Fiscal Discipline Council: COVID-19 aid must not burden future budget

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The Fiscal Discipline Council of Latvia (FDP) released the fifth crisis monitoring report on July 10, expressing the view that current support mechanisms should not impose a disproportionate burden on future budget.

In a statement to the media, FDP said that Latvia has managed to overcome the first wave of the pandemic more successfully than most countries of the European Union (EU) and the world, thanks to secure fiscal policies, euro-zone, and low levels of household debt. Following a sharp drop of activity in April, May and June, the situation in Latvia's economy has improved significantly and domestic trade is recovering more rapidly than expected. However, the weakness of exports slows down the recovery of Latvia's economy.

In the first half of 2020, as in previous years, very low lending activity was observed, which limited the increase in internal consumption, the FDP reported.

The amount of funds allocated to downtime compensations and other social measures was insufficient to maintain internal consumption at pre-crisis levels.

Despite positive developments, overall, the macroeconomic environment can be described as unsustainable, FDP stated. There are negative indications of consumer price trends. Unemployment continues to rise, production and retail sales continue to fall.

Meanwhile, taxes are collected at a relatively good level in Latvia, FDP said. Given the tax holidays granted, in June this year the tax was collected at 3% more than a year earlier in the month. Those trends give it hope that the lower point of tax revenue compared to the previous year is behind. 

The government has continued to develop a program of economic support measures – the budgetary impact of planned support measures is already approaching 9% of gross domestic product (GDP). In addition, EU aid instruments could give fiscal momentum of 16% of GDP without virtually increasing the size of government debt.

Overall, the FDP welcomed government-backed measures in the short term, but urges caution on rising deficits and debt in 2021 and later.

The FDP pointed out that the country's existing and planned support for the economy has reached a significant level (particularly in view of potential EU support) and cannot be infinite due to the principle of fiscal sustainability and inter-generational responsibility. Sooner or later, it will be necessary to return to fiscal conditions and today's support mechanisms should not impose a disproportionate burden on future budgets, the Council stressed.

State aid, in FDP's view, must be more selective, targeted and with immediate effect. Investment projects should primarily contribute to Latvia's economic potential development, productivity growth and competitiveness. Some of the state investment projects (Riga concert hall, Liepaja prison) are poorly or completely inconsistent with these criteria.

According to the FDP, it is necessary to establish a process of analysis of aid effectiveness that would help justify the choice of the most efficient projects and support mechanisms.


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