Support for mitigation of Covid-19 must not impose a disproportionate burden on the future / Article / LSM.lv

Fiscal Discipline Council

• Work started in Latvia on January 1, 2014;
• Such councils have been set up or are in the process of being set up in all EU countries and in a number of other countries outside the EU. The councils are being formed after the severe global financial and economic crisis of 2008/2010;
• The Council is an independent collegial body that is not subordinate to national governments or parliaments, but provides its own assessment of issues of fiscal discipline;
• The main tasks of the council are:

o to monitor the compliance of the development and implementation of the state budget framework and the medium-term budget framework with sustainable and balanced public finance management;

o to follow the indicators of economic development of the country by performing their independent assessment;

o Assess and publish reports on the sustainability of public fiscal policy and assess whether any government decisions pose risks to economic development.

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-In a statement to the media, the FDP pointed out that Latvia had managed to overcome the first wave of the pandemic more successfully than most other European Union (EU) and world countries, thanks to prudent fiscal policy, membership in the eurozone, and low household debt. After a sharp decline in activity in April, May and June, the situation in the Latvian economy has significantly improved, and the recovery in domestic trade is much faster than expected. However, weak exports are holding back Latvia’s economic recovery.

In the first half of 2020, as in previous years, very low lending activity was observed, which limited the growth of domestic consumption, the FDP informed.

The amount of resources allocated to downtime benefits and other social objectives was insufficient to maintain domestic consumption at pre-crisis levels.

Despite the positive developments, the overall macroeconomic environment can be described as volatile, the FDP emphasized. There are negative signs in consumer price trends – in May marked and deflation strengthened in June and the situation in the electricity market may further exacerbate this trend. Unemployment continues to grow, continues production will fall a mretail trade turnover.

Meanwhile, taxes in Latvia are collected at a relatively good level, FDP emphasized. Taking into account the tax holidays granted, in June this year, taxes were collected by 3% more than a year earlier in the respective month. These trends give hope that the lowest point of tax revenue compared to the previous year is behind us. According to the council, the decline in tax collection is still smaller than the decline in economic activity. One reason could be the shadow economy, which is not reflected in official economic activity statistics.

The FDP noted that the government has continued to develop its program of economic support measures, with the budgetary impact of the planned support measures already approaching 9% of gross domestic product (GDP), which is relatively high. Additional EU support instruments could provide a fiscal stimulus of 16% of GDP with virtually no increase in government debt.

Overall, the FDP welcomed the government’s support measures in the short term, but urges caution with regard to excessive deficit and debt growth in 2021 and beyond.

The FDP noted that existing and planned public support for the economy has reached significant levels (especially in view of potential EU support) and cannot be infinite due to the principles of fiscal sustainability and intergenerational responsibility. Some countries are already talking about the need for spending cuts and more restrictive monetary policies. We must be aware that sooner or later we will have to return to fiscal conditions and today’s support mechanisms should not place a disproportionate burden on future budgets, the council emphasized.

In the FDP’s view, state aid must be increasingly selective, better targeted and have an immediate effect. Investment projects must primarily promote Latvia’s economic potential development, productivity growth and competitiveness. Some planned public investment projects (Riga Concert Hall, Liepāja Prison) poorly meet or do not fully meet these criteria.

According to the FDP, it is necessary to set up an aid effectiveness analysis process to help justify the choice of the most effective projects and support mechanisms.

In the Council’s view, the choice of support instruments and projects must be transparent, and it is desirable to plan audits of support measures and expenditure in good time. According to the FDP, the “Law on Covid-19 Infection Management” stipulates that the fiscal provisions of the Fiscal Discipline Law will not apply in 2021, so there is no “anchor” for budget expenditures.

It fully agrees with the Bank of Latvia that long-term (up to 25 years) support tools for entrepreneurs are unacceptable in terms of fiscal risks, extremely risky and disproportionate to the potential benefits.

“This initiative recalls the infamous distribution of G-24 credits almost 30 years ago, when the good intention to support local businesses unfortunately did not achieve the expected goal.

Such a practice is unacceptable, as it may contribute to a disproportionate increase in the public debt burden, ”said Inna Šteinbuka, Chairwoman of the Fiscal Discipline Council.

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