Fiscal watchdog urges government to start saving

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The Fiscal discipline council - an independent body monitoring Latvia's compliance with fiscal discipline - on August 24 urged the government to pursue cautious fiscal policy as the country's economy is heating up. 

In a release sent to the press the council urged the government to pursue "cautious fiscal policy (the establishment of fiscal reserves and the reduction of public debt), rather than fiscal expansion."

The watchdog also criticized the government, saying it "consistently uses all the available options to deviate from the budget deficit target", which is set at 0.5% of GDP in the Fiscal discipline law.

It also claimed that, while "the macroeconomic environment is favorable for all, but the conditions in the labor market are especially favorable to workers and job seekers," suggesting that the labor market may be heating up and there may be potential difficulties for businesses to find employees.

"Remuneration in the public sector may also be a problem. The limited resources available may create a wage gap compared to the private sector and hamper the ability to attract employees in the near future, argues Jānis Platais, Chairman of the Council. Macroeconomic risks should also be considered, because the economy may start to cool down after heating up."

"Despite the favourable economic conditions, the Government has decided not to establish a fiscal safety reserve for 2019 in order to reduce the deficit (0.5 of GDP), which was caused by the tax reform. This decision runs counter to the principles of countercyclical fiscal policy, stresses Andžs Ūbelis."

On the flip side, the council appeared to confirm the revised forecasts by the Finance Ministry, which say Latvia's economy will grow an impressive 3.7% this year and 3.4% the next.

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