Recommendation for a COUNCIL RECOMMENDATION on Latvia’s 2014 national reform programme and delivering a Council opinion on Latvia’s 2014 stability programme
Date: 2014-06-02
Institutions: European Commission
Subjects: Latvia, budgetary control, competitiveness, economic convergence, economic growth, economic reform, economic stabilisation, public debt, social situation, stability programme













EUR-Lex - 52014DC0415 - EN











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52014DC0415

Recommendation for a COUNCIL RECOMMENDATION on Latvia’s 2014 national reform programme and delivering a Council opinion on Latvia’s 2014 stability programme /* COM/2014/0415 final  - 2014/ () */









 
Recommendation for a
COUNCIL RECOMMENDATION
on Latvia’s 2014 national reform programme
and delivering a Council opinion on Latvia’s 2014 stability programme
THE COUNCIL OF THE EUROPEAN UNION,
Having regard to the Treaty on the
Functioning of the European Union, and in particular Articles 121(2) and 148(4)
thereof,
Having regard to Council Regulation (EC) No
1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary
positions and the surveillance and coordination of economic policies[1], and in particular
Article 5(2) thereof,
Having regard to the recommendation of the
European Commission[2],
Having regard to the resolutions of the
European Parliament[3],
Having regard to the conclusions of the
European Council,
Having regard to the opinion of the
Employment Committee,
Having regard to the opinion of the
Economic and Financial Committee,
Having regard to the opinion of the Social
Protection Committee,
Having regard to the opinion of the
Economic Policy Committee,
Whereas:
(1)                   
On 26 March 2010, the European Council agreed to
the Commission’s proposal to launch a new strategy for growth and jobs, Europe
2020, based on enhanced coordination of economic policies, which will focus on
the key areas where action is needed to boost Europe’s potential for
sustainable growth and competitiveness.
(2)                   
On 13 July 2010, the Council, on the basis of
the Commission's proposals, adopted a recommendation on the broad guidelines
for the economic policies of the Member States and the Union (2010 to 2014)
and, on 21 October 2010, adopted a decision on guidelines for the employment
policies of the Member States, which together form the ‘integrated guidelines’.
Member States were invited to take the integrated guidelines into account in
their national economic and employment policies.
(3)                   
On 29 June 2012, the Heads of State or
Government decided on a Compact for Growth and Jobs, providing a coherent
framework for action at national, EU and euro area levels using all possible
levers, instruments and policies. They decided on action to be taken at the
level of the Member States, in particular expressing full commitment to achieving
the objectives of the Europe 2020 Strategy and to implementing the
country-specific recommendations.
(4)                   
On 9 July 2013, the Council adopted a
recommendation on Latvia's national reform programme for 2013 and delivered its
opinion on Latvia's updated convergence programme for 2012-2016.
(5)                   
On 13 November 2013, the Commission adopted the
Annual Growth Survey[4],
marking the start of the 2014 European Semester of economic policy
coordination. On the same day on the basis of Regulation (EU) No 1176/2011, the
Commission adopted the Alert Mechanism Report[5],
in which it did not identify Latvia as one of the Member States for which
an in-depth review would be carried out. 
(6)                   
On 20 December 2013, the European Council
endorsed the priorities for ensuring financial stability, fiscal consolidation
and action to foster growth. It underscored the need to pursue differentiated,
growth-friendly fiscal consolidation, to restore normal lending conditions to
the economy, to promote growth and competitiveness, to tackle unemployment and
the social consequences of the crisis, and to modernise public administration.
(7)                   
On 29 April 2014, Latvia submitted its 2014 national
reform programme and on 30 April 2014 its 2014 stability programme. In order to
take account of their interlinkages, the two programmes have been assessed at
the same time.
(8)                   
The objective of the budgetary strategy outlined
in the 2014 Stability Programme is to gradually reduce the headline deficit and
to maintain a structural balance which is consistent with the medium-term objective
when taking into account the allowed temporary deviation from the medium-term
objective due to the impact of the systemic pension reform. The programme has
changed the medium-term objective from -0.5% to -1.0%; the new medium-term
objective reflects the objectives of the Stability and Growth Pact. The planned
path of the headline balance in Latvia's programme implies a gradual
deterioration of the (recalculated) structural balance, although still within
the margin allowed by the implementation of the pension reform. Taking into
account the allowed deviation from the medium-term objective, the planned
structural deficit is in line with the requirement of the Pact until 2016.
However, the planned increase in the recalculated structural deficit in 2017
leads to a deviation from the required adjustment path towards the medium-term
objective. Overall, the budgetary strategy outlined in the programme is mostly
in line with the requirements of the Stability and Growth Pact. Government debt
is set to remain well below 60% of GDP over the whole programme period,
declining to 31% of GDP by 2017. The macroeconomic scenario underpinning the
budgetary projections in the programme, which has not been formally endorsed by
an independent institution, is plausible. Economic growth is expected to remain
around 4% per year over the programme period, and projected price increases are
moderate. The programme's budgetary scenario envisages a steep decline in the
share of government's revenue and expenditure in GDP, reflecting several
revenue-reducing measures against targeted expenditure restraint. Increasing
spending demands in several policy fields represent a risk to the projected
expenditure reductions in the programme. The Commission 2014 spring forecast
shows that while fiscal policy in 2014 is in line with the requirement of the
Pact, there is a risk of a deviation in 2015. Based on its assessment of the
programme and the Commission Forecast, pursuant to Council Regulation (EC) No
1466/97, the Council is of the opinion that in 2014 the deviation of the
structural deficit from the medium-term objective reflects the impact of the
systemic pension reform, while as of 2015 there is a risk of a deviation from
the required adjustment path.
(9)                   
Latvia has taken steps to lower the tax burden
for low-income earners and families with dependants and to strengthen property
and environmental taxation, but the level and design of these taxes does not
sufficiently affect the behaviour of economic operators, and some
environmentally harmful subsidies remain in place. While the authorities have
made some progress in improving tax compliance and reducing the proportion of
undeclared economic activity, notably by improving risk assessment and
tightening sanctions against fraudulent behaviour, challenges in the fight
against tax fraud and evasion remain. In particular, despite representing a
significant proportion of total taxation, revenue from consumption taxes has
ample potential for further increase if tax compliance is improved. 
(10)               
Despite an originally ambitious plan to reform
higher education, Latvia has made no progress in setting up an internationally
approved accreditation system, plans to introduce a new financing model are
uncertain, consolidation of higher education institutes has been weakened and
restrictions on the use of foreign languages remain unchanged. This is despite
the fact that there is significant room for reforming the higher education
system, which is too large in view of the declining population, offers too many
distinct study programmes and has a limited attraction for foreign students and
teaching staff. The results of the first independent assessment of research
institutions shows that only 10% of those evaluated can be considered as high-level
international research centres. Moreover, Latvia had an R&D intensity of
only 0.66% of GDP in 2012 and is not on track to achieve its Europe 2020
objective of devoting 1.5% of GDP to R&D.
(11)               
Latvia has made progress in tackling
unemployment, which has fallen considerably. However, youth
unemployment is still relatively high and there is a need for outreach measures
to non-registered inactive youth. Although Latvia has taken measures to address
skills mismatches and the quality of vocational education, these still require
attention, notably in improving the quality of apprenticeships and in
developing comprehensive career guidance. Active labour market policies are
still limited in scope and over rely on public works.
(12)               
Working age poverty remains very high in Latvia.
Latvia has taken some steps to reform social assistance and has completed a
large-scale assessment of the social security system providing a solid basis
for an evidence-based reform. It has significantly increased various child-related
benefits, and raised the non-taxable thresholds in personal income tax for
dependants. However, the effectiveness of social protection in terms of poverty
reduction remains poor and designing an effective social safety net remains a
challenge. Overall, a high proportion of population is at risk of poverty or
social exclusion, and such proportion is even higher for children. Families
with children, the unemployed, people with disabilities and people living in
rural areas are at a particularly high risk of poverty and social exclusion. Latvia's
spending on social protection as a percentage of GDP is the lowest in the EU. Access
to healthcare is hampered by costs, including high out-of-pocket payments and
prevalent informal payments, leaving a high proportion of the population with
unmet health-care needs. There is significant room to enhance the efficiency of
the system, ensure cost-effective financing and promote disease-prevention
activities. 
(13)               
Latvia has made some progress in opening its
electricity market to competition and this will be extended to the household
sector in early 2015. Latvia joined the regional Scandinavian-Baltic Nord Pool
Spot market for electricity contracting in June 2013. Further reinforcement of
interconnections with the EU energy market is needed, as Latvia is currently
import-dependent and the cross-border electricity connection with Estonia is
mostly congested. Development of infrastructure is therefore essential and Latvia
faces considerable challenges in closing infrastructure gaps. Some progress was also achieved in the natural
gas sector as the Parliament approved amendments to the Energy law, defining
gradual opening up of the gas market from April 2014; however, the full market
opening was postponed until 2017. Latvia has put forward a balanced mix of
policy measures addressing energy savings for the main sectors of the economy
and in coming years more than 70% of energy savings will be generated in the
buildings sector. However, efficiency in transport, buildings and heating
systems still needs to be improved. 
(14)               
Latvia has taken significant action to improve
capacities in the judiciary to reduce the backlog and length of proceedings.
However, the high judicial backlog still poses a threat to business and reforms
to improve the efficiency and quality of the judiciary need to be completed,
including as regards insolvency, mediation and arbitration. Latvia has proposed
ambitious public administration reforms; however their implementation is slow
and not applied to local governments and the reform of state-owned enterprises
has been significantly delayed. Amendments to the
Competition Law are needed to give the Competition Council greater institutional
and financial independence to intervene effectively against actions of public
and private bodies restricting competition.
(15)               
In the context of the European Semester, the
Commission has carried out a comprehensive analysis of Latvia’s economic
policy. It has assessed the stability programme and the national reform
programme. It has taken into account not only their relevance for sustainable
fiscal and socio-economic policy in Latvia but also their compliance with EU
rules and guidance, given the need to reinforce the overall economic governance
of the European Union by providing EU-level input into future national
decisions. Its recommendations under the European Semester are
reflected in recommendations (1) to (5) below.
(16)               
In the light of this assessment, the Council has
examined Latvia’s stability programme, and its opinion[6] is reflected in
particular in recommendation (1) below.
(17)               
In the context of the European Semester the
Commission has also carried out an analysis of the economic policy of the euro
area as a whole. On the basis of this analysis the Council has issued specific recommendations
for the Member States whose currency is the euro. Latvia should also ensure the
full and timely implementation of these recommendations.
HEREBY RECOMMENDS that Latvia take
action within the period 2014-2015 to:
1.                      
Preserve a sound fiscal position in 2014 and
strengthen the budgetary strategy as of 2015, ensuring that the deviation from
the medium-term objective remains limited to the impact of the systemic pension
reform. Pursue efforts to further reduce the tax burden on low-income earners in
the context of a shift towards more growth-friendly property and environmental
taxes and by improving tax compliance and collection.
2.                      
Step up implementation of the higher education
reform, in particular through the establishment of an independent accreditation
agency and a financing model that rewards quality. Provide career guidance at
all education levels, improve the quality of vocational education and training,
including by strengthening apprenticeship, and make progress in employability
of young people including by putting in place outreach measures for
non-registered youth not in employment education or training. Take steps for a
more integrated and comprehensive research system also by concentrating
financing towards internationally competitive research institutions.
3.                      
Reform social assistance and its financing
further to ensure better coverage, adequacy of benefits, strengthened
activation and targeted social services. Increase coverage of active labour
market policies. Improve the cost-effectiveness, quality and accessibility of
the health care system.
4.                      
Accelerate the development of gas and
electricity interconnections to neighbouring Member States to diversify energy
sources and promote competition through improved integration of the Baltic
energy markets. Pursue efforts to further increase energy efficiency in
transport, buildings and heating systems. 
5.                      
Complete judicial reforms including the pending
reforms of insolvency, arbitration and mediation frameworks to ensure a more
business- and consumer- friendly legal environment. Step up public
administration reforms, including by implementing state-owned enterprise
management reform and increasing institutional and financial independence of
the Competition Council.
Done at Brussels,
                                                                       For
the Council
                                                                       The
President
[1]               OJ L 209, 2.8.1997, p. 1.
[2]               COM(2014) 415 final.
[3]               P7_TA(2014)0128 and P7_TA(2014)0129.
[4]               COM(2013) 800 final.
[5]               COM(2013) 790 final.
[6]               Under Article 5(2) of Council Regulation (EC) No
1466/97.