Latvian budget spending should shrink by nearly 100m euros, say experts

The state budget spending next year should be EUR 94.6 million smaller than currently planned, the Fiscal Discipline Council member Inna Šteinbuka told reporters October 10.

She presented the council's Fiscal Discipline Monitoring Report on the 2020 state budget, prepared ahead of the government's meeting on Friday, October 11, where the government will take final decisions on the shape of the budget it will present to Saeima.

According to Steinbuka, even though European Commissioner Valdis Dombrovskis (New Unity) has previously said that Latvia's 2020 draft budget complies with the European Union rules on fiscal discipline, the Fiscal Discipline Council assessed next year's budget according to Latvian laws, which have tighter fiscal discipline rules.

"According to Latvian fiscal discipline standards, budget spending in 2020 should be EUR 94.6 million smaller," Šteinbuka said, adding that only the government could decide whether to take this recommendation into consideration or not.

At the same time, Šteinbuka stressed that, compared to other EU countries, Latvia's fiscal discipline was good, especially when it comes to the level of government debt to gross domestic product. Nonetheless, the Fiscal Discipline Council calls on the government to think more actively about a "safety cushion" because of uncertainty on external markets. Economic growth projections for 2020, approved this past June, may need to be revised, added Šteinbuka .

She reminded that the government approved a budget with a surplus in 2016, while in the next two years, the budget had a deficit, even though economic growth exceeded 4%.

The rapid economic growth led to a strong demand for labor and wages growing faster than productivity, which caused different risks. Luckily, inflation remained low Šteinbuka said.

She welcomed the government's efforts to comply with fiscal discipline in the 2019 and 2020 budgets, as well as planning a gradual reduction of the budget deficit in the years to come.

The Fiscal Discipline Council is an independent collegial body established in 2014 to monitor the compliance with national rules of fiscal discipline to ensure government spending plans are sustainable and avoid populist spend-and-save swings according to political expediency. You can read more about its purpose and its members at its website.

Šteinbuka's comments were consistent with a statement from the FDC in August which said: "According to the Council, the current proposed budgetary framework is considered to be in line with the requirements of the Fiscal Discipline Law, but the eligible expenditure for 2020 is increased by the impact of the tax reform of € 94 million. The Council has previously considered the one-off nature of the tax reform to be incompatible with the requirements of the Fiscal Discipline Law."

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