Public debt soon to hit ceiling, finance watchdog warns

Latvia's public debt is reaching critical proportions, and the Fiscal Discipline Council (FDP) is urging the government to rein in the spending, Latvian Radio reported August 21.

The impact of government aid measures in the Covid-19 crisis on the state budget is already critical and will exceed two billion euros, or nearly seven percent of gross domestic product, this year. Therefore, the spending watchdog, FDP, calls on the government to be fiscally responsible and to put an end to aid measures.

Next week, the government will begin work on building the next year's state budget. The Ministry of Finance has already estimated that it will be able to spend around €300 million on additional costs. As a result, the budget deficit is initially estimated to be less than four percent. However, these are only the first forecasts: this year's experience shows that the real deficit, with all aid measures, is already nearing ten percent of gross domestic product.

Head of the FDP, Inna Šteinbuka, urges the government to slow down with spending.

“In times of crisis, you can never say too much or too little. Compared to other EU countries, Latvia does not look bad in terms of aid. However, given the rapid growth in GDP, which has already reached pre-crisis levels, unemployment is declining, the government needs to phase out or completely stop supporting businesses. Of course, this depends on the epidemiological situation, because we are still living in great uncertainty, the pandemic is not over, and we do not know if there will be any new restrictions in the autumn. If the economy needs to be supported, it will have to be done in a very targeted way in future,” Šteinbuka said.

She said that there are many unsatisfied people in the crisis, either those who did not receive as much as they wanted, but also those who can only survive with state aid. When it is terminated, these companies will go bust, so it is never possible to say exactly what is needed for whom. However, the economy is growing, meaning that State aid at the macroeconomic level was effective.

Šteinbuka said that already this year State aid amounts to more than €2 billion, or 7% of GDP.

“If we look at liabilities from a state debt standpoint, sovereign debt is a key criterion to be taken into account by the government. Since public debt is already close to 50% of GDP, that means the debt ceiling has been reached. In any case, it should be borne in mind that future crises must also be minded, a reserve for a darker time that might come sometime,” Šteinbuka said.

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