministry of Finance indicate that in a medium-term perspective the general government budget deficit will stay at 2.6% of GDP in 2023, 0.4% in 2024 and 2025 as long as the government’s policy remains unchanged. Representatives of parties forming the coalition have also signed the Fiscal Discipline Agreement, which provides for a commitment to reduce the general government structural deficit to 0.5% of GDP in 2025.
Also read: Inflation causes tax revenue grow more rapidly than budget expenditures in Latvia