According to EC forecasts, the 2024 general government budget deficit will be 0.2% of GDP higher than the Ministry of Finance's (FM) forecasts while compiling the budget.
The latest FM estimate, which takes into account lower revenue growth, suggests the deficit could be close to EC projections – but it is highly probable the state budget deficit will remain below the crucial 3% limit this year.
"It should be recalled that last fall, the European Commission predicted Latvia's state budget deficit for this year as much as 3.1% of GDP. However, the government responsibly manages fiscal risks, strictly adheres to the approved budget, not allowing additional expenses above 3%, and carefully monitors the fulfillment of the revenue forecast. As in 2024, the government will also follow a responsible fiscal policy next year, simultaneously strengthening the country's internal and external security, as well as providing support to Ukraine," said Finance Minister Arvils Ašeradens in response to the figures.
Depsite Ašeradens' upbeat assessment, the verdict of the EC was decidedy mixed. "Latvia’s economy is set to stagnate in 2024," it bluntly stated.
"Private consumption has not yet recovered despite pronounced wage growth, whereas public expenditure is set to remain strong, through additional spending on healthcare and research. The economy is forecast to pick up in 2025 and 2026, with GDP growth reaching 1% and 2.1%, respectively... As energy prices normalise, inflation is expected to reach 2.2% in 2025 and 2026. Unemployment is projected to increase in 2024 and to decrease slightly in 2025 and 2026. The general government deficit is forecast to increase to 3.2% of GDP in 2025 and 2026 driven by weaker growth of tax revenue," the EC added.
| Indicators | 2024 | 2025 | 2026 |
|---|---|---|---|
| GDP growth (%, yoy) | 0,0 | 1,0 | 2,1 |
| Inflation (%, yoy) | 1,2 | 2,2 | 2,2 |
| Unemployment (%) | 6,7 | 6,7 | 6,5 |
| General government balance (% of GDP) | -2,8 | -3,2 | -3,2 |
| Gross public debt (% of GDP) | 48,1 | 50,3 | 51,6 |
| Current account balance (% of GDP) | -3,2 | -2,1 | -2,3 |
"In 2025, the government deficit is forecast to increase to 3.2% of GDP. The deficit increase stems from the revenue side, including tax revenue reduction due to the labour tax reform, in particular on taxes on income and wealth, as well as a projected decline of revenue from property income, which was elevated in 2023 and 2024 due to high profitability of state-owned companies in energy and forestry sectors.
"The revenue from advance payments in the corporate income tax from the financial sector is projected to decrease in line with expected lower profit margins following a decline in interest rates," continued the EC.
"In 2026, the government deficit is forecast to remain at 3.2% of GDP, mainly due to the projected revenue decrease from property income, impact from the labour tax reform carried out in 2024 and moderate growth of government consumption expenditure," it concluded.
