Council Opinion of 5 July 2004 on the Convergence Programme of Latvia, 2004-2007
Date: 2004-07-05
Institutions: Council of the European Union
Subjects: Latvia, budget policy, economic convergence, economic policy, stability programme

24.12.2004

EN

Official Journal of the European Union

C 320/7

COUNCIL OPINION

of 5 July 2004

on the Convergence Programme of Latvia, 2004-2007

(2004/C 320/04)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveil-
lance of budgetary positions and the surveillance and coordination of economic policies (1), and in particu-
lar Article 9(2) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

On 5 July 2004 the Council examined the convergence programme of Latvia, which covers the period
2004 to 2007. The programme complies only partly with the data requirements of the revised ‘code of
conduct on the content and format of stability and convergence programmes’. In particular, some data are
not yet fully in line with ESA95 standards and the general government debt and deficit figures should be
treated with caution, since the data submitted in the March 2004 fiscal notification were not validated by
Eurostat.

The budgetary strategy underlying the programme aims to ensure compliance with Treaty obligations on
general government deficits and eventually to reduce the deficit towards balance in the long term. Never-
theless, over the programme period the deficit is projected to remain at about 2 % of GDP, and with some
deterioration in 2004 relative to 2003 due to a worsening of the central government balance. The
programme envisages maintaining a primary deficit of the order of 1 % of GDP consistent with a slight
reduction in both the revenue and expenditure ratios over the programme period. On the revenue side this
is not fully explained, particularly for 2006 and 2007, since no further changes are envisaged after tax cuts
in 2004 and collection efficiency is assumed to strengthen over the programme period. On the expenditure
side this is assumed to result from firm expenditure control focusing on a reduction of transfers, while
allowing for additional outlays linked to the obligations of NATO membership and to implementation of
partly EU-financed spending plans. The two latter together account in 2004 for about 0,7 percentage
points of GDP in net terms. The debt ratio, although increasing, at 17,7 % of GDP in 2007, remains very
low.

The macroeconomic scenario underlying the programme seems to reflect rather favourable growth
assumptions. In particular, the evolution of growth in the medium term projected in the programme could
be slightly on the high side given structural constraints and the vulnerability of the economy to external
shocks. The projection for inflation for 2004 is likely to be overshot but for later years appears realistic.

The programme's targets for the general government deficit are below the 3 % of GDP reference value in
each year. However, the pace of consolidation is rather slow and the programme's targets are inconsistent
with a position of close to balance within the programme period. Risks to the budgetary outcome seem
broadly balanced. The possibly optimistic growth forecast noted above is a risk for the envisaged budgetary
targets, while confidence in the programme is tempered by the evidence of poor data quality. This is coun-
tered by some apparent pessimism in revenue forecasts, particularly in the later programme years. The
budgetary stance in the programme does not provide a sufficient safety margin against breaching the 3 %
of GDP deficit threshold with normal macroeconomic fluctuations.

(1) OJ L 209, 2.8.1997, p. 1. The documents referred to in this text can be found at the following website

http://europa.eu.int/comm/economy_finance/about/activities/sgp/main_en.htm

C 320/8

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Official Journal of the European Union

24.12.2004

In the light of this assessment, if the growth rates envisaged in the programme materialise, Latvia is recom-
mended to make progress towards a close-to-balance budgetary position, particularly in view of its current
account deficit and domestic demand pressures. Furthermore, Latvia is urged to improve the reliability and
robustness of source data and methodologies used to ensure better adherence to ESA95 standards. Finally,
the Latvian authorities are encouraged to proceed with the public sector reforms aimed at administrative
capacity, thus increasing efficiency of the tax collection and strengthening expenditure control.

Latvia is relatively well-placed to meet the budgetary costs of an ageing population. The prospects for the
long-term sustainability of public finances have been improved by the implementation of a three-pillar
pension reform. This is further reinforced by the very low level of general government debt. However, the
risk of long-term budgetary imbalances cannot be ruled out. Timely implementation of measures aimed at
containing age-related expenditure, together with a fiscal consolidation so as to secure an adequate primary
surplus is essential to ensure that the public finances are on a sustainable footing.

Key projections from the convergence programme of Latvia

Real GDP growth (%)

Employment growth (%)

HICP inflation (%)

General government balance (% of GDP)

Government gross debt (% of GDP)

2003

2004

2005

2006

2007

7,5

1,8

2,9

– 1,8

15,3

6,7

1,0

4,5

– 2,1

16,2

6,7

1,0

3,7

– 2,2

16,8

6,5

0,5

3,0

– 2,0

17,3

6,5

0,5

3,0

– 2,0

17,7