More effective spending can help loosen up additional resources. This mostly applies to ministries, where it is still possible to find internal reserves. They can be diverted to government priorities, such as defence. Swedbank economists believe policies aimed at growth should be one of the government’s priorities in order to support productivity boost and innovations in education, research and development, as concluded in the latest outlook by Swedbank.
Much has been debated about the next year’s budget and options for balancing budget requirements and weaker than planned revenue. However, cyclic challenges are only the tip of the iceberg.
According to bank representatives, structural problems cause the largest challenges for the budget. Tax revenue in Latvia makes up 28% of GDP, which is one of the lowest indexes among 28 EU member states (average of 39%).
It is requested to increase expenses for social matters (reduce income inequality, increase birth rates, increase pensions), defence (in order to fulfil NATO requirements), education (raise teachers’ wages), etc. It is impossible to spend more in these areas right now. So it is important to carefully consider priorities in order to make it possible to spend more in the future. It is not about cutting costs in euro, but rather in % from GDP. The government’s current priorities include defence, structural reforms in education, healthcare and retirement pensions.
Latvia proportionally spends more of its GDP on economic processes than EU member states do on average. In terms of expenses on transport, maintenance of municipal territories, entertainment, culture and education, Latvia’s general expenses are currently larger than they were in 2005 (prior to the bubble years).
At the same time, Latvia’s budget expenses on general government services, defence, healthcare and social care are lower than the average in the EU. Expenses on social protection are the largest in comparison with other areas (11% of GDP; approximately two-thirds of that is pensions). Regardless, they remain the lowest in the EU (average of 20%). In euro, retirement pensions are only one of two areas in which expenses have grown in comparison with 2008 (by approximately one-third). The second area is state debt maintenance.
State budget expenses for development-increasing policies are notably lower than the average in Baltics and sometimes in the EU. Latvia’s government invests more % from GDP than the EU does on average (4.3% from GDP in comparison with 2.9% last year). However, these investments have grown more than GDP in recent years. Moreover, these investments had declined in 2013. Expenses on education are also slightly above average in the EU, but what is important is the quality of education. Unfortunately, Latvia is by a mile behind in many areas in education, including: international ratings of universities, number of publications in international scientific journals, innovations and their commercialization. Latvian government’s investments into research and development are significantly behind the average level in the EU and the country’s Baltic neighbours.
State budget expenses should be focused on policies that benefit economic growth
According to Lija Strasuna, Swedbank’s senior economist, growth-enhancing policies should be one of the government’s priorities in order to support productivity growth and innovations. This applies to education and R&D areas. Growth-friendly policies could improve budget revenue in the future and reduce the risk of ‘middle-age crisis’ – a very slow convergence with EU’s average income level. More effective expenses would help loosen up resources. There is also potential to make expenses more transparent and thereby motivate residents to pay taxes. Open public discussions should be held in regard to expenses for social protection, because what matters is how much support Latvia’s population wishes to receive from the state and how much people are prepared to pay for it. In order to be able to pay larger pensions/social benefits, it is necessary to have larger tax revenue. Too much money for welfare and too little for economic growth means there will be slower economic growth and smaller improvements to the average level of welfare in the country.