Analytics, Economics, EU – Baltic States, Latvia, Modern EU
International Internet Magazine. Baltic States news & analytics
Thursday, 28.03.2024, 20:59
Latvian issues in progress: EU’s vision for the country’s growth
The Council’s
opinion has an important role in both the EU economic integration and in
“regulating” the member states’ economic progress. It is known as the “voice of
the EU member governments” because it adopts the EU laws (together with the
European Parliament, based on proposals from the Commission) and coordinates
the whole spectrum of EU socio-economic policies practically implemented in the
member states. Last but not least, the Council adopts the annual EU budgets,
i.e. also jointly with the European Parliament.
More in: https://europa.eu/european-union/about-eu/institutions-bodies/council-eu_en#overview
As to the OECD’s recommendations for Latvia, see two
articles: Eteris E. “Tackling Latvian economy and sustainability:
OECD’s assessment. 03.06.2019. In:
http://www.baltic-course.com/eng/modern_eu/?doc=149553&ins_print;
and “OECD’s review shows Latvian main problems”. 04.06.2019. In:
http://www.baltic-course.com/eng/editors_note/?doc=20581&ins_print;
Modern Latvian situation
General overview.
Latvian Reform Programme - 2019 and its Stability Program are presently in the rank
of a “preventive arm” of the Stability and Growth Pact. Latvian government
plans to improve the headline balance from a deficit of 1.0% of GDP in 2018 to
a deficit of 0.5% of GDP in 2019 and 0.4% of GDP in 2020 and 2021. Based on the
recalculated structural balance, the medium-term budgetary objective, set at a
deficit of 1% of GDP in structural terms, is planned to be reached in 2019.
According to Latvian Stability Program - 2019, the general
government debt-to-GDP ratio is expected to decrease to 33.1% of GDP by 2022.
The 2019 Stability Program’s GDP growth projections and possible risks to the
budgetary position are regarded as “balanced”.
The 2019 country report for Latvia (published at the end of February
2019) is addressing the country-specific recommendations adopted by the Council
in July 2018; the follow-up steps were adopted in previous years for Latvia's 2020
progress’ targets.
The assessment of the National Reform Program and Stability
Program has shown that Latvia has achieved its medium-term budgetary objective
in 2019, taking into account the allowances linked to the implementation of the
structural reforms for which a temporary deviation is granted.
This is consistent with a maximum nominal growth rate of net
primary government expenditure of 4.8% in 2019, corresponding to an improvement
in the structural balance by 0.2% of GDP. Based on the Commission 2019 spring
forecast, Latvia is expected to be close to its medium-term budgetary
objective, taking into account the allowance linked to the implementation of
the structural reforms for which a temporary deviation has been granted too.
However, the Council is of the opinion that Latvia has to
take further measures (during 2019-20) to comply with the EU stability and growth
provisions. It mentioned some of the negative aspects: “government
decision-making is still perceived to be influenced by favoritism and the
procurement process as susceptible to corruption due to lack of transparency,
in particular in municipalities and state-owned and municipal enterprises”
(here and below are citation from the Council’s recommendations).
For example, the Council thinks that “legislative amendments
on conflict of interest regime may give rise to abuses” and that the “recently
adopted Code of Ethics does not cover politically appointed persons”.
More in: Council’s recommendations on the Latvian 2019
National Reform Program of Latvia and a Council opinion on the Latvian 2019
Stability Program in:
Taxation issues.
Important considerations have been voice by the Council concerning the taxation
spheres. Thus, the Council stressed that tax revenue in Latvia as a share of GDP
has been lower compared to the EU’s average; this limits to some extent the
delivery of public services, in particular healthcare, and social inclusion.
Capital and property are relatively undertaxed and the freezing of the values
used to calculate land and property taxes will reduce their revenue further.
At the same time, the tax burden on labour remains high for
low-wage earners relative to the EU’s average, despite having been reduced. The
share of the shadow economy appears to have declined over the past years by
different estimates. Nevertheless, the share of under-reported economic
activity is higher in Latvia than in other Baltic States. In particular,
underreporting of salaries (so-called “envelope wages”), particularly in the
construction sector, accounts for a large share of the shadow economy.
Following the closure of its third largest bank due to
allegations of money laundering, Latvia tightened the regulation concerning
non-resident clients. As a result, nonresident deposits, which are the main
source of money laundering risk in Latvia, have significantly decreased since
May 2018, but challenges regarding fighting money laundering remain. Moreover,
Latvia has come up with a detailed action plan for improving its anti-money
laundering/counter terrorist financing strategy. The main priorities listed in
the action plan include enhancing risk-based supervision, ensuring the required
human resources for the supervisory authorities, and ensuring effective
information exchange and collaboration among the investigative authorities and
with the private sector.
Social protection. The
Council said that Latvia was facing challenges on delivering on several of
social protection and inclusion principles in line with the European Pillar of
Social Rights. “Income inequality in Latvia is high, as the redistribution
through the tax-benefit system is low”, the Council said. The adequacy of
social benefits remains low and the impact of social transfers on poverty and
inequality reduction is limited. The poverty risk among the elderly and the
people with disabilities is both relatively high and increasing due to benefits
not keeping pace with wage growth: the social exclusion rate for the elderly was
49.0% in 2018 (with the EU average at 18.2% in 2017) and for the disabled
people with disabilities 40.7%, with the EU’s average at about 30%.
The state social security benefit for people with
disabilities and minimum old-age pensions, have not been revised since 2006.
The minimum income level reform, announced in 2014, has not been implemented,
which negatively affects the poorest households. Access to long-term care also
remains weak. Investments are thus required to address social exclusion, including
food and material aid for the most deprived. Moreover, investments, including
infrastructure, are needed to improve access to childcare, long-term care,
employment and other social services, and to enable integration of health and
social services, including the transition from institutional to community-based
care.
The share of people facing severe housing deprivation is
among the highest in the EU: about 15% in Latvia versus 4.0% in average in the
EU, and the social housing is scarce. Hence the Council conclusion is that “investment
is needed to improve the provision of affordable housing”.
Science and
research. The Council underlines that Latvia invests little in research and
development though the investment into innovation is important. Presently, Latvia’s
share of expenditure on research and development is among the lowest in the EU,
the negative figures have been rather stable over the past decade. Moreover,
research funding relies almost entirely on various EU funds. As a result,
Latvia is a “moderate innovator”, although with some strong points in ICT infrastructure
(but its performance lags behind in human resources, in public-private sector
cooperation and in investment in intellectual property). Reference to:
Regional problems.
The Council attracted Latvian government’s attention to regional
disparities: it is known about significant
economic differences between Riga metropolitan region and other Latvian regions
which have led important investment gaps. A “slow motion” in this governance
sphere in Latvia, i.e. the growing gap in socio-economic performance between
the capital and other regions “has not narrowed since the country’s accession
to the EU”, underlined the Council.
Besides, the Council added, there is a considerable
difference in competitiveness and quality of public services among Latvian
regions, which in great deal is influencing their territorial attractiveness.
The Council’s advice is: budget investments “should
therefore address significant regional differences in mobility and digital
infrastructure”; gaps in connectivity in the Trans-European Transport Network
and with peripheral and border regions are still extremely high, the fact that
is having a negative impact on Latvia’s economic activities, FDI and exports.
Investments gaps also exist to complete the Rail Baltica project and the key
electricity infrastructure projects that form part of the Baltic energy market
interconnection plan.
Additionally, investment in resource efficiency is also
needed in order to speed up Latvia's energy transition. Finally, mentioned the
Council, more efforts were needed to improve national overall energy
efficiency, in particular in the residential and transport sectors.
Council’s four recommendations for Latvian governance
Final “remarks” from the Council, which shall be regarded as
compulsory for the national decision-makers, are connected with the following
“demands”:
1. Ensure that the nominal growth rate of net primary government expenditure does not
exceed 3.5% in 2020, corresponding to an annual structural adjustment of
0.5% of GDP. Reduce taxation for
low-income earners by shifting it to other sources, particularly capital
and property, and by improving tax compliance. Ensure effective supervision and
the enforcement of the anti-money laundering framework.
2. Address social exclusion notably by improving the adequacy of minimum income benefits, minimum
old-age pensions and income
support for people with disabilities. Increase the quality and efficiency of
education and training in particular of low-skilled workers and jobseekers,
including by strengthening the participation in vocational education and training and adult learning. Increase the
accessibility, quality and cost-effectiveness of the healthcare system.
3. Focus investment-related economic policy on innovation, provision of affordable housing, transport notably on its sustainability, resource and energy efficiency, energy interconnections and on digital infrastructure, taking into account regional disparities.
4. Strengthen the accountability and efficiency of the public sector, in particular with regard to local authorities and state-owned and municipal enterprises and the conflict of interest regime.
Note: Our magazine
fully supports the Council’s recommendations, as well as a previous (a week
ago) “advice” from the OECD experts concerning the main “reforming agenda” in
the Latvian governance and political economy. We don’t think that Latvian
elites need any more external advices! The magazine’s staff wishes the Latvian
government quicker and resolute reaction to these recommendations with visible
results.