Budget deficit hike projected for 2018, says Latvia's top man in Europe

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Latvia’s fast economic growth notwithstanding, its budget deficit will grow siginficantly, from 0.8% of GDP this year to 1.8% in 2018 due to the projected tax reform, Valdis Dombrovskis (Unity), the European Commission’s Vice President for the Euro and Social Dialogue, said in Brussels.

Citing the European Commission’s spring forecast, Dombrovskis said that Latvia’s economic growth, driven by investment growth and consumers’ strengthening purchasing power, is expected to accelerate to 3.2% this year and 3.5% next year, but that the widening of the budget deficit will be considerable, reported LETA on May 11.

“Basically, the growth of the budget deficit will be brought about by the planned tax reform, which at least for now lacks compensatory measures that should be earmarked to offset the negative fiscal impact. Forecasts suggest that this year Latvia will be showing faster economic growth than the other Baltic states, but it will also have the largest budget deficit,” Dombrovskis said.

The European Commission’s vice president also noted that last year Latvia’s economic growth was impeded by a decline in investment, which was largely due to the transition to the EU’s new multiannual budget, which in turn slowed the absorption of EU funding. Meanwhile, demand for labor force has continued to rise, fueling consumers’ economic activity and reducing unemployment, Dombrovskis said, adding that the demand for labor force and the plan to raise the minimum wage will sustain strong wage growth, which is likely to exceed 6% a year.

The European Commission’s vice president projected that after four years of low inflation, Latvian consumer prices are likely to start climbing at a faster rate and move up 2% to 2.2% annually in 2017 and 2018 amid rising energy prices in the world and growing domestic demand in Latvia.

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