Even next year the allowed budget deficit level has to be 1% of GDP. It is a maximum level of deficit for Latvia. This would allow the country to maintain development within EU fiscal discipline guidelines and public financial longevity, notes the government.
Next year’s general government budget deficit under a scenario of unchanged government policy is planned at 1.4% of GDP. It exceeds the allowed deficit level by EUR 96.8 million. With that, the government has to hold talks and decide on measures to realize in order to achieve the established goal of 1% of GDP in 2016, notes Finance Ministry.
Going above 1% would put at risk payments of EU funds, increase interest rates for state debt maintenance and thereby reduce budget funds for priorities. Going above 1% would also breach Latvia’s agreement on stability, coordination and management in the economic and monetary union, which may lead to court and fine of up to 0.1% of GDP.
In the next three years, the general budget deficit is 1.0% of GDP in 2016 and 2017, 0.8% of GDP in 2018.
According to current estimates, Latvia’s economic growth will be 2.1% in 2015 and 3.0% in 2016. In 2017 and 2018, Latvia’s economic growth will speed up to 3.6%. Short-term economic growth will be backed by rise in private consumption. However, external uncertainty, Russia’s sanctions and economic problems, as well as low investment level will delay further economic development, explains FM.
Completion of this year’s general government budget will depend on tax administration, rise of expenses in the special budget, successful use of EU funds and development of municipal budget in 2015.
The geopolitical situation remains the most negative risk for Latvia’s economic development. The adoption of new restrictions on EU imports to Russia also present risks. Potential shocks in global financial markets are also a potential risk.
Factors that could contribute to economic growth in Latvia include more rapid than expected economic growth in Eurozone, European Central Bank’s measures to stimulate monetary policies and European Commission’s successful implementation of its EUR 315 billion investment plan. Low oil prices could contribute as well.
Latvia’s fiscal policy course has not changed – it will remain aimed at securing long-term economic growth and responsible fiscal policy realization in accordance with fiscal discipline guidelines. In accordance with rules stated in Law on Fiscal Discipline, Latvia’s fiscal policy strategy relies on structural deficit not exceeding 0.5% of GDP, notes Finance Ministry.
Looking at the development of the fiscal situation in a medium-term perspective, Latvia’s budget deficit could be 0.3% of GDP in 2017. A look at the estimate for 2018 shows that revenue will exceed expenses; a surplus of 0.5% of GDP is expected to form.
In the development of medium-term macroeconomic development scenario, FM consulted experts of commercial banks, IMF and EC. Updated macroeconomic indexes have been presented to Fiscal Discipline Council and have been coordinated with the Bank of Latvia and Economy Ministry.
It is planned to submit the next year’s budget project to the Saeima on 30 September.