COMMISSION STAFF WORKING DOCUMENT Assessment of the 2013 national reform programme and convergence programme for LATVIA Accompanying the document Recommendation for a Council Recommendation on Latvia’s 2013 national reform programme and delivering a Council Opinion on Latvia’s 2013 convergence programme for 2012-2016
Date: 2013-05-29
Institutions: European Commission
Subjects: Latvia, budgetary equilibrium, economic growth, economic statistics, job creation, natural gas, poverty, research and development, youth unemployment

EUROPEAN 
COMMISSION 

Brussels, 29.5.2013  
SWD(2013) 364 final 

COMMISSION STAFF WORKING DOCUMENT 

Assessment of the 2013 national reform programme and convergence programme for 
LATVIA  

Accompanying the document 

Recommendation for a Council Recommendation  

on Latvia’s 2013 national reform programme and delivering a Council Opinion on 
Latvia’s 2013 convergence programme for 2012-2016 

{COM(2013) 364 final} 

EN 

   EN 

 
 
 
 
  
 
CONTENTS 

Executive summary .................................................................................................................... 3 

1. 

2. 

2.1. 

2.2. 

3. 

3.1. 

3.2. 

3.3. 

3.4. 

3.5. 

4. 

5. 

Introduction .................................................................................................................. 5 

Economic developments and challenges...................................................................... 6 

Recent economic developments and outlook............................................................... 6 

Challenges .................................................................................................................... 7 

Assessment of policy agenda ....................................................................................... 9 

Fiscal policy and taxation............................................................................................. 9 

Financial sector .......................................................................................................... 15 

Labour market, education and social policies ............................................................ 16 

Structural measures promoting growth and competitiveness..................................... 19 

Modernisation of public administration ..................................................................... 24 

Overview table ........................................................................................................... 27 

Annex ......................................................................................................................... 30 

2 

 
 
 
EXECUTIVE SUMMARY 

Economic outlook 

In  2012,  the  Latvian  economy  was  by  far  the  fastest  growing  in  the  EU  at  5.6%. 
According to the Commission's spring 2013 forecast, growth is expected to slow to 3.8% 
in  2013  and  4.1%  in  2014,  but  the  country  is  still  set  to  remain  among  the  best 
performers in Europe. Unemployment is expected to drop to 13.7% in 2013 and to 12.2% in 
2014 (from 14.9% in 2012). Meanwhile, inflation slowed to 2.3% in 2012, and is expected to 
fall to 1.4% in 2013 and 2.1% in 2014. 

Latvia’s public finances are improving. The headline budget deficit fell to 1.2% of GDP 
in  2012,  which  means  Latvia  has  corrected  its  excessive  deficit  within  the  agreed 
deadline. The deficit is predicted to remain at 1.2% of GDP in 2013 and fall to 0.9% in 2014. 
However, after declining to 0.3% of GDP in 2012, the structural deficit (net of the impact of 
the cycle and one-off and temporary measures) is expected to increase to 1.4% in 2013 and to 
1.5% in 2014, according to the Commission, on the back of the pension reform and planned 
tax cuts. Latvia's medium-term objective is a structural deficit of 0.5% of GDP. Government 
debt is expected to remain well below the 60% of GDP limit, falling from 40.7% of GDP in 
2012 to 40.1% in 2014. 

Key issues 

In  2012,  the  Latvian  economy  was  by  far  the  fastest  growing  in  the  EU.  Though  high 
economic  growth  is  expected  to  slow,  the  country  is  still  set  to  remain  among  the  best 
performers in Europe. Latvia has asked the Commission and the European Central Bank for 
a convergence assessment in view of adopting the euro from January 2014. 

Latvia  has  made  some  progress  with  regard  to  the  2012  CSRs,  and  the  prospects  for 
future implementation are encouraging. The budgetary situation improved considerably in 
2012,  as  the  headline  deficit  declined  to  1.2%  of  GDP  and  the  structural  deficit  to  0.3%  of 
GDP, allowing Latvia to correct its excessive deficit by the deadline and to reach its medium-
term budgetary objective ahead of earlier plans. The adoption of the Fiscal Discipline Law is 
welcome, and the proposed reforms in the education and science sectors respond well to the 
challenges  identified  by  the  Commission,  though  implementation  will  be  difficult.  The 
liberalisation  of  the  electricity  market  is  a  positive  step,  though  further  action  is  needed  to 
prepare for the opening of the gas market and improve energy efficiency.   

In  the  medium-  to  long  term,  Latvia  faces  a  number  of  challenges,  in  particular  to 
maintain sound fiscal policy and reduce the size of the shadow economy. Other challenges 
relate to the quality of vocational education, social assistance, R&D spending and innovation 
performance, energy and the efficiency of the judiciary. European structural funds for 2014-
2020 will provide an important source of public investment to support Latvia in meeting these 
challenges. 

•  Labour market: Youth unemployment (at 28% in 2012) is the seventh highest in the 
EU,  and  young  people  are  overrepresented  among  emigrants.  Long-term 
unemployment  stands  at  7.8%  of  the  active  population,  significantly  above  the  EU 
average of 4.6%. There are concerns that vocational education and training is failing to 
provide  sufficient  skills  for  the  workforce,  with  shortages  of  qualified  candidates  in 
ICT, pharmaceuticals and engineering. 

3 

 
 
 
 
•  Poverty:  The  major  challenge  in  Latvia  is  that  40%  of  the  population  is  at  risk  of 
poverty or social exclusion, and little direct action has been taken on this front in the 
last year. Unemployed people and families with children are particularly vulnerable, as 
social benefits are poorly targeted, with a large share going to the wealthiest people. 
There are high disparities across local governments in providing social assistance and 
weak incentives to for social benefit recipients to go back to work. 

•  Research: Latvia’s challenge is to rationalise and modernise research activities, keep 
highly-qualified  scientists  at  home  in  the  face  of  international  competition,  and 
increase the number of new doctorates awarded. Latvia has the lowest business R&D 
intensity  in  the  EU  (0.19%  of  GDP  in  2011)  and  there  is  little  R&D  investment  by 
domestic or foreign companies to support specialisation in innovation-driven sectors. 

•  Energy:  Crucial  gas  infrastructures  –  including  the  LNG  terminal  project  and  the 
renegotiation  of  the  Incukalns  gas  storage  contract  –  need  to  be  put  in  place,  while 
negotiations  with  Russia  and  Belarus  on  the  creation  of  a  Baltic  regional  electricity 
market  are  key.  Latvia’s  energy  and  carbon  intensity  is  more  than  double  the  EU 
average  (particularly  in  households  and  the  transport  sector).  The  implementation  of 
EU-funded  housing  insulation  projects  has  been  a  big  challenge,  and  transport 
measures do not seem to have had a significant effect. 

4 

 
 
 
 
 
1.  INTRODUCTION 

In  May  2012,  the  Commission  proposed  a  set  of  country-specific  recommendations  (CSRs) 
for economic and structural reform policies in Latvia. On the basis of these recommendations, 
the  Council  of  the  European  Union  adopted  seven  CSRs  in  the  form  of  a  Council 
Recommendation  in  July  2012.  These  CSRs  concerned  public  finances,  taxation,  the  labour 
market,  poverty  and  social  exclusion,  energy  networks  and  efficiency,  the  judiciary,  and 
higher  education  and  science.  This  Staff  Working  Document  (SWD)  assesses  the  state  of 
implementation of these recommendations in Latvia. 

The  SWD  assesses  policy  measures  in  light  of  the  findings  of  the  Commission’s  Annual 
Growth Survey 2013 (AGS)1 and the second annual Alert Mechanism Report (AMR)2, which 
were  published  in  November  2012.  The  AGS  sets  out  the  Commission’s  proposals  for 
building the necessary common understanding about priorities for action at national and EU 
level in 2013. It identifies five priorities to guide Member States to renewed growth: pursuing 
differentiated, growth-friendly fiscal consolidation; restoring normal lending to the economy; 
promoting growth and competitiveness for today and tomorrow; tackling unemployment and 
the social consequences of the crisis; and modernising public administration. The AMR serves 
as an initial screening device to determine whether macroeconomic imbalances exist or risk 
emerging in Member States. The AMR found positive signs that macroeconomic imbalances 
in Europe are being corrected. To ensure that a complete and durable rebalancing is achieved, 
14  Member  States  were  selected  for  a  review  of  developments  in  the  accumulation  and 
unwinding of imbalances.3 

Against  the  background  of  the  2012  Council  Recommendations  and  the  AGS,  Latvia 
presented  updates  of  its  national  reform  programme  (NRP)  on  2  May  2013  and  of  its 
convergence  programme  for  2013-2016  on  29  April  2013.  These  programmes  provide 
detailed information on progress made since July 2012 and on the government’s future plans. 
The information contained in these programmes provides the basis for the assessment made in 
this  SWD.  The  programmes  submitted  went  through  an  inclusive  consultation  process 
involving  the  national  parliament,  local  and  regional  authorities  and  other  stakeholders. 
Compared to previous years, the quality of submitted programmes has greatly improved. 

Overall assessment 

The  analysis  in  this  SWD  leads  to  the  conclusion  that  Latvia  has  made  some  progress  on 
measures taken to address the CSRs in the Council Recommendation. In addition, prospects 
for  future  implementation  appear  to  be  encouraging,  and  are  primarily  supported  by  better 
policy-making  and  broad  support  for  reforms.  An  exception  is  the  reform  of  the  social 
assistance  system,  where  ambitious  reforms  are  needed  to  address  poverty  and  social 
exclusion.  The  budgetary  situation  improved  considerably  in  2012,  with  Latvia  reaching  its 
medium-term budgetary objective (MTO), and fiscal governance has been strengthened with 
the  adoption  of  the  Fiscal  Discipline  Law.  The  tax  measures  announced  by  the  authorities, 
while going in the right direction, did not, however, sufficiently address low income earners, 
and no compensatory tax measures were announced. The proposed reforms in the education 

1 COM(2012) 750 final. 
2 COM(2012) 751 final. 
3 13 in-depth reviews were published on 10 April 2013. While selected for an in-depth review in the 2012 AMR, 
Cyprus  was  ultimately  not  reviewed  under  the  MIP  in  view  of  the  advanced  preparations  for  a  financial 
assistance programme. 

5 

 
 
 
 
                                                 
and  science  sectors  respond  well  to  the  challenges  identified  by  the  Commission,  though 
implementation  will  be  difficult.  Liberalisation  of  the  electricity  market  is  a  positive  step, 
though further action is needed to prepare for the opening of the gas market, improve energy 
efficiency performance and implement a stable, transparent and cost-effective support scheme 
for renewable energy. Further efforts are needed to expand the reach of active labour market 
policies  (ALMPs)  to  address  high  long-term  and  youth  unemployment,  continue  to  make 
improvements  in  judicial  procedures  and  the  Insolvency  Law,  and  to  implement  credible 
public  administration  reforms.  Regrettably,  decision-making  procedures  regarding  key 
structural reforms appear to be long, in particular as regards reviewing important legal texts 
by the Parliament. 

The policy plans submitted by Latvia address most of the challenges identified in last year's 
SWD, and broad coherence between the two documents has been ensured. The NRP confirms 
Latvia's  commitment  to  address  shortcomings  in  the  areas  of  labour  market,  higher  and 
vocational  education  and  science,  energy  efficiency  and  judicial  reforms.  The  convergence 
programme  demonstrates  Latvia's  commitment  to  maintain  a  structural  budgetary  position 
which is based on the MTO, with any deviation limited to the incremental impact of systemic 
pension  reform.  Sometimes,  however,  planned  measures  do  not  address  the  challenges  in  a 
comprehensive  way,  in  particular  as  regards  improvements  in  social  assistance  to  address 
poverty and social exclusion. 

2.  ECONOMIC DEVELOPMENTS AND CHALLENGES 

2.1.  Recent economic developments and outlook 

Recent economic developments 

The  Latvian  economy  continued  to  recover  at  a  rapid  pace  in  2012,  despite  adverse 
external shocks. The growth rate of 5.6% in 2012 was the highest in the EU and followed an 
equally  strong  economic  expansion  of  5.5%  in  2011.  Investments,  exports  and  private 
consumption  were  major  growth  drivers  on  the  demand  side,  while  construction  and 
manufacturing were the fastest growing supply components of GDP. An exceptionally good 
agricultural crop and favourable weather conditions also supported economic growth in 2012. 
Meanwhile,  inflation  (harmonised  index  of  consumer  prices  or  HICP)  slowed  to  a  year-
average of 2.3% and decreased further to a record low of 0.3% year-on-year in March 2013, 
helped  by  a  steady  decline  in  non-energy  industrial  goods,  some  downward  corrections  to 
prices of energy imports, and VAT cut from 22% to 21% as of July 2012. 

The  strong  economic  growth  brought  substantial  improvements  to  the  labour  market. 
Employment  rose  by  2.8%  in  2012  and  the  labour  force  expanded  by  1.3%  over  the  same 
period  amid  a  significant  decline  in  net  emigration.  Accordingly,  the  unemployment  rate 
dropped from 16.2% in 2011 to 14.9% in 2012 and 13.8% in the last quarter of the year.  

In  the  external  sector,  the  current  account  deficit  contracted  to  1.7%  of  GDP  in  2012. 
The deficit was well covered by net inflows of foreign direct investment, which reached 2.9% 
of GDP, as well as large net inflows in the capital account (3% of GDP), linked mostly to EU 
Structural  Funds  and  the  Cohesion  Fund.  In  effect,  the  country’s  net  external  debt  dropped 
further to 38.1% of GDP at the end of 2012, from 46.4% a year earlier. 

6 

 
 
 
 
Economic outlook 

The  Commission’s  latest  economic  sentiment  indicator  and  the  2013  spring  forecast 
confirm a broadly favourable economic outlook for Latvia. Despite some slowdown, the 
country’s  economic  growth  is  forecast  to  remain  among  the  highest  in  the  EU,  at  3.8%  in 
2013 and 4.1% in 2014. Inflation (HICP) is set to remain low, at 1.4% in 2013 and 2.1% in 
2014, while unemployment is expected to slide further, to 13.7% in 2013 and 12.2% in 2014. 
The current account deficit is projected to widen gradually to 2.1% of GDP in 2013 and 2.6% 
in 2014, but non-debt inflows in the capital and financial accounts are expected to contribute 
to a further reduction of the country’s external indebtedness. 

The economic outlook and the macroeconomic scenario of Latvia’s CP/NRP are broadly 
in  line  with  the  latest  Commission  forecast.  According  to  NRP  estimates,  the 
implementation  of  the  measures  identified  in  the  programme  over  the  period  2013-16  are 
expected to boost GDP growth by 1.5 pps. per year. The estimates are based on the projected 
total  financing  value  of  NRP  measures  but  details  on  other  underlying  assumptions  for 
quantifying the impact are not provided. 

2.2.  Challenges 

The budgetary situation improved considerably in 2012, as the headline deficit decreased to 
1.2%  of  GDP  and  the  structural  deficit  to  0.3%  of  GDP.  Latvia  thus  reached  its  MTO 
considerably earlier than was envisaged in the 2012 convergence programme. The challenge 
ahead is to maintain prudent fiscal policy in the growth phase. The Fiscal Discipline Law that 
was  approved  by  Parliament  in  January  2013  and  entered  into  force  in  March  2013 
considerably  strengthens  the  legal  basis  for  rules-based  fiscal  policy  and  would  provide  a 
mechanism  to  limit  expenditure  growth  in  good  economic  times.  However,  practical 
implementation of the law still remains untested. 

Latvia has reduced taxes on labour and further steps to lower taxation of labour are planned 
for 2014-15. However, the focus on low income earners has been insufficient, against high tax 
wedge  for  this  category.  Environmental  taxes  remain  underdeveloped,  while  the  on-going 
reform  of  property  taxation,  which  gives  more  flexibility  to  local  governments,  as  well  as 
excise taxes, could provide higher budget revenues. Moreover, further reducing the high share 
of the informal economy and undeclared work could result in additional tax revenue. 

Although  there  have  been  notable  improvements  in  the  labour  market,  high  unemployment 
remains the most pressing issue. At 28%, youth unemployment is the seventh highest in the 
EU (2012), and the rate of young people not in employment, education or training is above 
the  EU  average.  Young  people  are  also  overrepresented  among  emigrants.  Long-term 
unemployment  stands  at  7.8%  of  the  active  population  which  is  significantly  above  the  EU 
average of 4.6%. The funding and coverage of active labour market policies (ALMPs) is still 
insufficient,  roll-out  of  new  ALMPs  is  sometimes  slow  and  provision  of  targeted  social 
services  is  poor.  Low-skilled,  pre-pension-age  workers,  people  living  in  depressed  regions 
and  the  disabled  are  experiencing  particular  difficulties  in  the  labour  market.  Parents  face 
difficulties to reconcile work and family life due to lack of affordable childcare facilities and 
flexible workplace practices.  

The high proportion of people at risk of poverty or social exclusion (40 %) is a big challenge. 
Families with children and the unemployed are particularly vulnerable to poverty. There are 
concerns  about  the  adequacy  and  coverage  social  assistance  benefits.  Child-  and  family-
related  benefits  are  poorly  targeted,  as  a  large  share  goes  to  the  wealthiest  part  of  the 
population.  There  are  high  disparities  across  local  governments  in  providing  social 
7 

 
 
 
 
assistance4,  weak  incentives  to  work  and  insufficient  conditionality  and  activation  of  the 
benefit recipients. Unequal access to higher education and poor up-skilling opportunities for 
the  low-skilled  also  contribute  to  perpetuating  poverty  and  inequality.  The  number  of  low-
income pensioners is projected to be high, so medium- and long-term pension adequacy is a 
significant challenge, also given the projected fall of the replacement rate, further aggravated 
by freezing of indexation.  

In the higher education field, the immediate challenge is implementing Ministry of Education 
and  Science  reform  proposals,  given  the  preference  to  maintain  status  quo  in  the  education 
sector.  This  includes  implementing  quality-based  accreditation  of  study  fields,  adopting 
changes to the governance of higher education institutions, promoting internationalisation of 
higher  education  and  science,  and  introducing  a  financing  model  that  rewards  quality, 
combined with increased national higher education financing. 

There  are  concerns  that  vocational  education  and  training  (VET)  is  failing  to  provide 
sufficient quality of skills for the workforce and there is limited availability of quality work-
based  training,  including  traineeship/apprenticeship  schemes.  Evidence  from  employers 
indicates  skills  shortages  in  areas  such  as  ICT,  pharmaceuticals  and  engineering,  and  the 
number of graduates in mathematics, science and technology is insufficient. Participation of 
adults in lifelong learning is very low and companies are not actively providing training for 
their workers. 

The effectiveness of scientific policy has been undermined by a lack of independent, external 
evaluation of the relevance of scientific output. Such assessment could support future national 
and  EU  funding  investments.  Latvia’s  challenge  is  to  rationalise  and  modernise  research 
activities,  keep  highly-qualified  scientists  in  the  face  of  international  competition,  and 
increase the number of new doctorates awarded. The level of commercialisation of research is 
low  and  there  is  little  R&D  investment  by  domestic  or  foreign  companies  to  support 
specialisation in innovation-driven sectors. 

For  the  years  ahead,  key  challenges  in  respect  of  energy  policy  will  involve  continued 
implementation  of  the  Third  Energy  Package,  including  adoption  of  key  legislation 
particularly in the gas sector. Further key steps needed are the creation of market structures, 
starting already from April 20145, and preparation of the gas sector for the end of its current 
isolation,  including  by  implementing  the  planned  regional  LNG  terminal  project  and  other 
crucial  infrastructure,  as  well  as  re-negotiation  of  the  regionally-important  Incukalns  gas 
storage management contract. In electricity, key steps include finalisation of negotiations with 
Russia and Belarus on operating the Baltic electricity network and the gradual creation of a 
Baltic regional electricity market. Renegotiation of the support mechanism for green energy 
will  be  another  big  challenge  in  the  coming  months,  with  substantial  implications  for  the 
economy’s future competitiveness.  

Latvia’s energy- and carbon intensity is more than double the EU-27 average, with the largest 
consumers  being  households  and  the  transport  sector.  However,  speedy  and  efficient 
implementation  of  EU-funded  housing  insulation  projects  has  been  a  big  challenge,  while 
measures undertaken in the transport sector do not seem to have had a significant effect. 

4 This document uses the term ‘social assistance’ in relation to cash or in-kind benefits of last resort targeted to 
people in need, who do not receive sufficient income from other sources.  
5  In  April  2014  the  "emerging  market"  derogation  from  the  3rd  legislative  package  runs  out,  including  on  the 
provisions of third party access and unbundling of accounts.  

8 

 
 
 
 
                                                 
Inefficiencies in the civil justice system have a negative impact on the business environment, 
increasing  the  risk  and  cost  of  doing  business.  Although  positive  steps  are  being  taken  to 
remedy the situation, lengthy civil and commercial case proceedings in the first instance and 
low clearance rates lead to an elevated backlog of court cases. The main challenges include: 
implementing  proposed  amendments  to  civil,  administrative  and  criminal  procedural  laws; 
ensuring  proper  interpretation  and  implementation  of  insolvency  law;  establishing  a 
comprehensive human resources policy for the judiciary linked to professional evaluation of 
judges;  streamlining  the  system  of  arbitration  courts;  and  implementing  the  Law  on 
Mediation. 

As  regards  state-owned  enterprises,  key  challenges  for  the  coming  months  include: 
establishing and equipping a professional centralised state-owned enterprise management unit 
under  the  Prime  Minister,  to  be  operational  from  January  2014;  the  gradual  transfer  of 
ministries’ stakes in enterprises to this unit; minority and non-core-activity share divestments; 
and  bigger  privatisation  plans  for  some  larger  state  assets  (e.g.  telecommunications).  These 
reforms  have  been  well  prepared  with  help  from  international  institutions  and  are  long 
overdue for implementation. 

As  regards  the  financial  sector,  the  experience  of  the  credit  boom-bust  cycle  calls  for 
monitoring of future credit growth and vigilant macro-prudential supervision. The three main 
challenges  ahead  include  the  sale  of  Citadele  Bank,  which  has  been  postponed  due  to 
allegedly unfavourable market conditions, the sale of remaining ‘problematic’ bundles of the 
state-owned Mortgage and Land Bank, and further measures to reduce risks from non-resident 
banking. 

Lastly,  institutional  capacities  of  tackling  economic,  financial,  money  laundering  and  tax 
evasion crimes are challenged by the dynamic developments in the financial sector, including 
the  rapid  increase  in  cross-border  financial  flows.  This  concerns  the  investigation  of  such 
crimes,  prosecution  and  the  work  of  judges.  In  many  cases,  the  knowledge  and  skills  of 
relevant  authorities  may  need  permanent  upgrading  to  successfully  prosecute  and  punish 
perpetrators. 

3.  ASSESSMENT OF POLICY AGENDA 

3.1. 

Fiscal policy and taxation 

Budgetary developments and debt dynamics 

The  objective  of  the  budgetary  strategy  outlined  in  the  programme  is  to  maintain  a 
structural budgetary position which is based on the MTO, with any deviation limited to 
the  incremental  impact  of  systemic  pension  reform.  Latvia  reached  its  MTO,  which  is  a 
structural deficit of 0.5% of GDP and which is in line with the requirements of the Stability 
and Growth Pact, in 2012. The pension reform is to be implemented gradually in 2013, 2015 
and  2016  and  the  programme  foresees  a  return  to  the  MTO  in  2019.  The  headline  general 
government  position  will  be  maintained  at  a  deficit  of  around  1%  of  GDP  in  2013-2016, 
according to the programme. 

In 2012 the Council recommended that Latvia ensure progress towards the timely correction 
of  the  excessive  deficit  in  2012,  by  implementing  the  budget  as  was  envisaged  in  the  2012 
convergence  programme  and  by  ensuring  the  fiscal  effort  specified  in  the  Council 

9 

 
 
 
 
recommendation  under  the  excessive  deficit  procedure6.  The  Council  also  recommended 
using the better-than-expected cyclical revenue to reduce government debt. 

Latvia's general government deficit decreased in 2012 to the level of 1.2% of GDP and 
the MTO has been achieved in that year. The outcome for 2012 is considerably better than 
the  target  of  2.1%  of  GDP  envisaged  in  the  2012  programme.  Moreover,  this  outcome  also 
includes a one-off deficit-increasing impact of reclassification within the general government 
of  a  financial  defeasance  unit  (AS  Reverta),  amounting  to  0.5%  of  GDP,  which  was  not 
anticipated  in  the  2012  programme.  This  result  is  better-than-targeted  and  was  achieved 
despite  the  fact  that,  contrary  to  the  Council  recommendation,  several  deficit-increasing 
measures  were  adopted  in  the  second  half  of  2012,  lowering  the  VAT  rate  by  1  percentage 
point  from  July  2012,  and  the  adoption  of  the  supplementary  2012  budget  that  raised 
expenditure  targets.  The  good  outcome  in  2012  does  not,  however,  only  reflect  a  cyclical 
improvement  in  taxes  caused  by  more  robust  growth.  Tax  efficiency  also  appears  to  have 
improved, reflecting the implementation of dozens of measures in the national action plan to 
combat the shadow economy, while actual expenditure was somewhat lower than targets set 
in the amended 2012 budget. Coupled with substantial consolidation measures in the original 
2012 budget, this ensured an improvement in the structural balance by 1.3 percentage points 
of GDP and Latvia thus reached its MTO in 2012, three years earlier than was envisaged in 
the 2012 programme. 

Box 1. Excessive deficit procedure for Latvia 

On 7 July 2009, based on a recommendation by the Commission, the Council decided in accordance 
with Article 104(6) TEC that an excessive deficit existed in Latvia and addressed recommendations to 
Latvia  in  accordance  with  Article  104(7)  TEC  with a  view  to  bringing  an  end  to  the  situation  of  an 
excessive  government  deficit.  The  Council  recommended  that  Latvia  puts  an  end  to  the  excessive 
deficit situation as rapidly as possible and at the latest by 2012, by ensuring an average annual fiscal 
effort  of  at  least  2¾%  of  GDP  over  the  period  2010-2012.  Moreover,  Latvia  was  recommended  to 
strengthen fiscal governance and transparency, by improving the budgetary framework and reinforcing 
spending controls, and financial market regulation and supervision.  

the 

An  overview  of  the  current  state  of  excessive  deficit  procedures,  including  additional  steps  adopted 
after 
on: 
http://ec.europa.eu/economy_finance/economic_governance/sgp/deficit/index_en.htm  (please  refer  to 
country sections at the bottom of the page). 

Staff  Working  Document, 

finalisation 

available 

this 

of 

is 

The headline deficit is projected to remain broadly unchanged in 2013. The programme 
projects a headline general government deficit of 1.1% of GDP in 2013, which is very close to 
the  deficit  of  1.2%  of  GDP  expected  in  the  Commission's  2013  spring  forecast;  both 
projections  are  better  than  the  target  of  -1.4%  in  the  2012  convergence  programme,  which 
was  also  the  basis  for  the  2013  state  budget  as  adopted  by  the  Latvian  Parliament  on  15 
November  2012.  The  most  significant  policy  changes  in  2013  are  the  increase  in  state 
contributions to the privately funded pension scheme (see Box 2 and the section on long-term 
sustainability  of  public  finances)  and  the  first  step  of  the  three-year  strategy  to  lower  the 
personal  income  tax  rate  from  25%  to  20%  (described  in  more  detail  in  the  section  on  tax 
systems). 

However, there are risks that deviation from the MTO may be significantly larger than 
the  incremental  impact  of  the  systemic  pension  reform.  Taking  into  account  policy 

See 

6 
http://ec.europa.eu/economy_finance/economic_governance/sgp/deficit/countries/latvia_en.htm  

documents 

procedure 

excessive 

related 

deficit 

the 

for 

to 

Latvia 

under 

10 

 
 
 
 
                                                 
changes described in the Box 2 and other factors, the structural balance7 is expected to worsen 
in  2013  by  1.2  pps.  according  to  the  programme  scenario  and  by  1.0  pp.  according  to  the 
Commission's  2013  spring  forecast.  The  growth  rate  of  government  expenditure,  net  of 
discretionary revenue measures, will exceed the reference medium-term rate of potential GDP 
growth  of  1.18%,  according  to  both  the  programme  scenario  and  the  Commission  forecast. 
When the impact of the systemic pension reform is taken into account, the risk of deviation 
both  in  terms  of  the  deviation  of  the  structural  balance  from  the  MTO  and  in  terms  of 
expenditure  growth  being  higher  than  the  medium-term  potential  GDP  becomes  less 
pronounced, but nevertheless some indicators point to a risk of significant deviation even after 
the impact of the systemic pension reform is taken into account. 

  Revenue 

Expenditure

Box 2. Main budgetary measures 

2013 

•  Suspension  of  pension  indexation  (impact  not 

specified) 

• 

Increase  in  state  contributions  to  the  private 
pension scheme from 2% to 4% of gross wages 
(-0.5% of GDP) 

•  Reduction  in  standard  VAT  rate  from  22%  to 

21% from July 2012 (-0.2% of GDP) 

•  Reduction in the personal income tax rate from 

25% to 24% (-0.2% of GDP) 

•  Measures  to  counter  the  shadow  economy 

(+0.1% of GDP) 

•  Reduction in the personal income tax rate from 

•  Gradual increase in retirement age by 3 months 

24% to 22% (-0.4% of GDP) 

annually (-0.1% of GDP) 

2014 

•  Measures  to  counter  the  shadow  economy 

(+0.1% of GDP) 

2015 

• 

Increase  in  state  contributions  to  the  private 
pension scheme from 4% to 5% of gross wage 
(-0.27% of GDP) 

•  Reduction in the personal income tax rate from 

22% to 20% (-0.4% of GDP) 

•  Measures  to  counter  the  shadow  economy 

(+0.1% of GDP) 

•  Gradual increase in retirement age by 3 months 

annually (-0.1% of GDP) 

2016 

• 

Increase  in  state  contributions  to  the  private 
pension scheme from 5% to 6% of gross wage 
(-0.28% of GDP) 

•  Change in the order of the vehicle tax payment 

(-0.1% of GDP) 

•  Measures  to  counter  the  shadow  economy 

(+0.1% of GDP) 

•  Gradual increase in retirement age by 3 months 

annually (-0.1% of GDP) 

  Note: The budgetary impact in the table is the impact reported in the programme, i.e. by the national 
authorities. A plus sign indicates that revenue/expenditure increases as a consequence of the measure. 

• 

7  Cyclically-adjusted  balance  net  of  one-off  and  temporary  measures,  recalculated  by  the  Commission  on  the 
basis  of  the  information  provided  in  the  programme,  using  the  commonly  agreed  methodology.  It  should  be 
noted that given the volatility of economic developments in Latvia in recent years, as well as on-going changes 
in the structure of the economy, the calculation of the potential growth is subject to rather high uncertainty. In 
particular, the recalculated information of the programme results in considerably higher estimate of the output 
gap (1.3% in 2013 and 2.7% in 2014) than the original programme information (respectively 0.2% and 0.4%) 
and the Commission's 2013 spring forecast (respectively 0.6% and 1.7%). 

11 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
In 2014, both the programme scenario and the Commission's 2013 spring forecast expect 
a headline deficit of 0.9% of GDP under current policies. The most notable policy change 
is the decrease in the personal income tax rate from 24% to 22%, which is partly offset by the 
impact  of  measures  against  the  informal  economy  and  the  start  of  the  pension  reform, 
according to which the statutory pension age will be increased by 3 months annually between 
2014  and  2025.  As  a  result,  the  structural  balance  is  expected  to  worsen  by  0.2  pp.  in  the 
programme scenario and by 0.1 pp. in the Commission forecast. Also in 2014 there is a risk 
that the growth rate  of  government  expenditure, net of discretionary  revenue measures, will 
exceed the reference medium-term rate of potential GDP growth of -0.05%, according to both 
the programme scenario and the Commission forecast. 

Risks to the nominal outlook for public finances are broadly balanced in 2013 and 2014. 
Apart from possible deviations from the macroeconomic scenario, the positive risks relate to 
the possibility that tax revenue could be better, if the improvement in tax efficiency continues 
at the same rate as in 2012, and/or if actual expenditure will be somewhat lower than planned, 
as it was the case in 2012. On the other hand, there are implementation risks (including those 
related  to  local  elections  in  2013  and  general  elections  in  2014),  and/or  the  possibility  that 
some  of  the  fiscal  risks  might  materialise.  In  particular,  the  government  could  face  a 
guarantee call in relation to an industrial company in difficulties, amounting up to 0.3 pp. of 
GDP if the guarantee is called in full, and possibly other costs related to this company in 2013 
or 2014. 

In 2015 and 2016 the headline deficit is affected by the systemic pension reform and by 
planned tax cuts, resulting in some further deterioration of the structural balance. In the 
programme's  later  years,  the  fiscal  outlook  is  mainly  influenced  by  the  continuing  systemic 
pension reform in 2015 and 2016 (with an impact of around 0.3 pp. of GDP in each year) and 
by  the  lowering  of  the  personal  income  tax  rate  to  20%  in  2015.  This  is  partly  offset  by 
increasing  the  statutory  pension  age  and  other  plans  that  aim  to  improve  the  efficiency  of 
public expenditure. As a result, the structural balance is set to continue to worsen by 0.2-0.3 
pp.  annually  and  the  growth  rate  of  government  expenditure,  net  of  discretionary  revenue 
measures,  is  set  to  exceed  the  reference  medium-term  rate  of  potential  GDP  growth  of 
-0.05%, even after excluding the incremental impact of the systemic pension reform. 

The debt-to-GDP ratio will remain well below the level of 60% of GDP. In the programme 
scenario,  general  government  debt  is  projected  to  increase  from  40.7%  of  GDP  in  2012  to 
44.5% in 2013, and then fall rapidly to 34.6% of GDP in 2016. This reflects the accumulation 
of  financial  assets  in  anticipation  of  large  repayments  of  loans  under  the  2009-11  financial 
assistance  programme  (as  evidenced  by  the  high  stock-flow  adjustment  in  2013)  and  the 
subsequent repayment of a large share of these loans in 2014-15. Latvia currently enjoys very 
favourable market conditions. In late 2012, the authorities made an early repayment of their 
outstanding obligations towards the IMF under the financial assistance programme, replacing 
this  part  of  official  debt  by  market  financing.  Since  the  debt-to-GDP  ratio  is  below  the 
reference  value,  the  debt  reduction  benchmark  is  not  applicable.  Medium-term  debt 
projections (see Graph below Table V in annex) also indicate that full implementation of the 
programme would lead to a smaller debt-to-GDP ratio in 2020. 

Long-term sustainability 

The long-term sustainability of public finances appears secured. Latvian public finances 
do not appear to face sustainability challenges either in the short-term, medium-term or long-
term  perspectives.  This  conclusion  reflects  in  particular  a  projected  decrease  in  age-related 
spending in the period 2010 to 2060, which contrasts with an average increase in the EU, and 

12 

 
 
 
 
a  relatively  low  level  of  government  debt  (40.7%  of  GDP  in  2012,  expected  to  decrease  to 
40.1% in 2014 according to the Commission's forecast). However, these projections imply a 
steep  decline  in  the  replacement  ratio  of  the  notional  defined  contribution  public  pension 
system,  representing  a  risk  to  the  adequacy  of  future  pensions  or  a  risk  of  current  policies 
being reviewed, which could have an impact on future sustainability. 

The  systemic  pension  reform  will  continue  in  2013-2016.  Latvia  increased  state 
contributions to the statutory funded pension scheme from 2% of gross wages to 4% in 2013, 
while the overall social contribution rate remained unchanged; there will be a further increase 
to 5% in 2015 and 6% in 2016. While this increase is more gradual than was recommended by 
the Council in 2012, it is not likely to have a substantial negative impact on the sustainability 
or adequacy of pensions,  in particular  when coupled with  the recently legislated  increase in 
statutory pension age from 62 to 65 years between 2014 and 2025. 

According to the 2012 Ageing Report8, projections for the health and long-term care are 
rather  favourable.  At  the  same  time,  health  status  indicators  are  relatively  weak,  in 
comparison with those of other Member States. This could mean a greater need for health and 
long-term care in the future, and therefore a possibility of higher costs. 

Fiscal framework 

The recent adoption of the Fiscal Discipline Law strengthens the fiscal framework. Until 
recently,  the  fiscal  framework  in  Latvia  lacked  mechanisms  to  limit  expenditure  growth  in 
good  economic  times.  Implementing  a  comprehensive  set  of  rules  to  govern  fiscal  policy 
throughout  the  cycle  had  therefore  been  a  priority  and  was  reflected  in  the  2012  Council 
Recommendations.  The  relevant  draft  law  was  adopted  by  the  government  in  late  2011  and 
was fleshed out in the course of parliamentary scrutiny, notably to reflect the entry into force 
of the ‘six-pack’ (legislation to strengthen economic governance) and the decision by Latvia 
to join the Treaty on Stability, Coordination and Governance. The resulting Fiscal Discipline 
Law was approved by the Latvian Parliament on 31 January 2013 and entered into force on 6 
March 2013. 

This law establishes the principle of budgetary targeting throughout the cycle, with the 
benchmark  structural  deficit  of  0.5%  of  GDP,  but  the  law  still  remains  untested. 
Practical implementation takes place through a multi-annual budget framework law (adopted 
as a rule annually in spring, with the exception of 2013 and 2014 when transitional provisions 
apply)  and  annual  budget  laws.  It  provides  mechanisms  for  adjustment  of  the  budgetary 
trajectory  in  the  event  of  any  deviation  from  the  medium-term  objective,  as  well  as 
mechanisms  to  ensure  that  the  expenditure  growth  rule  is  adhered  to.  To  this  end,  the 
expenditure ceilings in the multi-annual budget framework law and in annual budget laws are 
determined in such a way that both the balance rule and the expenditure growth rule stemming 
from  the  reinforced  Stability  and  Growth  Pact are  satisfied.  The  Fiscal  Discipline  Law  also 
contains  provisions  regarding  the  establishment  of  an  independent  Fiscal  Council,  to  be 
operational from 1 January 2014, which will oversee compliance with the set of fiscal rules, 
including by publishing regular and ad hoc reports. Given the very recent nature of the law, 
next  budgets,  in  particular  the  budget  for  2014,  will  provide  real-life  test  for  the  new 
framework. 

8 See http://ec.europa.eu/economy_finance/publications/european_economy/2012/2012-ageing-report_en.htm. 

13 

 
 
 
 
                                                 
Tax system 

Latvia has one of the lowest tax-to-GDP ratios in the EU, at 27.9% of GDP in 2012, with 
relatively  high  reliance  on  consumption  taxes  and  low  reliance  on  taxation  of  capital. 
While the implicit tax rate on labour is below the EU average, the single personal income tax 
(PIT)  rate  translates  into  particularly  high  labour  taxation  for  low-income  earners:  the  tax 
wedge for single earners was the sixth highest in the EU in 2010 for people earning 67% of 
average  wage.  In  contrast,  the  tax  wedge  for  high-income  earners  is  well  below  the  EU 
average. In line with these labour tax incentives, the low-skilled employment rate of 46.7% is 
well below the EU average and almost 40 percentage points lower than that of high skilled-
workers, which, at 83.4%, is in line with the EU average. 

Latvia  has  taken  measures  to  reduce  labour  taxation,  but  the  focus  on  low  income 
earners  has  been  insufficient.  The  three-year  strategy  to  lower  the  PIT  rate  from  25%  to 
20%  was  adopted  in  mid-2012  and  the  first  step  (lowering  the  PIT  rate  to  24%)  came  into 
effect  in  January  2013.  In  addition,  targeted  relief  for  families  with  children  (an  increased 
monthly non-taxable threshold for dependants from LVL 70 (€ 100) to  LVL 80 (€ 114)) will 
come into force in July 2013. While these government decisions are in line with the objectives 
of  the  2012  Council  recommendations  to  shift taxation  away  from labour,  no  compensatory 
tax  measures  were  announced  (although  the  on-going  reform  of  property  taxation,  which 
gives  the  local  governments  more  flexibility,  could  result  in  a  higher  share  of  property 
taxation).  These  decisions  did  not  specifically  address  the  situation  of  low-income  earners 
either. Moreover, as the elasticity of demand and supply with respect to wages is higher for 
lower-income groups, focusing reduction of labour taxes on low-income earners would have a 
more  pronounced  impact  on  reducing  unemployment.  The  concerns  about  high  in-work 
poverty  and  large  numbers  of  low-wage  earners  provide  additional  arguments  in  favour  of 
concentrating the tax reduction efforts on lower-income groups. 

The labour tax cuts were not accompanied by an increase in consumption taxes. To the 
contrary, the VAT rate was lowered from 22% to 21% as from July 2012, partly reversing the 
measures  taken  during  the  crisis,  when  the  standard  VAT  rate  was  increased  from  18%  to 
22%  and  the  reduced  rate  from  5%  to  12%,  while  narrowing  the  scope  of  its  application. 
However,  these  crisis-related  rate  increases  were  not  reflected  in  VAT  revenues  or  in  the 
implicit  tax  rate  on  consumption.  Instead,  the  VAT  revenue  ratio,  which  compares  actual 
VAT  revenue  to  theoretical  VAT  revenue  at  standard  rates,  decreased  from  around  65% 
before the crisis to 43.2% in 2011 — the fourth lowest in the EU. Given the comparatively 
limited application of reduced rates, this indicates that the efficiency of the VAT system has 
been greatly affected by the economic crisis9 and has potential for further improvement as the 
economy recovers, in particular if supported by policy action to improve tax collection. 

The proportion of property taxes in overall taxation has increased in recent years. The 
on-going  reform  of  property  taxation  since  January  2013,  which  gives  local  governments 
flexibility in choosing appropriate tax rates, could further improve the revenue base of local 
governments in the medium term, thus providing opportunities for a tax shift. Given the very 
recent nature of the reform, its results would need to be assessed at a later stage. A review of 
cadastral  values  to  better  reflect  the  value  of  individual  properties  and  real  estate  market 
developments would provide another way of further increasing reliance on property taxation. 

9 These inefficiencies might be the result of high levels of cross-border shopping, tax evasion or avoidance or 
even a shift towards consumption goods, which are taxed at the reduced rate. 

14 

 
 
 
 
                                                 
There  is  scope  for  further  broadening  of  tax  base  for  environmental  taxes.  The 
proportion  of  environment  taxes  is  at  the  EU  average,  albeit  dominated  by  fuel  taxation. 
Furthermore, the implicit tax rate on energy – measuring energy taxation per unit of energy – 
is  the  lowest  in  the  EU,  reflecting  low  energy  efficiency  against  relatively  low  tax  rates  for 
energy sources. The weak indicators relating to waste management and air quality10 suggest 
that the taxation rates in place may not be conducive to environmentally friendly behaviour. 
Further  broadening  of  the  tax  base  for  environmental  taxes,  including  pollution  and  energy 
sources,  as  well  as  a  progressive  increase  of  the  existing  landfill  tax,  would  help  achieve 
environmental goals, while allowing taxation to be shifted away from low-income earners. 

The  government  has  stepped  up  efforts  to  combat  the  informal  economy.  Although 
backward-looking indicators still point to considerable challenges in this area, the impact of 
recent policy measures is gradually translating into improved tax collection rates, particularly 
visible  in  2012,  when  the  annual  increase  in  total  tax  revenue  as  reported  by  Eurostat  was 
above GDP growth. The State Revenue Service has been considerably reinforced during the 
past  few  years  and  its  organisational  structure  has  been  adapted  to  strengthen  the  audit 
function.  In  parallel,  several  policy  decisions  have  been  or  are  being  adopted  in  order  to 
reduce  the  stock  of  tax  arrears  and  to  limit  their  accumulation  in  the  future.  In  parallel,  the 
allowed  frequency  of  tax-free  movement  of  goods  on  the  EU  external  border  has  been 
reduced  as  from  2012,  and  several  legislative  measures  have  been  taken  in  order  to  limit 
opportunities for fraudulent behaviour or to strengthen applicable sanctions. At the same time, 
Latvia  does  not  systematically  make  use  of  third-party  information  to  review  individual 
income declarations. According to the World Bank Ease of Paying Taxes Report 201311, the 
costs of tax compliance in Latvia are relatively high despite recent improvements and should 
therefore remain in the focus of attention. 

3.2. 

Financial sector 

The  banking  sector,  with  total  assets  of  around  130%  of  GDP,  is  relatively  moderate 
compared to 370% of GDP in the EU as a whole. Around half of deposits are non-resident, 
in  particular  from  Russia  and  other  CIS  countries.  After  the  collapse  of  the  second  biggest 
domestic bank, Parex, in 2008, which necessitated a request for a Balance of Payments (BoP) 
assistance  programme  from  the  EU  and  the  IMF,  the  authorities  have  taken  appropriate 
supervisory  and  resolution  measures.  As  part  of  the  programme,  a  blocked  financial  sector 
account at the Central Bank was established with around EUR 650 million that were gradually 
released as the authorities implemented the restructuring and sale  of two state-owned banks 
and other financial-sector reforms.     

Further actions have been taken to strengthen the financial system over the past months. 
This  includes:  closer  supervision  of  the  banks  owned  by  non-EU  entities  and  having  high 
exposure  to  non-EU  customers;  continued  progress  on  the  orderly  resolution  of  ex-Parex 
Bank12; selling of the Mortgage and Land Bank’s commercial assets (excluding the real estate 
bad loan bundle); measures to deal with issues that emerged in the context of the Krajbanka 

10In particular, 88 % of municipal waste was landfilled and only 10 % recycled in Latvia in 2011, against 37 % 
and 25 % respectively for the EU as a whole. Air pollution levels exceeded legislated limits in some urban areas 
in 2011. 
11http://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Special-Reports/Paying-
Taxes-2013.pdf  
12Former Parex Bank was split into a Resolution Bank (Parex bank) and a New Bank (Citadele bank), which is 
continuing business activity. In 2012 Parex bank changed its status to a distressed asset management company 
under the new name of Reverta. 

15 

 
 
 
 
                                                 
fall-out  (e.g.  thorough  checks  of  availability  of  correspondent  account  financing);  and 
activities to improve the public's financial knowledge.  

The Mortgage and Land Bank sale process has taken a long time. Accepting financially 
reasonable  offers  received  for  the  more  problematic  commercial  assets,  rather  than  keeping 
them under state management, seems the best way forward. It is also important to assess how 
the  Mortgage  and  Land  Bank  could  be  managed  more  effectively  as  a  development  bank. 
Preferably,  an  open  competition  should  be  organised  to  attract  managers  with  extensive 
experience in development bank activities. 

There  has  been  little  progress  as  regards  the  setting-up  of  a  Single  Development 
Institution,  including  deciding  on  further  operations  of  the  Mortgage  and  Land  Bank’s 
development  part.  The  institution  is  to  implement  state  aid  programmes  through  financial 
instruments  currently  handled  by  the  Mortgage  and  Land  Bank,  the  Latvian  Guarantee 
Agency, and the Rural Development Fund. A swift decision on the Institution is particularly 
important in view of the new EU financing period, where emphasis on financial engineering 
instruments may be significant. 

As regards access to finance, new lending to residents has improved, but remains weak 
as  gradual  deleveraging  continues  in  the  household  and  corporate  sectors.  However, 
well-established  and  export-oriented  companies  seem  to  have  little  trouble  accessing  credit. 
Effective and timely implementation of a wide range of Structural Fund-supported financial 
engineering  programmes  could  further  promote  access  to  financing.  While  the  post-crisis 
structural adjustment has been overall successful, the experience of a pronounced boom-bust 
cycle calls for vigilant monitoring of future credit growth and macro-financial stability.  

The authorities have not devoted adequate attention and resources to tackling complex 
economic and financial crimes. Some of the institutions under the Prosecutor General Office 
and the Ministries of Finance and Interior need more staff, training, and resources to perform 
their  tasks  effectively.  Furthermore,  the  significant  non-resident  deposit  business  in  Latvia 
poses  some  specific  challenges.  Continuous  high  inflow  of  foreign  capital  could  fuel 
excessive lending or stimulate foreign investment by domestic banks without providing them 
with  a  sufficiently  stable  funding  base.  The  authorities  should  step-up  efforts  to  contain  the 
risks  stemming  from  the  non-resident  banking  sector.  Finally,  another  emerging  challenge 
with significant social implications is containing and enhancing the monitoring of non-bank 
lending activities. 

3.3.  Labour market, education and social policies 

Unemployment in Latvia remains above the EU average. High youth unemployment and 
long-term unemployment are reasons of particular concern. Activation of the unemployed and 
benefit recipients is low, while the tax wedge for low-wage earners is among the highest in 
the  EU,  which  is  hindering  job  creation  for  the  low-skilled.  Challenges  for  the  higher 
education field include a need for better compliance with labour market needs and raising the 
economy’s innovation potential. There are concerns about vocational education and training 
failing to provide sufficient quality of skills for the workforce and about limited availability of 
quality work-based training. The high proportion of the population at risk of poverty or social 
exclusion,  high  income  inequality  and  increasing  material  deprivation  are  also  significant 
challenges. Children are particularly exposed to the risks of poverty. 

16 

 
 
 
 
Labour market 

Latvia has taken a number of steps to tackle long-term and youth unemployment. The 
level  of  long-term  and  youth  unemployment,  however,  stays  high  at  7.8%  and  28.4% 
respectively in 2012, though starting to decrease since its peak in 2010. Funding and coverage 
of ALMPs was increased in 2013 as compared to 2012, and more unemployed people will be 
involved  in  training,  wage  subsidies  and  public  works  programmes.  Profiling  of  the 
unemployed,  which  is  significantly  delayed,  and  improved  job  search  assistance,  is  to  be 
implemented in 2013 to channel resources to those who need them most. Encouragingly, the 
authorities are re-assessing and improving the effectiveness and quality of training provided 
to the unemployed, implementing in-company training programmes (though the ESF-financed 
‘training  with  employers’  programme  has  faced  delays),  and  a  small-scale  Minnesota 
programme  providing  support  to  unemployed  people  with  addiction  problems,  and 
introducing  mobility  grants  to  help  the  long-term  unemployed  to  move  away  from  areas  of 
joblessness.  

Young people are being involved in vocational training programmes, but there are still 
challenges. In addition to measures described above, 2 000 young people without professional 
qualifications  will  be  involved  in  a  short  cycle  (1-1.5  years)  vocational  training  programme 
and a new ‘Workshops for Young People’ measure has been prepared to give young people 
the opportunity to try out three different professions in vocational schools. Latvia has a range 
of  existing  and  new  measures  targeting  young  people,  but  has  not  yet  established  a 
comprehensive  system  delivering  a  Youth  Guarantee13.  Similarly,  there  are  no  measures  to 
support  people  at  pre-retirement  age,  who  are  often  subject  to  discriminatory  attitudes  and 
sometimes  lack  sufficient  skills.  The  ESF  will  be  an  important  source  of  funding  for  youth 
employment  policies,  in  particular  through  the  support  of  the  Youth  Employment  Initiative, 
which  will  deliver  measures  targeted  at  young  people  not  in  employment,  education  or 
training.  

Lack  of  rigorous  evaluation  of  ALMP  measures  was  identified  as  a  problem  in  earlier 
assessments. Latvia has addressed  this  issue by concluding  an  advisory  agreement  with  the 
World  Bank,  which  includes  evaluation  of  the  ALMPs  and  recommendations  on  improving 
their effectiveness. Preliminary results are expected by summer 2013 and may serve as a basis 
for 2014 budget proposals as regards social assistance, benefits and ALMPs. 

The  overall  response  from  Latvian  authorities  is  adequate  and  relevant,  even  though, 
due to the extent of the challenges faced, efforts are not sufficient and several measures 
are in the early stages of implementation. The long-term unemployed often face barriers to 
labour  market  entry  which  are  not  addressed  by  traditional  ALMPs  such  as  caring 
responsibilities, health problems or disability, addictions, lack of motivation, low level of life 
skills  and  others.  To  overcome  these  barriers,  providing  targeted  social  services  is  equally 
important.  Many  of  the  long-term  unemployed  are  involved  in  the  European  Social  Fund-
financed public works programme, which is used as a substitute for social assistance and does 
not adequately address the main barriers to employment.  

13 Council Recommendation of 22 April 2013 on establishing a Youth Guarantee (2013/C 120/01) to ensure that 
all young people under the age of 25 years receive a good-quality offer of employment, continued education, an 
apprenticeship or a traineeship within four months of becoming unemployed or leaving formal education.  

17 

 
 
 
 
                                                 
Education 

The  Ministry  of  Education  and  Science  has  proposed  ambitious  reforms  that  would 
largely address the challenges faced by higher education. The reform of the accreditation 
process  includes  moving  from  accreditation  of  study  programmes  to  study  fields  and 
increasing the independence and impartiality of the accreditation committee (for accreditation 
purposes,  as  of  2014  higher  education  institutions  will  be  allowed  to  select  any  of  the 
independent  institutions  included  in  the  European  Quality  Assurance  Register).  Large-scale 
evaluation  of  higher  education  programmes  was  completed  with  European  Social  Fund 
financing  and  the  results  will  be  used  as  input  for  budgetary  and  accreditation  processes. 
Reform  plans  also  include:  separating  academic  and  management  functions  of  the 
universities;  developing  a  new  financing  model;  attracting  international  teaching  staff  and 
students; and further consolidating higher education institutions.  

The  response  to  the  CSR  is  adequate  and  relevant,  even  if  these  plans  are  at  an  early 
stage. If properly implemented, they will have a significant positive impact on the quality of 
higher education in Latvia. 

Latvia  has  allocated  significant  ERDF  funds  for  renovating  11  VET  schools.  However, 
close  monitoring  will  be  needed  to  ensure  timely  and  effective  absorption  of  the  allocated 
financing in the next few years. A project to improve the attractiveness of VET curricula and 
raise  professional  standards  is  ongoing,  in  cooperation  with  employer-led  Sectoral  Expert 
Councils. Latvia is drawing up plans to improve VET governance and introduce more flexible 
modes  of  learning,  including  provision  of  education  for  adults  and  the  unemployed.  While 
participation in VET started from very low levels and has been increasing, this may be more 
due  to  monetary  incentives  (eg.  stipends  to  VET  students)  than  to  real  attractiveness  of 
programmes.  Latvia  still  lacks  a  comprehensive  nationwide  system  of  impartial  career 
guidance  to  help  students  make  informed  choices.  Importantly,  there  has  not  been  any 
rigorous  evaluation  of  the  traineeship/apprenticeship  schemes,  though  concerns  have  been 
raised  as  regards  their  quality,  availability,  attractiveness  to  employers  and  organisational 
aspects. 

Both the labour market situation and the policies implemented during recent years have 
contributed to the reduction in the rate of early school leavers (10.5%, against the EU 
average of 12.8% in 2012). To bring more young people back into education, an additional 
2 000  young  unemployed  will  be  involved  in  short  cycle  (1-1.5  years)  VET  programmes  to 
obtain  professional  qualifications.  Proper  implementation  of  the  on-going  measures  will  be 
key  to  further  reducing  dropout  numbers.  As  early  school  leavers  are  disproportionally 
affected by unemployment, further reducing their number will also have a positive impact on 
youth unemployment. 

Social policies and poverty 

Lack  of  fiscal  space  has  led  Latvia  to  take  some  decisions  that  are  likely  to  aggravate 
extreme  poverty  and  exacerbate  the  existing  inequality  in  access  to  social  assistance 
across  local  governments.  As  of  January  2013,  the  level  of  guaranteed  minimum  income 
(GMI)  was  decreased  and  state  budget  financing  of  the  GMI  benefit  was  abolished.  These 
decisions  were  seemingly  taken  without  analysis  of  the  impact  on  incentives  to  work  and 
poverty, and prior to the results of two studies on social assistance.   

There  has  been  no  significant  direct  action  to  address  problems  related  to  social 
assistance  identified  in  the  Commission’s  2012  assessment:  transparency,  benefit 
adequacy and coverage, and insufficient activation measures for benefit recipients. There 
18 

 
 
 
 
is also no unified social assistance data management system providing individual-level data to 
enable better monitoring of social assistance policies. The targeting of child-related benefits 
remains  unfavourable  to  low-income  households.  The  at-risk-of-poverty  rate  increased 
slightly in 2012, suggesting that growth does not automatically translate into reduced poverty 
and that targeted policies are necessary. 

Some  improvements  are  nevertheless  taking  place.  More  positively,  Latvia  has  partially 
addressed the problem of low coverage of unemployment benefits by increasing their duration 
to nine months for all unemployed people as of January 2013 and, with a view to improving 
the  demographic  situation,  the  sliding  scale  cap  on  maternity/paternity/parental  allowances 
was increased; however these measures will benefit only middle- and high-income families. 
Families  and  municipalities  were  allocated  additional  support  for  providing  kindergarten 
services  and  financing  was  granted  for  in-vitro  fertilisation  procedures.  In  order  to  support 
poorer  families,  minimum  monthly  parental  benefits,  child-care  benefits  and  child-care 
benefit supplements for children born in multiple births were increased to EUR 140, including 
for parents without social insurance, and the PIT allowance for dependents was increased to 
EUR  115.  Given  the  high  child  poverty rates, it is important to monitor the effects of these 
decisions on child poverty and child-related benefits.  

An  evaluation  of  the  social  assistance  system  is  on-going  to  provide  the  support  for 
evidence-based policy-making to reform the social assistance system. The authorities have 
also  started  work  on  the  Guidelines  for  Development  of  Social  Services  with  the  aim  of 
improving social services. It is expected that high social inequality will already be addressed 
in the 2014 budget. 

3.4. 

Structural measures promoting growth and competitiveness 

Latvia’s  indicators  of  competitiveness  have  improved  substantially  since  the  start  of 
internal adjustment triggered by the financial crisis in 2008-09. This is also evident from 
the  recent  substantial  gains  in  export  market  shares  and  the  rising  proportion  of  exports  in 
GDP. Nevertheless, exports remain to a large extent dependent on low value-added industries 
with low technological intake. This indicates certain challenges as regards competitiveness in 
higher  value-added  sectors.  The  areas  and  reforms  listed  below  are  paramount  to  further 
improving Latvia’s competitiveness. 

The Structural Funds and Cohesion Fund, which financed most of Latvia’s public investment 
in recent years, have played an important role in supporting structural reforms and alleviating 
the effects of the crisis.  

Electricity market 

In  2012,  Latvia  made  progress  in  opening  its  electricity  market  to  competition  for 
industrial  users  and  participation  in  the  regional  market.  The  proportion  of  regulated 
prices has decreased considerably, standing at 25% in November 2012. Latvia is to join Nord 
Pool Spot trading in June 2013. The phasing-out of regulated prices for household and small 
non-household  consumers  is  still  outstanding  and  would  stimulate  competition  in  the 
electricity sector. In this regard, the phasing-out of price regulation for electricity may require 
identification  of  vulnerable  customers  and  design  of  appropriate  protection  mechanisms,  as 
well as empowering consumers to make informed choices. 

The  electricity  supply  system  is  robust.  There  are  no  internal  bottlenecks  between  Latvia 
and  Lithuania;  however  Estonian  and  Latvian  cross-border  transmission  infrastructure  is 
frequently  congested.  Electricity  generation  is  based  on  hydro-energy,  which  has  led  to 
19 

 
 
 
 
notable fluctuations over the last decade, and high dependence on imports, particularly from 
Russia, when water levels are low. Gas, which is 100% imported, is also used extensively for 
electricity  generation.  For  historical  reasons,  the  Latvian  electricity  system  is  heavily 
interconnected  with  the  networks  of  Belarus,  Russia,  Estonia  and  Lithuania  (BRELL  ring 
agreement).  There  are  on-going  negotiations  with  Russia  and  Belarus  on  the  technical 
operation of the networks to allow for proper implementation of EU energy legislation. In the 
medium term, Latvia and the other Baltic States aim at synchronisation with the EU electricity 
system, which requires significant investment. The Latvian network needs to be reinforced to 
be able to transport significant amounts of energy via the Baltic transmission system from/to 
Finland, Sweden or Poland. 

Gas market 

There  has  been  no  progress  in  opening  the  natural  gas  sector  and  a  single-source 
dependency prevails. The authorities are facing difficult negotiations with Gazprom/Latvijas 
Gaze  as  regards  preparation  of  the  gas  sector  for  ending  isolation  and  creating  respective 
market  structures,  starting  from  April  2014.  There  have  recently  been  calls  by  some 
politicians in the media to delay this reform and make it subject to ending of Latvia's overall 
derogation  from  implementing  other  crucial  elements  of  the  Third  Energy  Package,  such  as 
unbundling. This would not be in line with Latvia's earlier position and endangers subsequent 
market opening. This includes renegotiation of the regionally important Incukalns gas storage 
management contract, which could contribute to the development of a more competitive gas 
market and yield substantially bigger revenues for the state than so far. 

To increase security of supply and enable proper functioning of the energy market, new 
supply  routes  have  to  be  developed  in  the  Baltic  region.  This  includes  the  Latvian-
Lithuanian  reverse-flow  project  linked  to  the  Poland-Lithuania  gas  interconnection,  the 
BalticConnector  between  Estonia  and  Finland,  and  the  regional  LNG  terminal.  Latvia  has 
confirmed  its  willingness  to  proceed  in  line  with  the  findings  of  the  Commission-financed 
LNG study. 

No decision has been taken on roll-out of smart meters for electricity or gas. The country 
has  only  reported  that  the  cost-benefit  analysis  results  for  both  electricity  and  gas  were 
negative.  

Energy efficiency 

Latvia's energy and carbon intensity is more than double the EU-27 average14. Latvia has 
put forward a balanced mix of policy measures addressing energy savings for the main sectors 
of the economy. It is foreseen that in coming years more than 70% of these energy savings 
will be generated in the buildings sector, including modernisation of district heating networks, 
where the potential is significant. The European Regional Development Fund, Cohesion Fund 
and  the  Climate  Change  Facility  Instrument  play  an  important  role  in  financing  already 
implemented  and  planned  energy-efficiency  measures.  Some  progress  has  been  achieved  in 
the insulation of administrative and residential buildings and results show significant energy 
savings  of  above  30%  for  the  pilot  residential  projects.  However,  the  number  of  insulated 
residential  buildings  remains  very  small  relative  to  the  stock  of  buildings  with  large  energy 
losses.  The  implementation  of  housing  insulation  projects  has  been  slow  and  hundreds  of 

Latvia's energy consumption stood at 327 kgoe/k€ during the 2005-10 period, more than twice the EU-
14  
27 average of 153 goe/€. Similarly, with a 0.8t CO2 equivalent/1000 €, the Latvian economy's carbon intensity is 
two times higher than the EU average.  

20 

 
 
 
 
                                                 
projects  are  currently  in  the  pipeline.  It  is  important  that  the  authorities  closely  monitor  the 
quality of construction works and materials used to achieve the projected energy savings. The 
adoption of the building energy-effectiveness law in 2012 is a commendable step.      

Measures  focusing  on  higher  uptake  of  energy  performance  contracting  (legal  and 
financial),  ensuring  mandatory  measuring  of  individual  consumption  in  renovated 
buildings, and specialised training of the building workforce, would further support this 
process. The complete and timely transposition and  effective implementation of the  Energy 
Efficiency  Directive  (by  June  2014)  and  the  financing  possibilities  under  the  European 
Structural and Investment Funds would additionally promote energy efficiency. 

Research and innovation 

The  Commission’s  2011  Innovation  Union  Scoreboard  identifies  Latvia  as  a  modest 
innovator whose aggregate Innovation Index score (0.201) is still significantly below the 
EU  average  (0.516).  Similarly,  the  2012-13  Global  Competitiveness  Report  of  the  World 
Economic  Forum,  which  ranks  Latvia  55th  out  of  144  countries,  finds  that  Latvia’s 
performance  on  business  sophistication  and  innovation  could  be  greatly  improved.  This 
chimes with the Latvian Competitiveness Report 2011, prepared by  independent  academics, 
which points to limited innovation activity, partly due to a lack of highly-qualified scientists 
and engineers. Scientific performance, measured as the proportion of publications in the top 
10% most-cited journals, is low. 

Regarding  the  Europe  2020  target  for  R&D  intensity,  Latvia’s  objective  is  to  devote 
1.5% of GDP to R&D by 2020. However, its current R&D intensity of only 0.7% of GDP is 
well below this target. While public investment has recently increased, this is mainly due to 
several  major  programmes  funded  by  the  Structural  Funds.  There  is  little  research  and 
innovation  investment  by  either  domestic  companies  or  foreign  affiliates  to  support 
specialisation  in  knowledge-intensive  and  innovation-driven  sectors.  Latvia  has  the  lowest 
business R&D intensity in the EU (0.19% of GDP in 2011), and licence and patent revenue is 
rather low. 

An evaluation of scientific institutions is expected in 2013. Regarding the rationalisation of 
scientific  institutions,  an  evaluation  of  the  effectiveness  of  scientific  institutions  and  their 
development  strategies  and  consolidation  will  be  carried  out  in  2013,  following  agreement 
with the Nordic Council of Ministers. This important assessment should support future budget 
and  European  Structural  and  Investment  Funds  allocations,  and  improve  the  quality  of 
scientific output.  

There  is  a  very  high  proportion  of  Structural  Funds  in  public  R&D  funding,  thus 
shifting  the  balance  towards  project-based,  competitive  funding.  Increased  national 
financing  for  scientific  institutions’  base  expenditure  (infrastructure  maintenance,  personnel 
expenses,  co-financing  for  international  financial  instruments  and  studies)  would  support 
stability and further development of the science and innovation sector. A major issue concerns 
funding  of  the  R&D  sector  after  2013,  before  the  new  round  of  Structural  Funds  becomes 
operational. Moreover, as the overall level of public support will remain limited, introducing 
broader  tax  incentives  for  research  and  innovation  may  need  to  be  considered,  including 
extending existing corporate tax rate allowances for investment in research and innovation. 

Several  initiatives  to  stimulate  innovation  are  in  the  pipeline.  As  regards  incentives  for 
companies to innovate, a voucher programme for small- and medium-sized enterprises will be 
launched  in  2013  to  support  entrepreneurs  in  the  purchase  of  external  services,  such  as 
industrial research. Also, 11 cluster projects and 6 Competence Centres are operational, and 
21 

 
 
 
 
aim to promote cooperation between companies and research and education institutions in the 
development of new products. Also, several Structural Fund-supported programmes are being 
implemented  to  promote  development  of  higher-value  added  products  and  to  introduce  new 
technologies.  It  is  still  too  early  to  assess  the  impact  of  these  initiatives  on  commercial 
innovation. 

Transport 

There  is  room  to  optimise  transport  systems.  Developing  integrated,  intermodal,  low-
carbon  and  intelligent  public  and  urban  transport  systems,  adapting  public  road  transport  to 
renewable energy sources, and further electrification of railway lines would make it easier to 
achieve the Europe 2020 targets. Latvia plays an important role in connecting the three Baltic 
States  with  the  rest  of  the  EU.  The  modal  split  in  the  transport  sector  is  characterised  by  a 
large  proportion  of  rail  transport,  although  the  level  of  electrification  is  low.  Overall 
connectivity  might  be  improved  by  realising  the  European-gauge  railway  infrastructure 
project Rail Baltic which would connect the main EU networks with north-eastern Europe as 
part  of  the  TEN-T  policy  and  is  planned  to  be  taken  forward  during  the  next  financial 
perspectives of 2014-2020. The project should be completed by 2023. 

Major  concerns  relate  to  the  poor  quality  of  road  infrastructure,  mainly  due  to 
underfinancing  of  transport  infrastructure  in  the  last  20  years.  EU  financing  is  gradually 
improving the situation, but not enough to radically improve the road network quality. Thus, 
to achieve significant improvement in the medium to long term, the authorities may need to 
greatly  increase  national  financing,  implement  public-private  partnership  projects  (based  on 
best international experience), or introduce toll roads. In this context, Latvia is one of the few 
Member States not to have any type of road charging for heavy goods vehicles. However, the 
Eurovignette legislation is expected to come into force in 2014. 

Latvian ports in particular could be a source of efficiency gains. As regards governance 
and  operational  standards  of  Latvian  ports,  the  World  Bank  has  been  invited  to  conduct  a 
comprehensive  study  on  competitiveness,  governance  and  investment  return  of  the  biggest 
ports. The observed quality of governance in the biggest Latvian ports and the government’s 
tools to achieve efficiency-improving changes seem inadequate.    

Competition 

The  Commission  has  repeatedly  emphasised  the  importance  of  active  surveillance  of 
companies’  compliance  with  competition  rules  (cartels,  abuse  of  dominant  position, 
mergers),  as  this  may  contribute  to  ensuring  long-term  price  level  sustainability.  The 
authorities  have  proposed  amendments  to  the  Competition  Law,  including  prioritising 
initiation of cases on markets with essential impact on competition, improving fine collection, 
and granting wider powers to obtain information necessary in case of investigation. However, 
it  will  take  time  to  implement  these  measures.  On  a  broader  level,  the  authorities  have 
initiated discussions on strengthening the functional, institutional and financial independence 
of  the  Competition  Council.  Despite  additional  financing  having  been  granted  in  the  2012 
budget, the Competition Council’s resources remain limited. 

Public procurement 

Comprehensive  changes  to  the  Public  Procurement  Law  have  been  adopted,  including 
an  obligation  for  local  governments  to  further  centralise  procurements  and  extend  the 
use of the Electronic Procurement System. The number of disputed procurements is falling, 
possibly  as  a  result  of  more  intensive  ex  ante  procurement  documentation  checks  by  the 
22 

 
 
 
 
Procurement Monitoring Office and other contracting agencies, and more training for officials 
dealing with procurements. 

As  regards  administrative  responsibility  for  irregularities  in  procurement  tenders,  key 
law  amendments  will  likely  be  adopted  by  the  parliament  in  2013.  This  entails 
administrative  penalties  for  individual  contracting  officials:  a  warning,  a  fine  of  up  to  EUR 
700, or disqualification from the public procurement evaluation committee. This is expected 
to improve the quality of work of procurement evaluation committees and increase use of the 
Electronic Procurement System. 

There  are  concerns  about  the  growing  number  of  local  government  ‘in-house’ 
procurements,  which  are  exempt  from  normal  public  procurement  regulations  (as  the 
service provider belongs to the municipality). In the past few years there has been a trend to 
increase administrative intervention of municipalities and other public bodies in commercial 
activities in waste management, provision of house maintenance services and port services. 

Renewable energy, greenhouse gas emissions and waste management 

Latvia is committed to reaching its goal of renewable energy sources (RES) representing 
40% of its final energy consumption, and 10% in the transport sector, by 2020. In 2011, 
the  energy-consumption  mix  had  the  second  highest  RES  proportion  in  the  EU-27  (after 
Sweden), reaching 33.1%. Latvia is unlikely to reach the first interim target of 34.1% under 
the  EU  Renewable  Energy  Directive.  In  2011,  the  proportion  of  renewable  energy  in  the 
transport sector increased to 4.8 %, which is above the 2011 national target of 4.1% set out in 
the  Latvian  Renewable  Energy  Action  Plan.  As  of  2011,  Latvia’s  support  scheme  for 
renewable  energy  is  on  hold  and  the  government  expressed  the  intention  to  revise  it  to 
develop  a  stable,  coherent,  predictable  and  cost-effective  RES  support  framework,  whilst 
avoiding changes that affect the legitimate expectations of investors. 

Latvia  is  permitted  to  increase  emissions  not  covered  by  the  EU  Emissions  Trading 
Scheme  (ETS)  by  17%  in  2020  compared  to  2005.  The  latest  projections15  suggest  that 
Latvia is on track with an emissions increase of 4% in 2011 compared to 2005. Greenhouse 
gas  emissions  from  the  transport  sector  accounted  for  26.7%  of  total  emissions  in  201016. 
Though  there  are  a  number  of  measures  in  place  to  decarbonise  the  transport  sector,  i.e. 
raising taxes on fuels, granting exemptions for biofuels, and a newly introduced registration 
tax based on differentiated CO2 emissions, further work is required to address high transport 
sector emissions and low fuel efficiency. New cars had the second highest CO2 emissions per 
km  in  the  EU  in  2011  (low  fuel  efficiency).  Developing  integrated,  intermodal,  low-carbon 
and  intelligent  public  and  urban  transport  systems,  adapting  public  road  transport  to 
renewable  energy  sources,  as  well  as  further  electrification  of  railway  lines,  would  make  it 
easier to achieve the Europe 2020 targets.  

In  2011  Latvia  still  landfilled  88%  of  municipal  waste,  with  only  10%  being  recycled 
and  1%  composted.  In  line  with  EU  waste  legislation,  landfilling  of  biodegradable  waste 
should  be  reduced  to  35%  and  50%  of  municipal  waste  should  be  recycled,  including 
composted,  by  2020.  The  total  typical  charge  for  landfilling  is  EUR  40  per  tonne  of  non-
hazardous municipal waste, but it is still low compared to the EU average of about EUR 80 
per tonne. A progressive increase of the existing landfill tax would facilitate the diversion of 

15 European Environmental Agency: Greenhouse gas emission trends and projections in Europe 2012 Tracking 
progress towards Kyoto and 2020 targets, table 9.2., page 88. 
16 Ibid, page 126. 

23 

 
 
 
 
                                                 
waste  from  landfill,  while  revenues  could  support  separate  collection  and  alternative 
infrastructure.  Also,  the  introduction  of  an  incineration  tax  would  make  recycling 
economically  more  viable.  Significant  environmental  challenges  remain  in  the  water 
management sector, with wastewater not being collected in many agglomerations. 

Business environment 

Latvia has implemented a series of ambitious reforms in recent years, including reduced 
company start-up costs and micro company regime, simplified procedures for property 
registration,  construction  permits  and  tax  collection,  and 
insolvency 
procedures.  In  the  World  Bank  2013  report  on  ease  of  doing  business,  which  covers 
performance in 2012, Latvia ranks 25th. Still, among other issues, Latvia has so far failed to 
adopt  a  revised  Construction  Law  and  the  Construction  Information  System  is  yet  to  be 
implemented,  long  court  cases  are  preventing  companies  from  effective  settlement  of 
commercial  disputes,  getting  an  electricity  connection  takes  time,  and  many  local 
governments lack capacities and incentives to attract investment and jobs.  

improved 

ICT 

Latvia  ranks  among  the  worst-performing  Member  States  when  it  comes  to  fixed 
broadband coverage. In particular, it is one of the five worst-performing Member States in 
rural broadband coverage: it had 67% rural fixed coverage compared to 78% in the EU-27. Its 
take-up  of  broadband  is  also  below  EU  average,  with  a  fixed  broadband  penetration  rate  of 
22.5%, against the EU average of 28%. There are concerns that the supply of ICT specialists 
cannot  meet  growing  demand  and  companies’  needs.  A  national  broadband  strategy  was 
adopted in December 2012; however it is too early to assess its impact. 

3.5.  Modernisation of public administration 

Apart  from  consolidation-driven  optimisation  of  central  government  institutions 
(rationalisation  of  administrative  bodies,  concentration  of  support  functions,  cutting 
staff  numbers  and  remuneration),  few  commendable  public  administration  reform 
measures have been implemented in recent years. A weak common public human resource 
management  policy,  lack  of  career  development  planning,  and  uncompetitive  remuneration 
result in relatively high staff turnover and ultimately risk sub-standard policy-making. In this 
context, the Commission has repeatedly encouraged the authorities to review the unified wage 
grid set-up, possibly inviting external expertise to ensure adequate pay for the low-level job 
categories and reward the best performers in middle and senior management. 

In  February  2013,  the  government  approved  a  concept  paper  for  the  public 
administration's  human  resource  development,  which  includes  staff  recruitment, 
assessment,  rotation,  mobility,  career  development  and  special  trainings  for  top 
managers.  However,  the  timetable  for  implementation  seems  overly  long  and  does  not 
include targets to monitor progress. Also, municipalities are exempt from these proposals. In 
the  absence  of  a  strategic  policy  framework  and  political  ownership,  the  2007-13  European 
Social Fund investment (EUR 22.9 million) in building administrative capacity has not been 
fully effective. 

Latvia  has  demonstrated  good  Structural  Funds  and  Cohesion  Fund  absorption 
progress,  partly  due  to  close  monitoring  in  the  framework  of  the  BoP  assistance 
programme.  However,  significant  delays  have  occurred  as  regards  large  EU  co-financed 
projects (reconstruction works in Riga airport and port, east-west road network, purchase of 
new  railway  carriages,  etc.),  mainly  due  to  public  procurement  procedures,  insufficient 
24 

 
 
 
 
administrative capacity in line ministries, and lack of bank financing. In light of experience 
from  the  2007-13  period,  further  streamlining  of  the  national  management  system  for 
European Structural and Investment Funds (ESIF) and simplification of procedures for final 
beneficiaries is expected. 

Compared to the EU average, corruption remains an issue. On the positive side, according 
to  the  World  Economic  Forum  Global  Competitiveness  Index  2012–13  some  progress  has 
been  made  in  the  related  sub-indicators  on  ‘wastefulness  of  government  spending’  and 
‘favouritism  in  decisions  by  officials’.  The  Corruption  Perceptions  Index  of  Transparency 
International ranks Latvia 21st out of 28 EU countries. 

Inefficiencies  in  the  civil  justice  system  have  a  negative  impact  on  business  and  the 
economic environment, as they increase the risk and cost of doing business. According to 
the EU Justice Scoreboard, the Latvian judicial system combines several unfavourable factors, 
such as lengthy proceedings required to solve civil and commercial cases in first instance and 
low clearance rates that lead to an increase in the backlog of court cases17. Moreover, many 
cases do not get resolved at first instance, which creates delays and backlogs at all instances, 
up  to  the  Supreme  Court.  These  shortcomings  are  confirmed  by  the  findings  of  the  World 
Economic  Forum  Global  Competitiveness  Index  2012–13,  which  ranks  Latvia  106th  out  of 
144 countries for the sub-indicator ‘efficiency of legal framework in settling disputes’. 

Positive  steps  to  improve  the  efficiency  and  quality  of  the  system  have  been  taken 
recently, but it is too early to assess their impact. As regards measures adopted to render the 
system  more  efficient,  amendments  to  the  Law  on  Judicial  Power  should  lead  to  the 
introduction of pure instance systems in the coming years (the Supreme Court Chambers will 
be  eliminated).  In  parallel,  amendments  to  civil,  administrative  and  criminal  procedural  law 
have  been  proposed  and  partly  implemented.  An  evaluation  of  the  effectiveness  of 
proceedings and a procedure for the court cost methodology will be undertaken by mid-2013. 
These  amendments  are  expected  to  increase  efficiency  by  introducing  wider  application  of 
written procedures, limitations on producing new evidence, possibilities for appeal, choice of 
courts, etc. Amendments to certain aspects of the Law on Insolvency have been approved in 
February 2013. However, it appears that some of the more controversial aspects like the role 
of  insolvency  practitioners,  their  responsibilities  with  regard  to  the  judges  and  the  effective 
liquidation of assets still warrant further action. 

There  are  also  concerns  with  regard  to  human resource management  and professional 
development  within  the  judiciary.  A  professional  evaluation  process  for  judges  started  in 
January  2013  and  should  support  the  establishment  of  a  comprehensive  human  resources 
management  policy  within/by  the  judiciary.  Stronger  involvement  of  the  Judicial  Council, 
strengthening the role of senior management positions within the judiciary and more training 
of judges might be necessary to develop a sustainable solution. 

The  availability  of  alternative  dispute  resolution  methods  is  being  improved.  The 
authorities  expect  the  parliament  to  adopt  the  new  mediation  law  by  July  2012.  Awareness 
and promotion campaigns will be necessary to ensure rapid take-up and consequently impact 
the  workload  of  traditional  courts.  A  reform  is  being  launched  to  streamline  the  system  of 
arbitration courts and improve their quality and credibility. 

ICT  communication  between  courts  and  parties  in  judicial  proceedings  has  been 
improved. Video-conferencing and audio recording equipment have been installed, electronic 

17 http://ec.europa.eu/justice/effective-justice/files/justice_scoreboard_communication_en.pdf  

25 

 
 
 
 
                                                 
publication  of  judgments  and  calendars  for  lawyers  will  be  soon  available,  and  electronic 
processing of documents for certain procedures (small claims) may soon be implemented. 

26 

 
 
 
 
4.  OVERVIEW TABLE 

2012 commitments 

Summary assessment 

Country-specific recommendations (CSRs) 

CSR 1: 1.Ensure planned progress towards the timely 
correction of the excessive deficit. To this end, 
implement the budget for the year 2012 as envisaged and 
achieve the fiscal effort specified in the Council 
recommendation under the Excessive Deficit Procedure. 
Thereafter, implement a budgetary strategy, supported 
by sufficiently specified structural measures, for the year 
2013 and beyond, to make sufficient progress towards 
the medium-term budgetary objective (MTO), and to 
respect the expenditure benchmark. Use better than 
expected cyclical revenue to reduce government debt. 

CSR 2: Implement measures to shift taxation away from 
labour to consumption, property, and use of natural and 
other resources while improving the structural balance; 
ensure adoption of the Fiscal Discipline Law and 
develop a medium term budgetary framework law to 
support the long-term sustainability of public finances; 
restore contributions to the mandatory funded private 
pension scheme at 6% of gross wages from 2013. 

CSR 3: Take measures to reduce long-term and youth 
unemployment by fighting early school leaving, 
promoting more efficient vocational education and 
training and its apprenticeship component, enhancing the 
quality, coverage and effectiveness of active labour 
market policy and its training component and through an 
effective wage subsidy scheme. 

CSR 4: Tackle high rates of poverty and social 
exclusion by reforming the social assistance system 
to make it more efficient, while better protecting the 
poor. Ensure better targeting and 
increase incentives to work. 

CSR 5: Further encourage energy efficiency by 
implementing measures and providing incentives for 
reducing energy costs and shifting consumption towards 
energy-efficient products, including vehicles, buildings 
and heating systems. Promote competition in major 
energy networks and improve connectivity with EU 
energy networks. 

27 

Significant progress.  
The general government deficit decreased in 2012 
to the level of 1.2% of GDP, which is significantly 
better than was envisaged in the 2012 programme. 
As the structural balance improved substantially in 
2012, partly reflecting measures to increase tax 
efficiency, Latvia also reached its MTO in that year. 
However, contrary to the CSR, the 2012 budget was 
not implemented as envisaged, as the standard VAT 
rate was lowered in mid-2012 and the 
supplementary budget raising expenditure targets 
were adopted in the second half of the year. 

Some progress. 
Latvia has reduced taxes on labour and plans 
further steps in this regard in 2014-15. However, 
focus on low-wage earners has been insufficient. 
The Fiscal Discipline Law was approved by 
parliament in January 2013 and entered into force 
on 6 March 2013, and the first medium-term 
budget law under the new framework is expected 
in the second half of 2013. Latvia has increased 
contributions to the mandatory funded private 
pension scheme, although the increases were more 
gradual than prescribed by the CSR. 

Some progress. 
Latvia has partially implemented the CSR by taking 
the following steps: increased coverage of ALMPs; 
development of new ALMP measures; 
modernisation of VET schools; and others. 
However, since youth and long-term unemployment 
is still high, further work is necessary. Also, several 
measures are at an early stage of implementation. 
There is scope for further action as regards 
promoting apprenticeships within VET and 
implementing the planned VET reforms.  

No progress. 
There has been little progress in addressing the 
problems of social assistance and some steps 
(abolishing central government financing for GMI; 
reduction of the GMI amount) go against the spirit 
of the CSR.  

Some progress. 
Progress achieved on liberalising the electricity 
market and integration in the regional market 
includes the following steps: regulated prices for 
industrial customers have been removed (not yet for 
households); Latvia will join the regional electricity 
trading area of Nordic countries on 3 June. Some 
progress was identified regarding energy network 
connections, as essential projects are under 
development in cooperation with other countries in 

 
 
 
 
the region. Limited progress was achieved on gas 
infrastructure and markets, and regional discussions 
continue. Some progress was made on energy 
efficiency. Delivery of the 40 % RES target by 2020 
requires further work, including on the set-up of a 
stable and predictable support framework. As 
transport is the sector with most greenhouse gas 
emissions, additional measures may be needed to 
re-design public and urban transport systems, adapt 
public transport to renewable energy sources, 
increase electrification of railway lines, and address 
vehicles’ poor fuel efficiency. 

Some progress. 
The following measures have been taken to improve 
the efficiency of the judiciary: the Law on Judicial 
Power; amendments to aspects of the Insolvency 
Law; introduction of a professional evaluation of 
judges; new Law on Mediation; and improvement 
of ICT facilities. The results of these measures 
cannot be assessed at such an early stage. 
However, the following challenges have not been 
addressed: the need to ensure proper interpretation 
of the insolvency law; continuing measures that 
further improve the quality of the judiciary; and 
establishing a comprehensive policy on human 
resources. 

Some progress. 
The Ministry of Education and Science has 
proposed several reforms. Although most reform 
plans are at an early stage, they appear ambitious 
and relevant. If properly implemented, they will 
have a significant positive impact on the quality of 
higher education and the economy’s innovation 
potential. Further efforts are needed to modernise 
and rationalise research and research institutions, 
based on independent external assessment. Such 
assessment should support future national and EU 
investment. The National Industrial Policy is 
expected to provide direction on cross-cutting 
innovation policy and promote cooperation between 
private-sector companies and research institutions. 
Substantial efforts are necessary to develop and 
apply the Smart Specialisation Strategy promoting 
innovation at company level and providing links to 
research and education.  

CSR 6: Take measures to improve management and 
efficiency of the judiciary, in particular to reduce the 
backlog and length of procedures. Take steps to improve 
the insolvency regime and the mediation laws.  

CSR 7: Continue reforms in higher education, inter alia, 
by implementing a new financing model that rewards 
quality, strengthens links with market needs and research 
institutions, and avoids fragmentation of budget 
resources. Design and implement an effective research 
and innovation policy encouraging companies to 
innovate, including via tax incentives, upgrading 
infrastructure and rationalising research institutions. 

Europe 2020 (national targets and progress) 

Employment rate target:  

R&D target: 1.5 % of GDP 

Greenhouse gas (GHG) national emissions target: 
limited increase of 17 % (compared to 2005 emissions, 
ETS emissions not covered by this national target)  

28 

The employment rate was 65.0 % in 2010, 66.3% in 
2011, and 68.2% in 2012. 

The R&D target is very ambitious. In order to reach 
it, Latvia needs an average annual growth rate of 
9% for R&D expenditure. 

The change in non-ETS greenhouse gas emissions 
between 2005 and 2011 was +4 %. According to the 
national projections submitted in 2011, emission 
will increase by 18 % in 2020 compared to 2005. 

 
 
 
 
Renewable energy target: 40% 
Share of renewable energy in the transport sector: 10% 

Indicative national energy efficiency target for 2020: 
primary energy savings in 2020 of 0.670 Mtoe (28 PJ). 
This implies reaching a 2020 level of 5.23 Mtoe primary 
consumption and 4.35 Mtoe final energy consumption. 

Early school leaving target: 13.4% 

Tertiary education target: 34-36% 

The target is consequently expected to be missed by 
a gap of 1 percentage point (% of 2005 emissions).  

Share of total renewable energy in gross final 
energy consumption was 33.1% in 2011 and 4.8% 
in the transport sector. (Source: Eurostat. April 
2013. For 2011, only formally reported biofuels 
compliant with Art. 17 and 18 of Directive 
2009/28/EC are included). 

Latvia has set an indicative national energy 
efficiency target in accordance with Articles 3 and 
24 of the Energy Efficiency Directive 
(2012/27/EU). It has also expressed it, as required, 
in terms of an absolute level of primary and final 
energy consumption in 2020 and has provided 
information on the basis on which data this has been 
calculated 

The early school leaving rate was 13.3% in 2010, 
11.6% in 2011, and 10.5% in 2012. Progress has 
been made and the target has been achieved. The 
government plans to set a revised target of 10%. 

The tertiary attainment rate was 32.3% in 2010, 
35.9% in 2011, and 37.0% in 2012. Significant 
progress has been made and the target has been 
achieved. Women perform almost twice as well as 
men: 48.1% against 26% in 2012. 

Risk of poverty or social exclusion target: reduce the 
number of people at risk-of-poverty and/or living in 
jobless households by 121,000 

Attainment in 2010: 54 ,000 

Attainment in 2011: 96 ,000 

29 

 
 
 
 
 
 
5.  ANNEX 

Table I. Macroeconomic indicators 

Core indicators
GDP growth rate
Output gap 1
HICP (annual % change)
Domestic demand (annual % change) 2
Unemployment rate (% of labour force) 3
Gross fixed capital formation (% of GDP)
Gross national saving (% of GDP)
General Government (%  of GDP)
Net lending (+) or net borrowing (-)
Gross debt
Net financial assets 
Total revenue 
Total expenditure
  of which: Interest
Corporations (%  of GDP)
Net lending (+) or net borrowing (-)

1995-
1999

2000-
2004

2005-
2009

2010

2011

2012

2013

2014

4.2
-1.6
4.8
7.3
16.6
18.8
15.6

-0.9
12.4
9.5
37.6
38.5
0.9

7.4
0.7
3.2
8.6
12.4
25.3
19.1

-1.9
13.9
8.9
33.9
35.9
0.8

2.0
3.4
8.4
0.5
9.9
29.9
20.5

-3.1
17.8
2.1
35.5
38.6
0.7

-0.9
-11.4
-1.2
-0.5
19.8
18.2
22.8

-8.1
44.4
-13.7
35.3
43.4
1.4

5.5
-5.7
4.2
11.3
16.2
21.3
23.0

-3.6
41.9
-14.8
34.9
38.4
1.5

5.6
-1.2
2.3
3.3
14.9
23.5
24.2

-1.2
40.7
n.a
35.2
36.4
1.3

3.8
0.6
1.4
4.4
13.7
24.3
24.5

-1.2
43.2
n.a
34.3
35.5
1.5

4.1
1.7
2.1
4.9
12.2
25.4
24.9

-0.9
40.1
n.a
33.8
34.7
1.6

-3.8

-5.4

-4.1

13.4

6.2

5.7

4.5

4.1

n.a
n.a
21.4
36.6

n.a
n.a
20.4
36.3

n.a
n.a
19.7
35.6

-81.6
-1.2
23.7
32.9

-91.3
0.3
23.4
30.3

-46.2
-5.2
18.4
23.6

-3.3
n.a
38.1
5.3
16.9
-1.1

-108.3
11.7
13.9
32.3

-103.8
11.3
19.2
32.5

-0.4
10.9
38.2
4.9
19.1
1.6

-1.0
28.2
33.9
7.1
16.6
0.3

-3.6
16.0
41.3
6.3
17.4
1.0

-0.2
34.4
33.9
11.8
18.3
1.2

-3.0
14.9
37.8
4.9
16.3
-1.0

Net financial assets; non-financial corporations
Net financial assets; financial corporations
Gross capital formation
Gross operating surplus
Households and NPISH (%  of GDP)
Net lending (+) or net borrowing (-)
Net financial assets
Gross wages and salaries
Net property income
Current transfers received
Gross saving
Rest of the world (%  of GDP)
Net lending (+) or net borrowing (-)
Net financial assets
Net exports of goods and services
Net primary income from the rest of the world
Net capital transactions 
Tradable sector
Non tradable sector
  of which: Building and construction sector
Real effective exchange rate (index, 2000=100)
Terms of trade goods and services (index, 2000=100)
Market performance of exports (index, 2000=100)
Notes:
1 The output gap constitutes the gap between the actual and potential gross domestic product at 2005 market prices.
2 The indicator on domestic demand includes stocks.
3  Unemployed persons are all persons who were not employed, had actively sought work and were ready to begin working immediately or within two weeks. 
The labour force is the total number of people employed and unemployed. The unemployment rate covers the age group 15-74.

4.9
101.5
-1.4
2.0
1.9
50.9
38.8
4.7
131.4
101.7
103.6

-0.2
94.5
-4.8
0.5
2.1
52.4
37.2
4.9
133.6
105.0
106.1

1.3
n.a
-3.3
0.0
3.0
52.6
36.8
5.5
131.8
103.7
110.5

-10.7
73.9
-14.3
-0.2
1.7
47.0
42.0
7.8
133.7
101.2
99.8

0.4
n.a
-4.5
0.0
3.0
n.a
n.a
n.a
132.0
103.7
113.8

0.9
n.a
-3.8
0.1
3.0
n.a
n.a
n.a
131.5
103.7
112.9

-7.5
40.2
-11.0
-0.4
0.6
52.0
37.7
5.8
95.5
97.8
88.6

-5.7
14.9
-7.6
0.3
0.1
53.2
35.2
5.0
90.6
96.3
93.0

-2.7
n.a
37.3
4.7
15.4
-0.2

-2.5
n.a
37.7
3.9
16.4
-0.1

Source :
Commission services’ 2013 spring forecasts (COM); Convergence programme (CP).

30 

 
 
 
 
 
Table II. Comparison of macroeconomic developments and forecasts 

Real GDP (% change)
Private consumption (% change)
Gross fixed capital formation (% change)
Exports of goods and services (% change)
Imports of goods and services (% change)
Contributions to real GDP growth:
- Final domestic demand
- Change in inventories
- Net exports
Output gap1
Employment (% change)
Unemployment rate (%)
Labour productivity (% change)
HICP inflation (%)
GDP deflator (% change)
Comp. of employees (per head, % change)
Net lending/borrowing vis-à-vis the rest of the 
world (% of GDP)

2012
COM CP
5.6
5.4
12.3
7.1
3.1

5.6
5.4
12.3
7.1
3.1

2013
COM CP
4.0
4.1
5.2
5.3
5.2

3.8
3.9
6.9
4.6
5.5

2014
COM CP
4.0
4.0
6.0
5.9
6.0

4.1
4.1
8.1
6.2
7.2

6.8
-3.2
2.0
-1.2
2.6
14.9
2.9
2.3
3.0
3.9
1.3

6.8
-3.2
2.0
-0.9
2.8
14.9
2.7
2.3
3.0
3.9
1.3

4.7
0.0
-0.9
0.6
1.9
13.7
1.9
1.4
1.9
3.1
0.9

4.3
0.0
-0.3
1.3
1.4
12.6
2.5
1.5
1.5
4.2
0.9

5.3
0.0
-1.2
1.7
2.2
12.2
1.9
2.1
2.2
3.8
0.4

4.5
0.0
-0.5
2.7
1.2
11.3
2.8
2.3
2.3
5.0
0.9

2015
CP
4.0
4.0
6.0
5.8
6.0

4.6
0.0
-0.6
3.8
1.3
9.9
2.7
2.2
2.2
4.9
-0.7

2016
CP
4.0
4.0
6.0
5.9
6.0

4.6
0.0
-0.6
4.5
1.3
8.7
2.6
2.0
2.0
4.7
-0.8

Note:
1In percent of potential GDP, with potential GDP growth recalculated by Commission services on the basis of the programme 
scenario using the commonly agreed methodology.

Source :

Commission services’ 2013 spring forecasts (COM); Convergence programme (CP).

31 

 
 
 
 
 
Table III. Composition of the budgetary adjustment 

(% of GDP)

Revenue

of which:

- Taxes on production and imports

- Current taxes on income, wealth, etc.

- Social contributions

- Other (residual)

Expenditure

of which:

- Primary expenditure

of which:

Compensation of employees

Intermediate consumption

Social payments

Subsidies

Gross fixed capital formation

Other (residual)

- Interest expenditure

General government balance (GGB)

Primary balance

One-off and other temporary measures

GGB excl. one-offs

Output gap

2

Cyclically-adjusted balance

2

3
Structural balance (SB)
Change in SB

Two year average change in SB 

Structural primary balance
Change in structural primary balance

3

Expenditure benchmark

Applicable reference rate

4

5,6

Deviation
Two-year average deviation (% GDP)

 (% GDP)

2012

2013

2014

2015

2016

COM COM

35.2

34.3

CP

35.2

1
COM

33.8

CP

33.8

CP

30.9

CP

31.2

11.6

11.4

11.4

11.5

11.2

11.0

10.8

7.7

8.6

7.4

7.5

8.1

7.3

7.6

8.2

8.0

7.1

8.1

7.0

7.1

8.1

7.4

6.7

7.7

5.5

6.6

7.5

6.3

36.4

35.5

36.3

34.7

34.7

31.9

32.0

35.1

34.0

34.8

33.1

33.1

30.4

30.6

9.1

6.8

10.3

0.8

3.9

4.3

1.3

-1.2

0.1

-0.5

-0.7

-1.2

-0.8

-0.3

1.3

1.3

1.0

-0.12

-0.8

-2.6

9.0

6.7

9.9

0.6

3.8

4.0

1.5

-1.2

0.3

0.0

-1.2

0.6

-1.4

-1.4

-1.0

0.1

0.1

-0.9

1.18

0.4

-0.2

8.7

5.9

10.4

0.7

3.5

5.5

1.5

-1.1

0.4

0.0

-1.1

1.3

-1.5

-1.5

-1.2

0.0

0.0

-1.0

1.18

0.9

-0.6

8.9

6.6

9.5

0.6

3.6

3.9

1.6

-0.9

0.6

0.0

-0.9

1.7

-1.5

-1.5

-0.1

-0.6

0.1

0.0

8.4

5.7

9.8

0.9

2.9

5.5

1.6

-0.9

0.8

0.0

-0.9

2.7

-1.7

-1.7

-0.2

-0.7

-0.1

-0.1

7.9

5.3

9.4

0.8

2.3

4.6

1.5

-0.9

0.6

0.0

-0.9

3.8

-2.1

-2.1

-0.3

-0.3

-0.6

-0.4

7.5

4.9

8.7

1.0

2.2

6.2

1.4

-0.9

0.6

0.0

-0.9

4.5

-2.3

-2.3

-0.2

-0.3

-0.9

-0.3

-0.05

-0.05

-0.05

-0.05

1.1

0.7

0.5

0.7

0.4

0.4

0.3

0.3

Change: 
2012-2016
CP

-4.0

-0.8

-1.1

-1.1

-1.1

-4.4

-4.5

-1.6

-1.9

-1.6

0.2

-1.7

1.9

0.1

0.3

0.5

0.5

-0.2

5.7

-1.5

-2.0

-

-

-1.9

-

-

-

-

Notes:

1On a no-policy-change basis.
2Output gap (in % of potential GDP) and cyclically-adjusted balance according to the programme as recalculated by Commission services on 
the basis of the programme scenario using the commonly agreed methodology.
3Structural (primary) balance = cyclically-adjusted (primary) balance excluding one-off and other temporary measures.
4 Reference medium-term rate of potential GDP growth. The (standard) reference rate applies from year t+1, if the country has reached its 
M TO in year t. A lower  rate applies as long as the country is adjusting towards its M TO, including in year t.The reference rates applicable 
to 2014 onwards have been updated in 2013. 
5 Deviation of the growth rate of public expenditure net of discretionary revenue measures and revenue increases mandated by law from the 
applicable reference rate. The expenditure aggregate used for the expenditure benchmark is obtained following the commonly agreed 
methodology. A positive sign implies that expenditure growth exceeds the applicable reference rate. 
6 The estimate of discretionary revenue measures in the Table 2c of the convergence programme of Latvia excludes the incremental impact of 
the systemic pension reform, whereas this impact is included in the Commission's estimate of discretionary revenue measures.

Source :

Convergence programme (CP); Commission services’ 2013 spring forecasts (COM); Commission services’ calculations.

32 

 
 
 
 
 
Table IV. Debt dynamics 

(% of GDP)

1
Gross debt ratio
Change in the ratio
Contributions 2 :

1. Primary balance

2. “Snow-ball” effect

Of which:

Interest expenditure

Growth effect

Inflation effect

3. Stock-flow adjustment

Of which:

Cash/accruals diff.

Acc. financial assets

Privatisation

Val. effect & residual

Gap to the debt benchmark
7
Structural adjustment
To be compared to:

5,6

Required adjustment

8

Notes:

Average
2007-2011

30.4

6.2

4.1

0.6

1.1

0.4

-0.9

1.5

2012

40.7

-1.2

-0.1

-2.0

1.3

-2.1

-1.1

1.0

2013

2014

COM

43.2

2.6

-0.3

-0.7

1.5

-1.5

-0.7

3.7

CP

44.5

3.8

-0.4

-0.6

1.5

-1.5

-0.6

4.9

COM

40.1

-3.1

-0.6

-1.0

1.6

-1.7

-0.9

-1.4

CP

41.0

-3.5

-0.8

-0.9

1.7

-1.7

-1.0

-1.7

2015
CP

36.4

-4.6

-0.6

-0.9

1.5

-1.5

-0.9

-3.1

2016
CP

34.6

-1.8

-0.6

-0.6

1.5

-1.4

-0.7

-0.6

2013

2014

2015

2016

2012

COM / 

3

CP
n.r.
n.r.

n.r.

n.r.
n.r.

n.r.

4

CP

n.r.
n.r.

COM / 

3

CP
n.r.
n.r.

4

CP

n.r.
n.r.

n.r.

n.r.

n.r.

CP

n.r.
n.r.

n.r.

CP

n.r.
n.r.

n.r.

1End of period.
2The snow-ball effect captures the impact of interest expenditure on accumulated debt, as well as the impact of real GDP growth 
and inflation on the debt ratio (through the denominator). The stock-flow adjustment includes differences in cash and accrual 
accounting, accumulation of financial assets and valuation and other residual effects. 

3 Assessment of the consolidation path set in CP assuming growth follows the COM  forecasts.
4Assessment of the consolidation path set in the CP assuming growth follows the CP projections.
5Not relevant for M ember Sates that were subject to an EDP procedure in November 2011 and for a period of three years 
following the correction of the excessive deficit.
6Shows the difference between the debt-to-GDP ratio and the debt benchmark. If positive, projected gross debt-to-GDP ratio 
does not comply with the debt reduction benchmark.
7Applicable only during the transition period of three years from the correction of the excessive deficit for EDP that were ongoing 
in November 2011.

8Defines the remaining annual structural adjustment over the transition period which ensures that - if followed – M ember State 
will comply with the debt reduction benchmark at the end of the transition period, assuming that COM  (SP) budgetary 
projections for the previous years are achieved.

Source :

Convergence programme (CP); Commission services’ spring 2013 forecasts (COM); Commission services’ calculations.

33 

 
 
 
 
 
 
Table V. Sustainability indicators 

S2

of which:

Initial budgetary position (IBP)

Long-term cost of ageing (CoA)

of which:

Pensions

Health care

Long-term care

Others

S1 (required adjustment)*

of which:

Initial budgetary position (IBP)

Debt requirement (DR)

Long-term cost of ageing (CoA)

S0 (risk for fiscal stress)**

Debt,  % of GDP (2012)

Age-related expenditure, % of GDP (2012)

LV

EU27

No-policy 
change 
scenario 

Programme 
(SCP) 
scenario

No-policy 
change 
scenario 

Programme 
(SCP) 
scenario

-1.0

0.9

-1.8

-1.8

0.4

0.2

-0.7

-3.0

-0.4

-1.2

-1.4

-0.1

1.3

-1.4

-1.3

0.4

0.2

-0.7

-2.5

0.8

-1.8

-1.5

3.0

0.8

2.2

1.0

0.9

0.6

-0.4

2.2

0.0

1.9

0.3

1.3

-0.9

2.2

1.1

0.8

0.6

-0.3

0.5

-1.8

1.9

0.4

0.24

40.7

17.6

:

87.0

25.8

Note: 
The 'No-policy change' scenario depicts the sustainability gap under the assumption that the budgetary position evolves 
according to the Commissions' spring 2013 forecast until 2014. The 'Programme (SCP)' scenario depicts the sustainability gap 
under the assumption that the budgetary plans in the programme are fully implemented.
* The required adjustment of the primary balance until 2020 to reach a public debt of 60% of GDP by 2030.              
** The critical threshold for the S0 indicator is 0.44. 

Source : 
Commission services; 2013 stability programme.                                                                                                                               

(% of GDP)
50

Gross debt as % of GDP - LV - Medium term debt projections

45

40

35

30

25

20

15

10

5

0

0
9
9
1

2
9
9
1

4
9
9
1

6
9
9
1

8
9
9
1

0
0
0
2

2
0
0
2

4
0
0
2

6
0
0
2

8
0
0
2

0
1
0
2

2
1
0
2

4
1
0
2

6
1
0
2

8
1
0
2

0
2
0
2

2
2
0
2

4
2
0
2

6
2
0
2

8
2
0
2

0
3
0
2

COM no-policy change scenario

COM + Shock ( -1p.p. in the short-term/long-term interest rate on maturing and new debt from 2015)

COM + Shock (+1p.p. in the short-term/long-term interest rate on maturing and new debt from 2015)

COM consolidation scenario (0.5% per year on SB) in order to achieve MTO

COM consolidation scenario (1% per year on SB) in order to achieve MTO

SCP scenario

34 

 
 
 
 
 
 
Table VI. Taxation indicators 

Total tax revenues (incl. actual compulsory social contributions, % of GDP)

28.6

30.6

29.2

26.6

27.2

27.6

2002

2006

2008

2009

2010

2011

Breakdown by economic function (% of GDP)1
     Consumption

              of which:

              - VAT

              - excise duties on tobacco and alcohol

             - energy

             - other (residual)

     Labour employed

     Labour non-employed

     Capital and business income

     Stocks of capital/wealth
     p.m.  Environmental taxes 2
3
VAT efficiency
     Actual VAT revenues as % of theoretical revenues at standard rate

Note: 

10.5

12.6

10.5

10.2

10.6

10.5

6.7

1.2

1.8

0.8

8.6

1.3

2.0

0.7

6.7

1.5

1.7

0.6

6.0

1.6

2.1

0.6

6.6

1.5

2.0

0.5

6.8

1.4

1.9

0.4

14.7

14.6

14.4

13.7

14.0

13.5

0.1

2.2

1.1

2.3

0.1

2.4

0.8

2.4

0.1

3.3

0.9

2.0

0.2

1.7

0.9

2.3

0.3

1.2

1.2

2.4

0.3

1.8

1.4

2.5

48.3

64.6

49.2

38.0

42.8

43.2

1 Tax revenues are broken down by economic function, i.e. according to whether taxes are raised on consumption, labour or capital. See European Commission 
(2013) Taxation trends in the European Union, for a more detailed explanation.

2 This category comprises taxes on energy, transport and pollution and resources included in taxes on consumption and capital.

3 The VAT efficiency is measured via the VAT revenue ratio. The VAT revenue ratio is defined as the ratio between the actual VAT revenue collected and the 
revenue that would theoretically be raised if VAT was applied at the standard rate to all final consumption. A low ratio can indicate a reduction of the tax base due 
to large exemptions or the application of reduced rates to a wide range of goods and services ('policy gap') or a failure to collect all tax due to e.g. fraud ('collection 
gap'). See European Commission (2012), Tax reforms in EU M ember States, European Economy 6/2012 and Taxation Papers 34/2012 for a more detailed 
explanation.

Source: Commission

35 

 
 
 
 
 
Table VII. Financial market indicators 

2008

2009

2010

2011

2012

Total assets of the banking sector (% of GDP)

140.2

161.8

168.5

146.0

129.5

Share of assets of the five largest banks (% of total assets)

Foreign ownership of banking system (% of total assets)
Financial soundness indicators:
              - non-performing loans (% of total loans)1)
              - capital adequacy ratio (%) 1)
              - return on equity (%) 1), 2)
Bank loans to the private sector (year-on-year % change)

Lending for house purchase (year-on-year % change)

Loan to deposit ratio

CB liquidity as % of liabilities

Banks' exposure to countries receiving official financial assistance  (% of GDP)

Private debt (% of GDP)
Gross external debt (% of GDP)3)
            - Public
            - Private

Long term interest rates spread versus Bund (basis points)*

Credit default swap spreads for sovereign securities (5-year)*
Notes: 

70.2

68.3

2.1
11.0

2.9

9.8

4.8

69.3

69.2

14.3
13.7

60.4

…

15.9
13.9

-50.6

-19.7

-6.8

-4.0

-6.7

-4.1

59.6

…

13.9
16.5

5.1

-4.9

-5.1

…

…

9.6
16.7

22.2

-1.0

-4.4

278.4

254.7

225.3

201.2

173.8

3.0

…

0.7

…

0.0

…

89.5

103.1

98.8

8.7
38.6

2.4

25.5
47.7

9.1

32.4
45.7

7.6

0.0

…

80.8

31.9
44.4

3.3

0.0

…

…

31.3
41.9

3.1

790.1

703.6

358.8

235.6

213.9

1) Latest data (September 2012).
2) After extraordinary items and taxes.
3) Latest data 2012Q3.
* M easured in basis points.

Source :

Bank for International Settlements and Eurostat (exposure to macro-financially vulnerable countries), IMF (financial soundness indicators), 
Commission (long-term interest rates), World Bank (gross external debt) and ECB (all other indicators).

36 

 
 
 
 
 
 
Table VIII. Labour market and social indicators 

Labour market indicators
Employment rate
(% of population aged 20-64)
Employment growth 
(% change from previous year)
Employment rate of women
(% of female population aged 20-64)
Employment rate of men 
(% of male population aged 20-64)
Employment rate of older workers 
(% of population aged 55-64)
Part-time employment (% of total employment, 
15 years and more)
Part-time employment of women  (% of women employment, 15 
years and more)
Part-time employment of men  (% of men employment, 15 years 
and more)
Fixed term employment (% of employees with a fixed term 
contract, 15 years and more)
Transitions from temporary 
to permanent employment
Unemployment rate1 (% of labour force, 
age group 15-74)
Long-term unemployment rate2 (% of labour force)
Youth unemployment rate 
(% of youth labour force aged 15-24)
Youth NEET rate (% of population aged 15-24)

Early leavers from education and training (% of pop. 18-24 with at 
most lower sec. educ. and not in further education or training)

Tertiary educational attainment (% of population 30-34 having 
successfully completed tertiary education)
Formal childcare (from 1 to 29 hours; % over the population less 
than 3 years)
Formal childcare (30 hours or over; % over the population less 
than 3 year)
Labour productivity per person employed (annual % change)

Hours worked per person employed  (annual % change)
Labour productivity per hour worked (annual % change; constant 
prices)
Compensation per employee (annual % change; constant prices)

Nominal unit labour cost growth (annual % change)

Real unit labour cost growth (annual % change)

2007

2008

2009

2010

2011

2012

75.2

75.8

67.1

65.0

66.3

68.2

0.9

-13.2

3.6

70.7

80.1

57.7

6.4

8.0

4.9

4.2

2.5

6.5

1.7

11.9

11.8

15.1

-4.8

64.9

65.1

48.2

9.7

-8.1

65.3

67.5

50.5

9.2

2.6

66.4

70.2

52.8

9.4

66.8

67.4

53.2

8.9

10.2

11.4

10.9

11.6

7.5

4.3

1.1

18.2

4.9

36.2

17.4

13.9

7.8

6.8

1.9

19.8

8.9

37.2

17.8

13.3

7.3

6.6

2.7

16.2

8.8

31.0

16.0

11.6

7.1

4.7

:

14.9

7.8

28.4

14.9

10.5

72.1

79.7

59.4

6.3

8.1

4.5

3.3

1.3

8.0

2.1

14.5

11.4

15.5

25.6

27.0

30.1

32.3

35.9

37.0

2.0

14.0

5.8

-1.3

7.2

11.9

27.7

5.8

2.0

12.0

-4.2

-4.3

0.1

2.4

20.7

6.9

2.0

13.0

-5.3

-2.9

-2.4

-11.6

-7.9

-6.7

1.0

15.0

4.0

-0.8

4.8

-5.6

-10.4

-9.2

1.0

14.0

14.8

0.9

13.8

14.2

2.1

-3.6

:

:

2.9

-0.8

3.8

0.6

2.8

-0.2

Notes:
1 Unemployed persons are all persons who were not employed, had actively sought work and were ready to begin working immediately or within 
two weeks. The labour force is the total number of people employed and unemployed.

2 Long-term unemployed are unemployed persons for at least 12 months.

Sources: 
Commission (EU Labour Force Survey and European National Accounts) 

37 

 
 
 
 
 
Expenditure on social protection benefits (% of 
GDP)
Sickness/Health care

Invalidity

Old age and survivors

Family/Children

Unemployment

Housing and Social exclusion n.e.c.

Total

of which:  means tested benefits
Social inclusion indicators
At-risk-of-poverty or social exclusion1 
(% of total population)
At-risk-of-poverty or social exclusion of children 
(% of people aged 0-17)
At-risk-of-poverty or social exclusion of elderly 
(% of people aged 65+)
At-Risk-of-Poverty rate2 (% of total population)
Severe Material Deprivation3  (% of total population)
Share of people living in low work intensity households 4 (% of 
people aged 0-59)
In-work at-risk-of poverty rate (% of persons employed)
Impact of social transfers (excluding pensions) on reducing 
poverty
Poverty thresholds, expressed in national currency at constant 
prices5
Gross disposable income (households)
Relative median poverty risk gap (60% of median equivalised 
income, age: total)

Notes:

2006

2007

2008

2009

2010

3.77

0.87

5.77

1.21

0.52

0.10

12.36

0.19

3.39

0.74

5.03

1.17

0.41

0.13

10.98

0.19

3.68

0.92

5.69

1.39

0.51

0.17

12.47

0.25

3.92

1.30

7.88

1.73

1.59

0.13

16.69

0.32

3.66

1.35

9.42

1.49

1.31

0.14

17.60

0.00

2007

2008

2009

2010

2011

36.0

33.9

50.3

21.2

24.9

6.1

9.7

22.1

1400

8555

24.6

33.8

33.2

58.1

25.6

19.0

5.1

11.0

15.2

1844

10338

28.6

37.4

38.0

55.5

25.7

21.9

6.7

11.2

15.2

1819

8690

28.9

38.1

42.0

37.7

21.3

27.4

12.2

9.7

26.8

1466

8143

29.4

40.4

44.6

32.9

19.1

31.4

12.6

9.4

30.0

1364

8678

31.8

1 People at-risk-of poverty or social exclusion (AROPE): individuals who are at-risk-of poverty (AROP) and/or suffering from severe 
material deprivation (SM D) and/or living in household with zero or very low work intensity (LWI).
2 At-risk-of poverty rate (AROP): share of people with an equivalised disposable income below 60% of the national equivalised median 
income. 
3 Share of people who experience at least 4 out of 9 deprivations: people cannot afford to i) pay their rent or utility bills, ii) keep their 
home adequately warm, iii) face unexpected expenses, iv) eat meat, fish, or a protein equivalent every second day, v) enjoy a week of 
holiday away from home once a year, vi) have a car, vii) have a washing machine, viii) have a colour tv, or ix) have a telephone.
4 People living in households with very low work intensity: share of people aged 0-59 living in households where the adults (excluding 
dependent children) work less than 20% of their total work-time potential during the previous 12 months.

5 For EE, CY, M T, SI, SK, thresholds in nominal values in Euros; HICP -  index 100 in 2006 (2007 survey refers to 2006 incomes)

Sources: 
For expenditure for social protection benefits ESSPROS; for social inclusion EU-SILC.

38 

 
 
 
 
 
Table IX. Product market performance and policy indicators 

Performance indicators

Labour productivity1 total economy (annual 
growth in %)
Labour productivity1 in manufacturing (annual 
growth in %)
Labour productivity1 in electricity, gas, steam and 
air conditioning supply (annual growth in %)
Labour productivity1 in the construction sector 
(annual growth in %)
Total number of patent2 applications per million of 
labour force

Policy indicators

Enforcing contracts 3 (days)
Time to start a business 3 (days)
R&D expenditure (% of GDP)
Tertiary educational attainment 
(% of 30-34 years old population)
Total public expenditure on education 
(% of GDP)

Product market regulation4, Overall
(Index; 0=not regulated; 6=most regulated)
Product market regulation4, Retail
(Index; 0=not regulated; 6=most regulated)
Product market regulation4, Network Industries 5
(Index; 0=not regulated; 6=most regulated)

2003-
2007

6.9

5.9

9.3

3.9

2008

2009

2010

2011

2012

-4.2

-5.3

4.0

14.8

-5.8

-22.8

1.3

3.2

18.2

24.3

13.0

3.9

n.a.

-5.1

11.0

-14.5

19.6

10.1

2.9

5.0

12.1

18.8

20.3

22.8

n.a.

n.a.

2003-
2007
280

16

0.5

2008

2009

2010

2011

2012

279

16

0.6

309

16

0.5

309

16

0.6

369

16

0.7

469

16

n.a.

20.0

27.0

30.1

32.3

35.9

36.5

5.12

5.75

5.64

5.01

n.a.

n.a.

2007

2008

2009

2010

2011

2012

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

Notes:
1 Labour productivity is defined as gross value added (in constant prices) divided by the number of persons employed.
2 Total number of patent applications to the European Patent Office (EPO) per million of labour force

3 The methodologies, including the assumptions, for this indicator are presented in detail on the website 
http://www.doingbusiness.org/methodology. 

4 The methodologies of the product market regulation indicators are presented in detail on the website 
http://www.oecd.org/document/1/0,3746,en_2649_34323_2367297_1_1_1_1,00.html. The latest available product market 
regulation indicators refer to 2003 and 2008, except for Network Industries.
5 Aggregate Energy, Transport and Communications Regulation (ETCR).
*figure for 2007.

Source :
Commission, World Bank - Doing Business  (for enforcing contracts and time to start a business) and OECD (for the 
product market regulation indicators). 

39 

 
 
 
 
 
 
Table X. Green Growth  

Green Growth performance

Macroeconomic
Energy intensity 
Carbon intensity 
Resource intensity (reciprocal of resource productivity)
Waste intensity 
Energy balance of trade 
Energy weight in HICP
Difference between change energy price and inflation 
Environmental taxes over labour taxes
Environmental taxes over total taxes

Sectoral 

Industry energy intensity 
Share of energy-intensive industries in the economy
Electricity prices for medium-sized industrial users**
Gas prices for medium-sized industrial users***
Public R&D for energy 
Public R&D for the environment
Recycling rate of municipal waste
Share of GHG emissions covered by ETS*
Transport energy intensity
Transport carbon intensity
Security of energy supply
Energy import dependency
Diversification of oil import sources 
Diversification of energy mix
Share renewable energy in energy mix

kgoe / €
kg / €
kg / €
kg / €
% GDP
%
%
ratio
ratio

kgoe / € 
% GDP
€ / kWh
€ / kWh
% GDP
% GDP
ratio
%
kgoe / €
kg / €

%
HHI
HHI
%

2002-
2006

0.38
0.97
3.44
n.a.
-4.7%
n.a.
n.a.
17.2%
8.6%

0.40
6.6
n.a.
n.a.
n.a.
n.a.
4.3%
n.a.
n.a.
n.a.

n.a.
n.a.
n.a.
n.a.

2007

2008

2009

2010

2011

0.31
0.80
3.23
n.a.
-4.6%
11
3.5
14.3%
6.9%

0.38
6.1
0.06
0.03
0.02%
0.01%
5.3%
23.6%
0.74
2.10

61.5%
0.31
0.29
29.6%

0.31
0.79
2.81
0.10
-5.9%
11
20.4
13.8%
6.8%

0.37
6.8
0.07
0.03
0.01%
0.01%
6.8%
23.7%
0.70
1.97

57.9%
0.31
0.29
30.0%

0.36
0.90
2.64
n.a.
-4.5%
12
6.9
16.5%
8.6%

0.43
7.1
0.09
0.03
0.02%
0.02%
7.8%
22.9%
0.74
2.03

58.8%
0.25
0.30
36.2%

0.38
1.00
n.a.
0.12
-4.8%
14
0.6
16.7%
8.8%

0.45
n.a.
0.09
0.03
0.01%
0.01%
9.4%
26.9%
n.a.
n.a.

41.6%
0.17
0.31
34.6%

0.33
n.a.
n.a.
n.a.
-5.4%
16
6.9
n.a.
n.a.

n.a.
n.a.
0.10
0.03
0.01%
0.01%
n.a.
25.4%
n.a.
n.a.

59.0%
n.a.
0.29
33.8%

Country-specific notes: 
The year 2012 is not included in the table due to lack of data.
General explanation of the table items:
Source: Eurostat unless indicated otherwise; ECFIN elaborations indicated below
All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2000 prices)
          Energy intensity: gross inland energy consumption (in kgoe) divided by GDP (in EUR)
          Carbon intensity: Greenhouse gas emissions (in kg CO2 equivalents) divided by GDP (in EUR)
          Resource intensity: Domestic M aterial Consumption (in kg) divided by GDP (in EUR)
          Waste intensity: waste (in kg) divided by GDP (in EUR)
Energy balance of trade: the balance of energy exports and imports, expressed as % of GDP  
Energy weight in HICP: the share of the "energy" items in the consumption basket used in the construction of the HICP
Difference between energy price change and inflation: energy component of HICP, and total HICP inflation (annual %-change)
Environmental taxes over labour or total taxes: from DG TAXUD's database "Taxation trends in the European Union"
Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (in 2005 EUR) 
Share of energy-intensive industries in the economy: share of gross value added of the energy-intensive industries in GDP
Electricity and gas prices medium industrial users: consumption band 500  - 2000M Wh and 10000 - 100000 GJ;  figures excl. VAT.
Recycling rate of municipal waste: ratio of municipal waste recycled over total municipal waste
Public R&D for energy or for the environment: government spending on R&D (GBAORD) for these categories as % of GDP
Share of GHG emissions covered by ETS: based on greenhouse gas emissions as reported by M ember States to EEA (excl LULUCF)
Transport energy intensity: final energy consumption of transport activity (kgoe) divided by transp industry gross value added (2005 EUR)
Transport carbon intensity:  greenhouse gas emissions in transport activity divided by gross value added of the transport sector
Energy import dependency: net energy imports divided by gross inland energy consumption incl. energy consumption international bunkers

Diversification of oil import sources: Herfindahl index (HHI), calculated as the sum of the squared market shares of countries of origin 

Diversification of the energy mix: Herfindahl Index over natural gas, total petrol products, nuclear heat, renewable energies and solid fuels

Share renewable energy in energy mix: %-share in  gross inland energy consumption, expressed in tonne oil equivalents

*Provisional data (15 April 213). Commission Services and EEA.

** For 2007 average of S1 & S2 for DE, LU, NL, FI, SE & UK. Other countries only have S2.

*** For 2007 average of S1 & S2 for IT, NL, FI, SE & UK. Other countries only have S2.

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