The Fiscal Discipline Council (FDP) generally approves of the fiscal strategy, fiscal goals, budget plan for 2023 and the medium-term budget plan for 2023-2025 provided by the Ministry of Finance. The council reports the suggested budget plan is appropriate to Latvia’s existing economic situation.
During the government meeting held on Tuesday, the 7th of February, ministers discussed the budget project that contained the largest expenditures in Latvia’s history. Revenue of the consolidated budget is planned at EUR 12.721 billion, whereas expenditures – at EUR 14.673 billion. Compared with the budget of 2022, this year there are plans for revenue growth of EUR 2.025 billion and expenditures growth of EUR 2.233 billion.
The ministry explains this leap with the geopolitical situation in the region, the government’s commitment to support Latvia’s residents with partial compensation of rising energy prices, as well as support Ukraine in the fight against Russia.
The general government budget deficit, which covers the state and municipal administrations, as well as state social insurance institutions, is estimated at EUR 1.77 billion in 2023, which is 4.2% of GDP.
The planned consolidated government budget deficit is EUR 1.95 billion or 4.6% of GDP.
The peak state debt ceiling is planned at EUR 19.2 billion or 45% of GDP, «which provides flexibility with additional financial measures in order to attract resources to cover planned debts in case of favourable financial market conditions or a situation when negative risks for the national economy and state budget deficit appear». If the aforementioned conditions do not come to pass, the state debt is expected at EUR 18 billion or 42% of GDP.
As FDP noted in its report published on the 7th of February, the budget for the year 2023 was composed under uncertainty. Both macroeconomic and fiscal outlooks are conservative. Generally the budget is considered fiscally neutral, according to requirements of the European Commission, and is appropriate to Latvia’s current economic, political and social situation.
The main risks listed by FDP include the ongoing geopolitical tension, growing energy and food prices, as well as slow economic growth.
FDP chairperson Inna Šteinbuka notes that Latvia’s budget contains a clear response to Russia’s aggression, as the budget includes a significant increase of expenditures for defence. «Of course, we would like to see larger budget expenditures towards education and healthcare, but this will be possible only once a breakthrough in national economy is accomplished,» stresses Šteinbuka.
The council believes currently the economy in at a turning point and the level of uncertainty is high. Inflation is one of the biggest factors that limit economic development in Eurozone and especially Baltic States. It is possible the strict monetary policy employed by the European Central Bank in increasing interest rates has given results, because inflation in Eurozone has started slowly going down since November 2022.
Nevertheless, FDP notes this is not the case in Latvia. In January 2023, according to the flash estimate from Eurostat, inflation in the country has reached the peak level among Eurozone member states – 21.6%. This puts Latvia ahead of Estonia (18.8%) and Lithuania (18.4%). Some optimism is offered by the drop of prices for energy resources to their pre-war level.
As for wages, the council notes that income of employed people grows more slowly than inflation. This is why the price-wage spiral risk is low. The fact that productivity is behind labour force costs is a negative factor. Last year labour force costs had exceeded their pre-pandemic levels, whereas the rise of productivity was calmer, which indicates growth of the productivity gap.
Outlooks for the general state budget development indicate that the debt threshold listed in the Fiscal Discipline Law (60% of GDP) is met in the medium term. Information from the State Treasury indicates that the debt in 2023 may reach 41.9% of GDP or EUR 18 billion. It is expected that in 2024 the debt in proportion to GDP will start going down to 39.3% and in 2025 – to 38.8%. However, in euro value the debt keeps increasing every year. In 2025 it is expected to reach EUR 18.4 billion.
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