LTV's De Facto: Latvia will need over €400 million in aid measures

Take note – story published 2 years ago

Latvia could need more than €400 million to finance both the aid measures introduced so far in the energy crisis and those planned to be adopted at the government meeting on Tuesday, Latvian Television's 'De Facto' reported January 23.

Funding of aid measures is mostly at the expense of borrowed money, and only a small part of it has its own revenue generated, for example, by selling emission allowances (€78 million). There is no doubt that State aid should be provided at all, the experts surveyed by LTV said. However, the limited resources is the main reason that politicians were reminded: the money must go to those who really need it.

Inna Šteinbuka, president of the Fiscal Discipline Council, analyzing governments' budget for the final balance forecasts of 2021 and the 2022 plans provided by the European Commission, concluded that Latvia has been among the 'deficit champions' for the first time since the global financial crisis. “Despite the commitment expressed by the government to belong to a group of fiscally responsible Northern states,” she added.

Only Greece, Italy and Malta are ahead of Latvia in terms of deficits, said Šteinbuka. The increase in deficits is also one of the causes of price increases.

“It's in principle an economic axiom. A further increase in the deficit will, unfortunately, stimulate price increases. And in some ways, a vicious circle will be forming: on the one hand, we must support, the government must support the vulnerable people and businesses, which is linked to increased state aid and deficits. On the other hand, if this state aid is disproportionate and the deficit continues to grow to mitigate the effects of inflation, it will all lead to another price increase,” said Šteinbuka.

In coalition discussions, the funds available haven't been a major factor. First, it is decided what aid measures to introduce, and only then the calculations are made. Minister for Economics Jānis Vitenbergs said "it would be too early to talk about fiscal discipline in these circumstances."

With such decisions, the contingency budget is growing at a high speed. When adopting the public budget in the autumn, €82 million was planned for contingency. At the beginning of the year, the government decided a further €300 million due to the Covid crisis. New decisions in the energy crisis will require a substantial increase in this part of the budget.

Minister of Finance Jānis Reirs said that this was not a reason to prioritize the aid too much.

“This is not the case where only those people who need this support most have to be helped. There is also a lot of concern for the middle class, and that is why this support is well thought out and right. The price fluctuations are the result of hybrid attacks and therefore support is not only for disadvantaged families but to a wider extent,” he said.

In the experts' view, the government did not have much room to act otherwise because of the government's own delayed response and lack of preparedness. Latvia can still bear the public debt. However, it should not be expected that the public budget will be able to fully compensate.

Moreover, cheap borrowing will not be so cheap in the future.

“We cannot count on interest rates to always be very, very low and governments to be able to borrow without paying interest or even borrowing at negative interest rates for a few moments. This will not be the case, and in the future the burden of interest rates on governments, public budgets will increase,” Uldis Rutkaste, head of the Bank of Latvia's monetary policy administration, said.

“It is such a misfortune that we will spend now,[..] because it is allowed, but a very gloomy forecast is that [..] we contribute to the next financial crisis,” said Šteinbuka.



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