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Wednesday 19.09.2018 | Name days: Verners, Muntis

Many promises will drop out – Latvia’s budget to be cut by EUR 300 million

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RUA deficit-free budget has been Latvia’s goal for the past ten years. Unfortunately, year after year the same thing repeats – planned expenditures always exceed revenue and the government is forced to borrow the missing millions.

Work has commenced on Latvia’s 2019 budget. Ministries estimate the country will require a one billion and one hundred million euros to fulfil the promise to raise wages for doctors, teachers and police officers, repair roads and support the poor, as reported by Nekā personīga.

«The dream shared by doctors, police officers and teachers for higher wages will not come to pass next year, because budget expenditures currently exceed permitted limits. To avoid breaching EU agreement on economic stability, Latvia’s budget expenditures have to be reduced by EUR 300 million,» the programme adds. It is also noted that after the financial crisis in 2011, EU member states agreed to abide by stricter fiscal discipline. European Commission was authorized for budget monitoring. Its duty is making sure countries do not spend more than they can afford.

Continuing: «The commission evaluates budgets based on two criteria. Structural balance criterion has so far been the most important one of the two. Its main requirement is making sure countries not exceeding permitted budget deficit. If the economy grows rapidly, the country is able to spend more money – in accordance with economic growth. It was beneficial for Latvia, because following economic growth the country was able to increase expenditures.»

«The second index is the expenditures criterion, which is there to ensure the government does not increase expenditures during times of rapid economic growth and instead measures them in accordance with GDP growth. In Latvia it is 2.5%. Now the most important criterion is the expenditures one. And this is no good for Latvia. Economic growth is rapid, budget completion is good, but the government is not allowed to spend money – all income above 2.5% growth rate have to be diverted to service the state debt,» the programme continues.

European Commission’s representative office economy advisor Mārtiņš Zemītis says: «European Commission has already mentioned the risks and proposals in its report, which was released this spring, for the first and second criterion. Latvia’s fiscal space has nearly run out for 2019 budget.»

Finance Minister Dana Reizniece-Ozola comments: «We have commenced a discussion with EC regarding the methodology used in the formation of the budget. Truth be told, last year we had coordinated the 2018 budget and the three-year budget. A balance condition was used, and our budget was declared compliant and one of the best in the European Union. This year, however, the European Commission has voluntarily decided to focus more on the expenditures condition without any objective reason. This is not good in Latvia’s case».

The decision to focus more on expenditures criterion was made at the meeting of EU Council’s finance ministers in November 2016.

Latvia also approved the Fiscal Discipline Law after the crisis. In it, the country is committed to limiting expenditures and forming reserves. However, it seems politicians have forgotten the lesson taught by the crisis, the programme adds.

Nekā personīga also adds that the minister says Europe’s request to reduce expenditures came unexpectedly. Because of that, Latvia will try to reach an agreement with EC to allow forming the country’s budget based on the balance criterion.

Reizniece-Ozola: «Yes, Latvia’s balance criterion is more appropriate, and we have commenced discussions with EC, because we have experienced a deep crisis. We should also take into consideration the rapid growth period».

Latvia’s government is trying to squeeze the maximum. So far the government has balanced on the brink of permitted budget deficit. The possibility of Europe transferring to a stricter budget monitoring system and Latvia not doing the same is low, the programme estimates.

Zemītis: «European Commission treats Latvia the same way it treats any other member state, because the law is equally applicable to all. With that, there is no room for talks regarding special treatment. Let’s not forget why these rules were developed. Remember 2000 – England and France neglected to comply with budget deficit and state debt requirements, which led to the financial crisis in Europe.»

«The Fiscal Discipline Council had previously warned Latvia about the looming dangers. Unfortunately, it seems politicians are unwilling to listen to recommendations on forming reserves stepping on the brakes before it is too late,» the programme adds.

Fiscal Discipline Council chairman Jānis Platais: «Current estimates show that next year’s expenditures should be reduced by approximately EUR 300 million. This means the index can become clearer – it can become slightly higher or lower. It is clear, however, that the new government will face very serious fiscal challenges after Saeima elections.»

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