Latviski English По-русски
Friday 25.05.2018 | Name days: Junora, Anšlavs

Economist: government’s implemented belt-tightening policy hinders economic recovery

(No Ratings Yet)

Economist Uldis Osis

The main problem of the government’s implemented economic policy is that the belt-tightening policy compresses the already depressive domestic market demand, accordingly slowing down the economic recovery, asserts the economist Uldis Osis. To his mind, several indicators create the illusion of an upturn, yet it rather happens regardless of the government’s policy.

Will hard times await the eurozone? How will this affect Latvia?

Post-crisis stagnation awaits the eurozone at least for the following 2-3 years. Its growth prospects are more dependent on the Eastern economic growth than from the domestic development forces. This can be explained by the fact that the Western global market is saturated with most products and services, the standard of living is high; however, there are very few new products whose consumption could stimulate the demand. Therefore, the Western economic development will continue to be based on the usual reproduction, when the product modernisation and service improvements mainly takes place.

While in the East a large proportion of the population is only now starting to engage in modern society formation process, consumption becomes more complex, new cities are emerging, and industrialisation process takes place in the manufacturing sector, which the Western countries underwent at the beginning of the 19th- 20th Century. This creates a large demand, which further propels the Western export.

Of course, this is beneficial for Latvia, because, although its production volumes are too insignificant to export something to the huge Eastern market, demand in Europe fuels Latvia’s exports and minimal economic growth.

However, there are also signs that the Eastern market begins to overheat and if similar bubble burst occurs as it happened here, a similar crisis will stroke. In this case, the world and also Latvia could lapse in a very heavy and prolonged recession.

How is Latvia’s competitiveness in the global market currently?

Latvia’s competitiveness level in the global market is still one of the lowest in the EU. In order to increase it reforms in the education system should be carried out, paying more attention to practical knowledge and skills, developing the vocational education, substantially reducing the number of education institutions, and concentrating resources on the remaining ones.

Are the current improvements in the Latvian economy partly seasonal or is it possible to talk about the economic recovery?

I would characterise it as partial unsafe economic stabilisation with series of very conflicting trends. For instance, the industrial production and also the export is increasing; however, the import is growing even faster. Consequently, the trade balance remains negative, which also means that Latvia’s competitiveness is not rising.

How soon could the economic upturn start in Latvia?

The economic upturn is not so much a question of time, as the result of the above mentioned internal and external factor combination. For example, if any problems occur in the Eastern economy, the development in Europe will also reduce, but relatively less competitive Latvia’s economy with its extensive development model could again get into serious difficulties.

How effective, in your opinion, is the government’s currently implemented economic policy? What are the mistakes?

Government’s economic policy is ineffective. The key problem is that the belt-tightening policy «crushes» the already depressive domestic market demand and accordingly hampers the economic recovery. Economists have named such policy as pro-cyclic, namely, aggravating even more the crisis period of economic cycle.

Nevertheless, several indicators, such as the domestic trade turnover growth, create the illusion that things are getting better. Yet, rather, this happens irrespective of the government’s policy, as the external factors contribute more to the economic stabilisation. External transfers – money transfers to Latvia by those working abroad – should also be mentioned, as they are becoming an increasingly important economic factor for the country in general.

Moreover, the government’s policy regarding reforms is also quite unprofessional. In most cases it is limited only to mechanical expenditure cuts, and not linked to reorganisation and restructuring, searching for the most reasonable state administration and public service delivery models. In many cases, instead of saving up the funds, this practice leads to their loss, and even damages the country’s prestige.

There are talks that in order to gain funds for 2011 budget several taxes will be increased. Will this attain the awaited effect?

This is yet another aspect of government’s flawed economic policy, which makes the current relative economic stability even more risky and threatens to unsettle it. Consequently, the tax raise in such situation may result in adverse effects – instead of decreasing, budget revenues and deficit will rather increase.

The amount of shadow economy this year has reached 32% of GDP, could it be reduced?

Reducing the shadow economy would be the most reasonable alternative to the budget cuts and tax increases. The estimates indicate that reduction of Latvia’s shadow economy at least by 10% is possible, if there is a political will and corresponding professionalism. This means that the planned budget deficit reduction next year, in theory, could be carried out only by actively combating the shadow economy, not by reducing the budget expenditure and raising taxes.

Does the «100-lats programme» damages the country’s economy?

In the crisis conditions, the «100-lats programme» is a useful short-term solution for 3-6 months, not more. I believe that at the present moment, when the most critical point is over, greater attention should be paid to involving the unemployed persons in a regular job. Thus, the «100-lats programme» should be discontinued.

Is the retirement age raise in Latvia inevitable? Why?

The retirement age raise is unavoidable due to the demographic situation in Latvia. The proportion of population of working age is still declining. Of course, there are alternatives, such as attracting labour force from other countries. However, as shown by several European countries’ experience, this causes other social and political problems.

Leave a reply

Dutch and Australian governments believe Russia responsible for MH17 tragedy, say Netherlands

Over the crash of the Malaysian passenger airline in Ukraine that took the lives of 298 people, the Dutch government has stated on Friday, May 25, that it together with Australia holds Russia rosponsible for what they saw as its downing with a missile.

Finance Ministry: growth observed for general budget revenue in Q1

In the first four months of 2018, Latvia’s general budget revenue had exceeded expenditures, forming a surplus of EUR 239.9 million, which is EUR 69.2 million more when compared to the same period of last year. A surplus formed for the state consolidated budget (EUR 160.1 million) and municipal consolidated budget (EUR 79.9 million), as reported by Finance Ministry.

Irish voters at ballot boxes in abortion referendum

Ireland's abortion referendum is taking place on Friday, May 25, as the mostly Catholic nation is asked if they wish for a strict ban on abortion to be upheld. Canadian-British news agency Reuters reported on Friday, May 25, that according to opinion polls Irish voters are set to overturn one of the world’s strictest prohibitons on pregnancy terminations. Voters in the once conservatively Catholic nation will be asked if they wish to lift a prohibition that was written in the constitution by a popular vote in 1983, and eased in 2013 for cases, where the mother’s life is in danger. As to the protection of «traditional» family values Ireland, allowed divorce by a small majority only in 1995, but three years ago became the first country in the world to adopt gay marriage by a referendum.

Police in Kuldiga confiscate 3.3 million illegal cigarettes; shut down illegal alcohol production to boot

Kuldiga Country State Police have arrested one person on suspicion of illegal excise goods turnover and have confiscated more than 3.3 million illegal cigarettes, which is the largest volume police in Kuldiga have arrested so far. In addition, authorities have also shut down illegal vodka production, as confirmed by State Police.

Flats built in Tallinn, construction volume in Estonia up by 21%

Construction companies in Estonia have in the first three months of 2018 expanded their production by 21%, Estonian statisticians have estimated.

Latvian Healthcare Ministry promises to improve chronic patients’ care

To improve chronic patient care, Latvia’s Healthcare Ministry has developed a project of rules that will govern the order in which the state pays for medical treatment of chronic, cancer and cardio-vascular diseases in medical institutions.

Weekends in Latvia expected to be hot; air temperature may reach +28° C

This week’s Saturday and Sunday will be hot in Latvia. Aside from summer-like weather, this also means increased possibility of fires, as reported by Latvia’s State Environment, Geology and Meteorology Centre.

Sweden recognises sex without active agreeing rape

Sweden has passed a new law saying that sex without consent is rape, even when there are no threats or force involved, stating that passivity is not a sign of agreeing to sex.

EU member states begin enforcing General Data Protection Regulation

Starting with Friday, 15 May, all European Union member states start enforcing the General Data Protection Regulation, which provides stricter requirements for personal data processing.

Pyongyang after U.S. refusal still willing to enter negotiations

Pyongyang has stated that North Korea was still ready to engage in talks at any time in any form after U.S. President Donald Trump unexpectedly cancelled his meeting with the head of North Korea, Kim Jong-un.

Lithuania moves forward with tax and pension reform

The heavily amended bills on taxes and pensions will have a significant impact on the Lithuanian citizens’ lives if Seimas, the country’s legislature, approves for them in their current form.

Riga City Council decides not to discuss matter of anti-corruption measures in Rīgas satiksme

Failing to reach a consensus on whether or not the matter regarding anti-corruption measures in Rīgas satiksme should be viewed behind closed doors, Riga City Council’s Security, Public Order and Corruption Prevention Committee decided to postpone its review.

Latvian companies in Vietnam to be provided with stable tax payment regime

Latvian businesses working in Vietnam are to be provided with a stable tax-payment regime that will not be subject to amendments of Vietnam’s regulations.

Saeima conceptually supports law amendments to reduce PIT debt formation

On Thursday, 24 May, Latvia’s Saeima approved in the first reading amendments to the Personal Income Tax Law that were proposed to reduce the possibility of PIT debt after application of differentiated non-taxable minimum or progressive rate on income, explains Saeima press-service.

Minister: unemployment is no longer Latvia’s main challenge

Latvia’s main challenge is no longer unemployment, rather the lack of qualified work force, said Welfare Minister Jānis Reirs at the opening of «Employment in Latvia yesterday, today and tomorrow» conference.

MH17 investigators: plane downed by Russian military unit

Dutch prosecutors, who are investigating the tragic crash of the Malaysian passenger plane that fell down in eastern Ukraine in 2014 taking the lives of 298 people, have stated that it has been downed by a missile released by a unit of the Russian Armed Forces.

Latvian Saeima gives green light to improve anti-doping regulation

On Thursday, 24 May, Latvia’s Saeima supported amendments to the Sports Law that provide for improving anti-doping regulation in the country and improve the autonomy of the anti-doping organization through the establishment of Latvian Anti-Doping Bureau, as confirmed by Saeima’s press-service.

Lithuania to host summit of women political leaders

Lithuania and its President Dalia Grybauskaitė will host the 2018 summit of the forum of Women Political Leaders, which is to take place in Vilnius from June 6 to 8.

Green energy becomes more and more attractive for Latvian residents

As technologies continue developing, the use of green energy gradually becomes more and more attractive to Latvian residents. The majority of respondents note that they may start using biomass, solar batteries and even wind turbines in the next ten years, according to results of Baltic International Bank’s latest Latvian Barometer.

Tartu railway routes operating again, system recovery from fire worth millions

In Estonia, railway traffic around the second city of Tartu interrupted last week by a cable fire has been restored with a temporary solution. To fully restore the automatic system, Estonian Railways estimate, millions of euros could be spent.

Committee chairman: municipalities’ involvement in state re-emigration policy is vital

«It is necessary to establish local governments’ responsibility in the country’s general re-emigration policy, because their role is vital. It is also important to involve the private sector. Re-emigration is not just a responsibility for regional coordinators; it is also a complex venture in which we should divide responsibility,» says chairman of Saeima’s Citizenship Committee Ritvars Jansons.

EC nearly to allocate half of next year’s budget to support economic growth

On Wednesday, 23 May, European Commission initiated approval of European Union’s 2019 budget project for EUR 166 billion, making EU’s next year budget 3% larger.

Yulia Skripal in first filmed statement: «We are very lucky to have survived»

Yulia Skripal, one of the victims of the Salisbury poison attack, has expressed her sentiments in her first filmed statement since the attack that has increased the diplomatic isolation of Russia as it is seen by many countries to have been highly likely linked to the attempted murder of Yulia and Sergei Skripals.

Latvia to refinance debt with lower interest rates

Latvia has released simultaneous two-term euro bonds for a total amount of EUR 650 million on international markets, as confirmed by State Treasury.

Italian head of state accepts Conte's candidacy for post of Prime Minister

In Italy, President Sergio Mattarella has accepted the candidacy of a political novice for the post of the Prime Minister chosen by two parties that seek both to lower taxes and renegotiate Italy's foreign debt.

Most read

Most commented

Newest comments