Fiscal watchdog warns that medics' wage hike breaks the rules

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Latvia's Fiscal Discipline Council (FDP) on December 19 issued a warning to the government that a planned major hike in health-sector wages potentially breaks agreed spending ceilings.

As previously reported by LSM, health sector wages are set to rise by around 20% next year.

But the letter from the FDP to government and the Saeima budget committee signed by FDP chairman Jānis Platais (pictured) points out that in doing so the medium-term expenditure ceiling established in order to create balanced budgets will likely be infringed unless remedial measures are taken elsewhere in budget plans.

"During the Cabinet meeting that took place on 18 December 2018 the Cabinet adopted measures increasing remuneration for health care staff resulting into expenditure increase in the amount of 87.5 million euro each year in 2019, 2020, and 2021, as well as in the following years," the FDP writes. 

Article 9 of Fiscal Discipline Law requires that if the Cabinet takes on expenditure that exceeds the state budget expenditure ceiling established in the Medium Term Budget Framework Law, it should simultaneously adopt measures that increase revenue or reduce other expenditure or submit relevant legislative proposals to the Saeima leading to increase in revenue or reduction in expenditure.

"According to the Ministry of Finance current assessment the fiscal space is negative for 2019 in the amount of 28.9 million euro and for 2020 – 23.3 million euro. The fiscal space assessment for 2021 is positive, in the amount of 59.0 million euro," says the FDP.

"The Ministry of Finance has added a list of measures enabling compensation for additional expenditures in the amount of 142.6 million euro in 2019, 112.8 million euro in 2020 and 78.3 million euro in 2021. Meanwhile, the measures are still to be enacted by decision of the Cabinet or initiation of a legislative measure in the Saeima thus not meeting the requirements of FDL," points out the Council. 

The Cabinet should prepare and adopt legislative acts that would fully compensate the decision to increase the remuneration in the health care in the amount of 87.5 million euro in 2019 and  2020, and 28.5 million euro in 2021, as well as to compensate negative fiscal space for 2019 and 2020 respectively in the amount of 28.9 million euro and 23.3 million euro, says the Council.  

The warning comes hot on the heels of another statement issued by the FDP  in which it "expressed its concern" at the wage hikes and said there was "not sufficient free fiscal space available" for the measures.

However, with Latvia in effect currently between governments, an incoming administration may judge it easier to breach the fiscal discipline rules for a while - thus weakening the long-term commitment to a balanced budget - rather than risk protests in the health sector or unpopular revenue-generation measures such as tax increases in the early days of a new government. 

Fiscal Discipline Council is an independent collegiate body established in 2014 to monitor the compliance with the rules of the fiscal discipline. It was set up after the financial crisis to advise and supervise government policy in an effort to avoid a repeat of the imbalances that led to Latvia's economic crash in 2008, which was by some measures the deepest in the world.


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