COMMISSION STAFF WORKING DOCUMENT Assessment of the 2014 national reform programme and stability programme for LATVIA Accompanying the document 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, budget deficit, competitiveness, economic disparity, economic growth, economic reform, economic stabilisation, job creation, macroeconomics, social situation, stability programme













EUR-Lex - 52014SC0415 - EN











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52014SC0415

COMMISSION STAFF WORKING DOCUMENT Assessment of the 2014 national reform programme and stability programme for LATVIA Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on Latvia’s 2014 national reform programme and delivering a Council opinion on Latvia’s 2014 stability programme /* SWD/2014/0415 final */









Contents
Executive summary. 2
1............ Introduction. 5
2............ Economic situation and outlook. 5
3............ Challenges and assessment of policy
agenda. 7
3.1......... Fiscal policy and taxation. 7
3.2......... Financial sector 14
3.3......... Labour market, education and social
policies. 14
3.4......... Structural measures promoting sustainable
growth and competitiveness. 17
3.5......... Modernisation of public administration. 22
4............ Conclusions. 24
Overview table. 26
Annex….. 30
Executive summary
Latvia remains among the fastest growing
economies in the EU. It has a sound macroeconomic and fiscal basis, but it is
vulnerable to external risks. Latvia’s economy grew by 4.1% in 2013 and is forecast to grow by 3.8% in 2014. The
unemployment rate is forecast to drop to 10.7% in 2014 from 11.9% in 2013. Nominal
budget deficits are projected to remain around 1% of GDP in 2014-15, despite
several income tax cuts planned, while debt is expected to remain below 40%. 
Overall,
  Latvia has made some progress in addressing the 2013 country-specific
recommendations. As regards fiscal policies, some
progress was made in reducing taxation of low-income earners, in shifting
taxation to other tax bases including environmental taxes and in strengthening
the fiscal framework. Substantial progress has been made in addressing vulnerabilities
in the financial sector, in particular through implementing additional
macro-prudential measures to supervise non-resident banking. Latvia has made some progress in addressing the recommendation on tackling long-term and
youth unemployment and implementing reforms in the field of vocational education
and training, including by developing the Youth Guarantee plan and improving
the quality and accessibility of work-based training. There has been some
progress in reforming social assistance and tackling child poverty; in
particular various child-related benefits were increased and other support
measures implemented. There was no progress in higher education and science, but
some progress was made as regards energy efficiency measures, gas market
opening and improving the quality of the judicial system.
In the
medium to long term, Latvia faces a number of challenges, in particular to
improve the quality of higher education and science output, reform social
assistance, build energy links to EU networks and further improve 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. The national reform programme submitted by Latvia addresses most of the challenges identified in this staff working document, however,
planned measures are sometimes unspecified and rather unambitious, in
particular as regards further measures to address poverty and social exclusion
and higher education and science reforms.
•        
Labour market: Unemployment
has decreased but remains at high levels: e.g., the proportion of long-term
unemployed remains high at around 50% of all job seekers. There are concerns
that vocational education and training is inadequate to provide sufficient and
appropriate skills for the workforce and the availability of quality work-based
learning and training is insufficient. Limited progress has been made to
establish comprehensive career guidance and counselling system.
•        
Poverty: Some 35%
of the population is at risk of poverty or social exclusion and inequality as
well as working age poverty remains high. Unemployed people and families with
children are particularly vulnerable, as social benefits are not sufficiently targeted.
Designing an effective social safety net including social assistance remains a
challenge. The cost of healthcare presents a challenge to fair access — not
only for the lowest income quintile, but also for the second lowest.
•        
Higher education and research: Latvia’s challenge is to implement ambitious and credible higher
education reforms — reforming the accreditation system, introducing a quality-rewarding
financing model, consolidating study programmes and institutions, etc. — and to
rationalise and modernise research activities in line with the objectives of
the European Research Area and the international assessment of research
institutes. Latvia’s business R&D intensity is one of the lowest in the EU,
making specialisation in innovation-driven sectors a challenge.
•        
Energy: Electricity
connections with Estonia are inadequate and challenges remain to ensure the
smooth functioning of the regional electricity market. Crucial gas-market
issues, including the renegotiation of the Incukalns gas storage contract and
completing the regional LNG terminal project, need to be addressed together
with neighbouring Lithuania and Estonia. Latvia’s energy and carbon intensity
is significantly higher than the EU average, particularly in household and
transport sectors; continuing ambitious energy efficiency projects in multi-storey
buildings and heating systems will be important.
•        
Judiciary and public administration: The efficiency and quality of the judicial system remains a
weakness, though positive steps have been taken. Lengthy civil and commercial
case proceedings in lower courts and rather low clearance rates have led to a
significant backlog of court cases. Court decisions often take years, and there
are loopholes in the application of insolvency law. In the public
administration, reforms related to improving incentives within a unified wage
grid, common standards for hiring senior staff, developing a comprehensive
training strategy and career development have been slow and inadequate.

1.        
Introduction  

In May 2013, the Commission proposed a
set of country-specific recommendations (CSRs) for economic and structural
reform policies for 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 2013. These CSRs concerned public finances and taxation,
financial sector stability, labour market, social assistance, higher education
and research, energy efficiency and connectivity, and judicial reforms. 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 2014 (AGS)[1] and
the third annual Alert Mechanism Report (AMR),[2]
which were published in November 2013. The AGS sets out the Commission’s
proposals for building the necessary common understanding about the priorities
for action at national and EU level in 2014. 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 ascertain 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, 16 Member States
were selected for a review of developments in the accumulation and unwinding of
imbalances. These in-depth reviews were published on 5 March 2014 along with a
Commission communication.[3]
Against
the background of the 2013 Council Recommendations, the AGS, and the AMR, Latvia presented a national reform programme (NRP) and a stability programme on 29 April 2014.
These programmes provide detailed information on the progress made since July
2013 and on the government’s plans. The information contained in these
programmes provides the basis for the assessment made in this staff working
document. The programmes submitted went through an inclusive consultation
process involving the national parliament, local and regional authorities and
other stakeholders.

2.        
Economic situation
and outlook

Economic
situation
In 2013 and early 2014, growth and
employment in Latvia remained strong despite the challenging external
environment and continuous deleveraging. Latvia’s economy grew by 4.1% in 2013
and 2.8% y-o-y in the first quarter of 2014, slowing from 5.2% in 2012. Private
and public consumption as well as net exports supported the overall economic
growth, but declines in investment and in inventories were a drag on growth. On
the supply side, services and construction were the main growth drivers, while
industrial production was adversely affected by a suspension of operations at
the largest metallurgical plant in Liepaja. Consequently, export performance
relative to growth in trading partners deteriorated in gross terms, but net
exports improved. The country’s external sustainability indicators also improved
as the current-account deficit fell from 2.5% of GDP in 2012 to 0.8% in 2013.
Economic growth was accompanied by a
solid improvement in the labour market. Unemployment fell to 11.9% in 2013 from
15% in 2012 and youth unemployment went down from 28.4% to 23.2% over the same
period. Long-term unemployment as a percentage of the active population also started
falling and reached 5.2%, around the EU average of 5.1% (third quarter 2013).
Despite increases in employment and wages, HICP inflation was close to zero in
2013, mainly due to falling energy prices, which offset the gradual increase in
core inflation.
Economic
outlook
According to the Commission 2014 spring
forecast, growth is projected to remain strong at 3.8% in 2014 and 4.1% in 2015
as investments are set to rebound on the basis of improving business sentiment
and higher external demand. Positive business reactions to the recent adoption
of the euro are seen as beneficial to investment. On the other side, tensions
over the Ukraine-Russian crisis stand as a downside risk to the outlook.
Corporate profits and EU funding are likely to remain major financing sources
for investors as banking sector deleveraging is still under way. Overall,
domestic demand and exports are projected to increase at similar rates.
However, investment in capital goods is expected to result in imports growing
faster than exports, resulting in a slightly negative net external contribution
to GDP. The current-account deficit is forecast to remain below 3% of GDP up to
the forecast horizon. Net inflows in the capital account, linked mostly to EU
structural funds, are set to exceed the current-account outflow, keeping net
external debt on a downward path.
The rise in the minimum wage in 2014 and
some shortages of skills in specific labour market segments are likely to
accelerate wage growth and restrain job creation. Nevertheless, unemployment is
expected to fall below 10% by 2015, a marked improvement on the peak of 19.5%
in 2010 but still well above the record low of 6.1% in 2007. The steady rise in
service prices and the forthcoming deregulation of household electricity prices
are set to push up inflation to 1.2% in 2014 and 2.5% in 2015.
The Latvian NRP and SP provide an
overall realistic assessment and outlook of the economic situation in the
country and existing risks, linked mainly to the geopolitical situation over
the Ukraine-Russian crisis. The country's macroeconomic projections are similar
to the Commission 2014 spring forecast with GDP expected to rise by 4% in both
2014 and 2015. The growth estimates do not include any impact from structural
reforms as the measures presented in the NRP are not quantified.
The macroeconomic forecast underpinning
budgetary projections in the 2014 Stability Programme has been developed in
consultation with experts from the Ministry of Economics, Bank of Latvia and
experts from commercial banks and international organisations, but it has not
been formally endorsed by an independent institution. 

3.        
Challenges and assessment of policy agenda


3.1.                
Fiscal policy and taxation

Budgetary
developments and debt dynamics
The
budgetary strategy of the 2014 Stability Programme is to reduce gradually the
nominal general government deficit and to respect the Medium-Term Objective (MTO),
taking into account the impact of the systemic pension reform. The targeted
general government deficit gradually declines, reaching 0.7% of GDP by the end
of the programme period. According to the authorities' calculations, this
ensures that the structural budgetary position continues meeting the MTO,
taking into account the impact of the systemic pension reform. The MTO itself
has been revised from -0.5% in the 2013 Convergence Programme to -1.0% in the
2014 Stability Programme; the new MTO reflects the objectives of the Stability
and Growth Pact[4].
However, calculations by the Commission based on the information in the
programme show that the targeted nominal deficit might not ensure meeting the
MTO over the programme horizon, as explained in more detail below.
2013
turned out better than expected in the previous programme and Latvia's structural balance was at the MTO. The budgetary outcome of ‑1.0%
of GDP in 2013 is slightly better than expectations in the 2013 programme (‑1.1%
of GDP) despite an unanticipated guarantee call of 0.3% of GDP that the
government had to meet in July 2013. The lower budget deficit reflects stronger
economic recovery – notably somewhat higher wage growth and private consumption
growth, which led to higher tax revenue – while total expenditure (including
expenditure on EU programmes fully matched by EU funds revenue) remained below
the level planned in the 2013 Convergence Programme, even including the
above-mentioned guarantee call. In 2013, the Council recommended that Latvia should reinforce its budgetary strategy to ensure that the deviation from the MTO only
reflects the incremental impact of the systemic pension reform, as Latvia was found to be eligible to a pension reform clause. Latvia's structural balance[5] stood
at ‑1% of GDP in 2013. As Latvia's MTO is ‑1.0%, Latvia was compliant with the
requirements of the Preventive arm, and based on the ex-post assessment the
country did not deviate from the MTO, while the pension reform clause would
allow a temporary deviation from the MTO of 0.5% of GDP in 2013 (see Box 2).
Box 1. The
  Latvia's status vis-à-vis the Stability and Growth Pact
Latvia is
subject to the preventive arm of the Pact and was at its Medium Term Objective
in 2013. Therefore, it should preserve a sound fiscal position which ensures
compliance with the Medium Term Objective.
The
nominal deficit is expected to remain stable in 2014, while the structural
deficit deteriorates. The programme projects a nominal
deficit of 1.0% of GDP in 2014, slightly worse than the target of a balance of ‑0.9%
of GDP in the 2013 programme[6].
The nominal deficit projection for 2014 corresponds to expectations in the
Commission's forecast, although there are some differences in levels of expenditure
and revenue, as well as individual categories[7].
Main policy changes affecting budgetary projections relate to taxation
(described in more detail in the respective section below and in Box 2), an increase of the minimum wage and a gradual increase in the statutory retirement
age from 2014. Taking into account cyclical developments in the economy, as the
output gap turns positive in 2014, the (recalculated) structural balance is set
to deteriorate by ½% of GDP[8]
and stand at -1.4% of potential GDP in 2014. 
The
targeted nominal deficit declines further in outer years of the programme,
reflecting sizeable expenditure restraint against several revenue-reducing
measures. For
2015-2017, the programme envisages a gradual decline in nominal deficits to
0.8% in 2015 and to 0.7% on 2016-2017. These projections, however, imply a
pronounced decline in the share of total revenue and total expenditure to GDP,
by around 4 percentage points between 2013 and 2017 (excluding decline in
expenditure related to EU programmes and fully matched by EU funds revenue).
For the revenue side, this decline reflects several discretionary measures
already in the law, as well as a projected decline in property income (see Box 2 for main policy changes). The expenditure projections in the programme are made on the
basis of the national no-policy-change definition, which implies that headline
targets are set according to the top-down approach of the Fiscal Discipline
Law, and expenditure is determined on the basis of this target, taking into
account revenue forecasts and other relevant information. It is also assumed in
the programme that any positive gap ("fiscal space") between this
top-down approach and pure bottom-up budgetary estimates of the cost of current
policies will be filled with new initiatives. This "fiscal space" is
estimated at 0 in 2015, 0.7% of GDP in 2016 and 1.5% of GDP in 2017. The
current approach, however, implies that several programmes – as they expire –
are not replaced, leading to expenditure restraint below GDP growth and,
correspondingly, a shrinking share of government in the economy. Given the
already relatively low level of expenditure to GDP against acute needs in many
policy areas (discussed in further details in chapters 3.3-3.5), this might be
difficult to achieve, representing therefore risk to the targets, especially if
the envisaged revenue-reducing measures are implemented as planned. Recognising
these risks, the Commission forecast expects a deficit of 1.1% of GDP in 2015,
against the programme projection of a deficit of 0.8%. 
   || Box 2. Main budgetary measures ||   
   || Revenue || Expenditure ||   
   || 2013 ||   
   || ·       Systemic pension reform(i) (-0.5% of GDP) || N.a. ||   
   || 2014 ||   
   || ·       Reduction in social security contributions rate from 35.09% to 34.09% (-0.2% of GDP) ·       Increase in PIT non-taxable thresholds (‑0.2% of GDP) ·       Tax on subsidised electrical energy (tax on energy producers) (0.1% of GDP) ·       Higher tax revenue due to increase in minimum wage (0.1% of GDP) ·       Higher tax revenue due to raising efficiency of tax control and administration (0.2% of GDP) || ·       Increase in retirement age (impact not specified)(ii) ·       Change in pension indexation formula (impact not specified) ||   
   || 2015 ||   
   || ·       Systemic pension reform (-0.3% of GDP)(i) ·       PIT rate cut from 24% to 23% (-0.2% of GDP) || ·       Increase in retirement age (impact not specified)(ii) ||   
   || 2016 ||   
   || ·       Systemic pension reform (-0.3% of GDP)(i) ·       PIT rate cut from 23% to 22% (-0.2% of GDP) || ·       Increase in retirement age (impact not specified)(ii) ||   
   || 2017 ||   
   || ·       N.a. || ·       Increase in retirement age (impact not specified)(ii) ||   
   || Notes: 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. (i) A part of social security contributions is being diverted from the central government budget to privately managed funds and revenue at the disposal of the government correspondingly declines. This share increases from 2% of gross wages in 2012 to 4% in 2013, to 5% in 2015 and to 6% in 2016. (ii) As of 2014, the statutory retirement age (at 62 in 2013) is increased by 3 months annually, reaching 65 by 2025. In parallel, the early retirement age and the minimum period of insurance are also raised. ||   
The projected deviation from the MTO
reflects the impact of the systemic pension reform in 2014-2016 and goes beyond
that impact in 2017 according to the programme scenario, while the Commission's
forecast points to a risk of an earlier and more substantial deviation. The
(recalculated) structural balance deteriorates gradually starting from 2014, as
the targeted nominal deficit reduction is less than the cyclical component due
to the widening positive output gap. According to the programme scenario, the
(recalculated) structural deficit reaches 1.8% of potential GDP in 2017,
against the MTO of a structural deficit of 1.0%. This deterioration, however,
includes the impact of the systemic pension reform. The reform is being
implemented in 2013, 2015 and 2016 and it involves a gradual increase in the
share of social security contributions diverted from the budget to privately
managed fully-funded schemes, with an incremental cost of 0.5% in 2013 and
about 0.3% of GDP in both 2015 and 2016. Each of the impacts is allowing a temporary
deviation from the MTO for up to three years, provided that an appropriate
safety margin with respect to the deficit reference value is preserved. Taking
into account the allowed deviation from the MTO, the planned structural deficit
is in line with the requirement of the Pact until 2016, but leads to a
deviation from the required adjustment path towards the MTO in 2017. There are,
however, risks to the budgetary scenario, as noted above, stemming from a very
pronounced decline in the ratio of expenditure to GDP. Based on the Commission
2014 Spring Forecast, deviation from the MTO might exceed what is justified by
the pension reform already in 2015.
The debt-to-GDP ratio is on a declining
path.
According to the programme scenario, general government debt hovers around
38-39% of GDP in 2013 and 2014 and starts declining noticeably from 2015,
reaching 31% by the end of the programme period. This reflects redemption of Latvia's obligations under the 2009-2011 financial assistance programme: in March 2014, Latvia repaid EUR 1 bn to the EU, and another repayment of a similar magnitude is scheduled
for early 2015. In order to finance these repayments, the Latvian authorities
have made in 2014 two successful benchmark-size bond issues with 7- and 10-year
maturity. After major repayments to the EU will be made in 2015, the need to
keep large precautionary buffers[9]
will expire, allowing the debt ratio to decline. The full implementation of the
programme would decrease debt even further by 2030. Since the debt-to-GDP ratio
is below the reference value, the debt reduction benchmark is not applicable.
Fiscal
framework
The adoption of the Fiscal Discipline
Law (FDL) and creation of the Fiscal Council lay the foundation for framing a rules-based
fiscal policy. The law was adopted in March 2013 and most of its provisions
— establishing a structural balance rule, expenditure rule and medium-term
planning — are now in force, with transitional rules still applying for more
technical aspects. The 2014 budgetary process was fully based on the new law. The
timing of annual updates to the medium-term budgetary law is, however, yet to
be aligned with the European Semester by shifting it from autumn to spring. The
law’s provisions setting up an independent Fiscal Council came into force on 1
January 2014 and the Council held its inaugural meeting on 25 February. The
Council will formally monitor policy compliance with the Fiscal Discipline Law through
regular and ad hoc reports, and provide independent opinions regarding
macroeconomic forecasts, including the cyclical position of the economy. While
the recommendation to strengthen the national fiscal frameworks has been addressed,
creating a culture of prudent fiscal policy-making is a long-term task,
especially given the deeply rooted practices of ad hoc decision-making. For
example, the Fiscal Council already faced its first test in March 2014, when it
presented an ad hoc report due to a legislative proposal which did not meet the
requirements of the FDL.
Long-term
sustainability
Latvia appears to face low fiscal
sustainability risks, but sufficient primary surpluses need to be ensured. The
medium-term sustainability gap[10],
showing the adjustment effort up to 2020 required to bring debt ratios to 60 %
of GDP in 2030, is at -2.4 % of GDP, primarily related to the low level of
government debt (33.4% of GDP in 2015) and the projected decline in ageing
costs (contributing with -1.2 pp. of GDP until 2030). In the long-term, Latvia
appears to face low fiscal sustainability risks, primarily related to the
projected decline in ageing costs contributing with -1.6 pp. of GDP over the
very long run. The long-term sustainability gap[11] shows
the adjustment effort needed to ensure that the debt-to-GDP ratio is not on an
ever-increasing path, is at -0.1 % of GDP. Risks would be higher in the
event of the structural primary balance reverting to lower values observed in
the past, such as the average for the period 2004-2013. Moreover, these
projections imply a steep fall in the replacement rate of statutory pensions,
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.
It is therefore appropriate for Latvia to ensure sufficient primary surpluses
in order to maintain the sustainability of public finances.
The privately managed funded pension
scheme will gradually take over part of the pension obligations of the public
pension scheme and thereby reduce risks related to future pension
sustainability. In order to finance future expenditure related to
population ageing, Latvia increased contributions to the funded pension scheme
from 2% to 4% of gross wages in 2013 and, under current plans, the rate will
increase further to 5% in 2015 and to 6% in 2016. The retirement age was
increased by three months from 62 years in 2014 and will be further increased
by three months each year to reach 65 years in 2025; however, it is not
intended to link the pensionable age or benefits with life expectancy. The
minimal contribution period to reach a full pension was increased from 10 to 15
years.
Healthcare has moved to the focus of
public debate as a sector where higher and more efficient financing could bring
significant improvements in the quality of life. Headline
population health status indicators such as life expectancy remain very weak
and high mortality rates among the working-age population aggravate demographic
challenges. Latvia’s poor performance on healthcare is confirmed by assessments
of health outcomes that are less likely to be compounded by lifestyle factors
such as early-life outcomes and vaccine-avoidable diseases. At first sight, the
healthcare sector does not seem to pose fiscal sustainability challenges in Latvia and the share of public expenditure on health is modest: 3.9% of GDP in 2012, compared
with 7.3% in the EU on average. However, a closer analysis may suggest that
additional financing for healthcare would need to be considered in the medium
term to meet the healthcare needs of the population, in particular the needs of
more vulnerable groups. This has to be considered in view of fiscal capacity and
implemented in a cost-effective manner to ensure that health outcomes improve.
In this context, Latvia plans to introduce a new model of healthcare financing
by implementing a mandatory state health insurance. The objective of the reform
is to set a formula for increasing public financing of the healthcare system
possibly up to 4.5% of GDP in coming years, while ensuring a more stable
financing base. The main reform parameters are still to be defined, thus possible
impacts in terms of financing, overall efficiency and accessibility of
healthcare services cannot be assessed at this stage.  
Tax
system
Latvia’s tax-to-GDP ratio, at 27.6% of
GDP in 2013, remains one of the lowest in the EU and the structure of taxation
is quite growth-friendly. The proportion of
consumption taxes in total taxation is relatively high, but the proportion of
taxes on capital and business income is one of the lowest in the EU. Recent tax
reforms focus on areas identified in the 2013 recommendations; the analysis in
this SWD leads to the conclusion that Latvia has made some progress on measures
taken to address these recommendations. 
The tax wedge on low wage earners for families with dependants has
decreased significantly, while the tax wedge on single earners decreased
marginally and remains high. As part of the 2014
budgetary package, the authorities partially replaced the previously planned
universal personal income tax rate cut with increased non-taxable thresholds,
especially for dependants, and reduced social contributions[12]. As a
result, the tax wedge on families with dependants was decreased significantly (from
39.6% in 2012 to 35.7% in 2014 for a two-earner family, each earning 67% of the
average wage, with 2 dependent children) but the tax wedge for single workers earning
67% of the average wage improved only marginally (from 43.6% to 42.1%). The
overall reduction of labour taxes is planned to continue in the coming years,
as the personal income tax rate will be reduced by 1 percentage point in 2015
and again in 2016. A more focused approach on single low-income workers could
be expected to lead to stronger employment impacts, as the high tax wedge has
been identified as contributing to poor employment outcomes for low-skilled
workers and undeclared work in Latvia[13].

Environmental taxation has been strengthened to a degree, but its
capacity to affect peoples’ behaviour seems limited, and some environmentally
harmful subsidies remain in place. As recommended
in 2013, some excise duties and environmental taxes were raised,[14]
although the budgetary impact of these tax increases was modest and led to only
a limited shift in the tax burden. Environmental indicators continue to pose significant
challenges, as discussed further in section 3.4. In particular, despite being the
only Baltic country to have relatively sophisticated vehicle taxation,
including a vehicle registration tax which is linked to CO2
emissions, emissions from newly
registered cars remain the highest in the EU.[15]
Taxes related to waste management similarly appear ineffective in diverting
waste from landfill to recycling. Moreover, there is no indexation rule for
excise or environmental taxes, and their real value is projected to fall over
time. The most prominent environmentally harmful subsidies are the fuel excise
exemption for diesel used in agricultural production and for petrol, diesel or
diesel oil used for heat generation, and the reduced VAT rate applied to
heating energy.
Revenue from property taxes could provide room for a growth-friendly
tax shift. Taxes on property in Latvia yielded revenues of 0.9% of GDP in 2012, well below the 2.3% average in the EU28. In
2013, the property tax regime was changed in Latvia, giving considerable
flexibility to local governments to adjust property tax rates. Although it is
still too early to draw conclusions on the effectiveness of the reform, there
are some indications that local governments might opt for lower tax rates
and/or providing exemptions, with a view to encouraging taxpayers to register
on their territory, competing for the share in personal income tax revenue. At
the same time, gradual improvements in cadastral values lead to a modest
increase in the base of property taxation.
The authorities have made some progress in improving tax compliance
and reducing the proportion of undeclared economic activity, notably by
improving risk assessment and increasing penalties for fraudulent behaviour. Nevertheless, challenges in this area remain. In particular, despite
representing a significant share of total taxation, revenue from consumption
taxes could be significantly raised if tax compliance was improved: the implicit
tax rate on consumption at 17.4 % in 2012 is among the lowest in the EU,
despite relatively high VAT rates (a standard of 21 % and a reduced rate of 12 %).
The overall VAT gap was the second highest in the EU in 2000-2011, driven
before the crisis by a rather broad application of the reduced rate, and in
recent years by a sharply increased VAT compliance gap.[16] Other
available estimates for the proportion of the shadow economy and undeclared
work, especially cash salaries, confirm these findings.[17] Strengthening
tax and customs authorities, improving VAT collection efficiency and
effectiveness[18],
as well as strengthening the role of judiciary and appropriate application of
sanctions for tax crimes, would help in addressing this challenge.
The corporate tax bias towards debt financing is set to increase
from 2014. On the one hand, among changes to the
corporate income tax law introduced as part of the 2014 budget package, the
deductibility of notional interest on retained profits — a measure designed to
encourage equity capitalisation — has been abolished, and the limit for maximum
interest deductibility has been raised. On the other hand, from 1 January 2014,
the application of tax relief for investments in new production technologies
and certain projects approved by the Government is extended until 2020, as well
as a tax relief for certain research and development costs is introduced from 1
July 2014. Thus, certain retained profits invested in the development of
company still receive favourable tax treatment. A comparative analysis of the
effectiveness of the above measures in practice would be useful to choose the
most appropriate instruments.

3.2.                
Financial sector

In 2013, Latvia received a CSR
concerning the use of micro- and macro-prudential policies to prevent
vulnerabilities that could arise from future credit growth and non-resident
banking activities. The analysis in this SWD leads to the conclusion that Latvia has
made substantial progress on measures taken to address this recommendation. 
In the context of the assessment of
Latvia’s readiness to join the euro area, financial supervision has been
tightened and the corresponding resources increased, in particular as regards
monitoring the growing non-resident banking sector. Additional
liquidity and capital adequacy requirements for non-resident banks were
introduced in 2013, regular on- and off-site checks are performed, and the
Deposit Guarantee Fund has been further strengthened. Restructuring the
Mortgage and Land Bank to perform development lending activities remains a
challenge, but the establishment of the Single Development Institution is in
progress. The authorities are assessing the conditions for selling Citadele
Bank and considering additional financial and human resources to tackle complex
financial and tax evasion crimes. As deleveraging in commercial banks
continues, access to finance remains a challenge, in particular for households,
SMEs and start-ups.  

3.3.                
Labour market[19], education and social policies

Although
unemployment has fallen considerably, it is still above 11%, implying
considerable economic and social costs. Youth employability
remains a challenge and the unemployment rate of persons with disabilities[20] and of
pre-retirement age is significantly above the EU average. Likewise, targeted
social services, the coverage and adequacy of social assistance and activation
of benefit recipients are issues that remain to be addressed. Skills mismatches
and the quality of vocational and higher education require continuous
attention. The
higher education network is too large and fragmented given the decline in population.
It offers too many overlapping study programmes, and has limited attractiveness
for foreign students and teaching staff. The accreditation system does not meet
international standards and the financing system does not provide incentives to
improve quality. One of the biggest social challenges is related to income
inequalities, as well as access to healthcare services and the high proportion
of the population with unmet healthcare needs; these factors also create barriers
to labour market participation. In addition, cross-border access to health care
and professional education should be improved.
In 2013, Latvia received a CSR
concerning tackling long-term and youth unemployment, establishing
comprehensive career guidance, implementing reforms in the field of vocational
education and training, and improving the quality and accessibility of
apprenticeships. They also recommended tackling the high rates of poverty by
reforming social assistance, reducing child poverty, and implementing reforms
in higher education and science sectors. The analysis in this SWD leads to the
conclusion that Latvia has made some progress in measures
taken to address labour market recommendations, limited progress regarding
reforms of social assistance, and it has made substantial progress as regards addressing
child poverty. Latvia has made no progress as regards higher education reforms
and limited progress regarding the modernisation of research institutions (for
the full CSR assessment see the overview table in Section 4).
Labour market
Unemployment fell to 11.9% in 2013 and long-term
unemployment rates are also falling. Youth
unemployment has been on the decrease but remains above the EU average
at 23.2% in 2013. The coverage of active labour market policies (ALMPs)
increased in 2013 as compared to the previous year, however the proportion of
financing for public works in the total ALMP package remains too high at around
30%. Profiling of the unemployed was finally introduced at the end of 2013. Latvia has also amended its legislation to define criteria governing what should be
considered a ‘suitable job’ (a job that cannot be refused without the risk of
losing unemployment benefits) and provided a legislative framework to improve
job search assistance. A pilot project was introduced to provide more support
to the long-term unemployed and to step up cooperation between public
employment services and social services. Based on this experience, similar
measures will be implemented in 2014. It is too early to assess whether the
ALMP measures taken so far will help bring back the long-term unemployed into the
labour market.
Box 3. The delivery of a
Youth Guarantee in Latvia[21] 
Important
challenges to deliver a Youth Guarantee (YG)[22] in Latvia are:
- Insufficient
administrative capacity to provide effective services;
- Develop
sufficiently ambitious outreach measures to non-registered, inactive young
people.­
Social situation and healthcare
Families with children, the unemployed,
people with disabilities, elderly women and people living in rural areas are at
a particularly high risk of poverty and social exclusion. In
2013, 35.1% of the population was estimated to be at
risk of poverty or exclusion and 24% were estimated to suffer from severe
material deprivation. Latvia’s spending on social protection as a percentage
of GDP has been one the lowest in the EU over the past several years: around
12% of GDP in 2011 and 11.2% of GDP in 2012 (the EU average was then close to
20% of GDP). The coverage and adequacy of social assistance is low and the incentives
to work for some groups of social assistance recipients could be improved. Many
benefit recipients face barriers to employment such as poor health, low skills,
caring obligations, addictions, low regional mobility, and low motivation. The weak
capacity of social services limits the success of bringing benefit recipients into
active employment.
Addressing the recommendation to reform social
assistance, Latvia completed a large-scale assessment of the
social security system, including social assistance, in June 2013
(carried out by the World Bank). In December 2013, the government agreed on the
thrust of the reform, but implementation of the key measures is not planned until
2016. The government also plans to improve quality and coverage of social work.
The government has not reversed the decisions adopted in 2012-13 to reduce the guaranteed
minimum income benefit and abolish central government co-financing of this
benefit.
Addressing the recommendation to reduce
child poverty, Latvia significantly increased a number of child-related
benefits, and raised the PIT non-taxable thresholds for dependants. Latvia also legislated that the responsibility to provide school supplies (books, working
books) lies with the state or municipality, thus relieving parents from these costs.
To provide formal childcare for children less than five years old, the
government introduced childcare vouchers as of September 2013. All parents of
children aged 1.5–4 who do not have a place in a kindergarten can buy childcare
services from private providers. Also, the co-payments for children for
reference drugs were abolished as of January 2014. The impact of these measures
in terms of access, affordability, and quality of childcare should be further
monitored.
Latvia has taken some
steps to tackle poverty. The disability related benefits were
substantially increased. Low wage earners with dependants will benefit from
increased PIT non-taxable minima. The increases in minimum wage may reduce
in-work poverty but could at the same time reduce the job creation potential
for low-skilled in some regions. The pension indexation was partially (up to EUR
285) reinstated.
Latvia has one of the
highest proportions of the population with unmet healthcare needs in the EU. The
cost of healthcare is the main barrier to equitable access — not only for the
lowest income quintile, but also for the second lowest.[23] The
excessive reliance on out-of-pocket payments for almost all types and levels of
healthcare services and prescribed pharmaceuticals, coupled with prevalent
informal payments,[24] is a
particular cause of concern. Long waiting lists for non-emergency care are
common, the health workforce is ageing and poorly remunerated, and the availability
of certain specialists outside Riga is problematic. Furthermore, there is room
to enhance health promotion and disease prevention activities, including by
strengthening disease screening. To address these and other issues, the
authorities are moving, inter alia, from cost-containment-induced global
hospital budgets towards the implementation of a Diagnosis-Related Group
payment mechanism by 2015, developing clinical guidelines, making improvements in
the e-health system, elaborating long-term health workforce strategy, and
implementing alcohol and tobacco consumption reduction activities. 
Vocational
education
Several measures are ongoing to improve
the labour-market relevance of vocational education and training (VET) and
increase the availability of quality work-based learning, including
modernising infrastructure and redesigning curricula with the close involvement
of social partners. A pilot project on a dual VET/apprenticeship-type system
involving around 150 students and 30 medium-sized and large firms, in
cooperation with German partners, started in September 2013. If properly
implemented, it could be transformed into a more permanent and widespread
mechanism and could be a first step towards promoting effective work-based
learning in Latvia. As there is a limited number of large enterprises, finding
ways of involving SMEs in work-based learning provision is needed. Amendments
in legislation to clarify the framework for career guidance services provision
were adopted in July 2013. Support measures to increase their coverage are
under development but a precise timetable for implementation has not been
defined.
Higher
education
So far, higher education reforms have largely
stalled. The current plans are significantly less ambitious in terms of content
and timetable for implementation than those presented in 2012-2013 and appear
insufficient to address the challenges faced by the higher education sector. The
opportunity to use independent international institutions for accreditations of
study fields in 2013 has been missed, as accreditation was done in a very short
period of time by the Ministry of Education and Science and most study fields
were accredited for six years.[25] The
government plans to create an independent national accreditation agency, to be
included in the European Quality Assurance Register for Higher Education no
later than in 2018. A new financing model based on European best practice is
currently being prepared in cooperation with the World Bank experts to improve
the accessibility and performance-orientation of higher education, but its
implementation is not planned until 2016. Original plans to consolidate higher
education institutions have been weakened; the only concrete steps now
envisaged are to develop joint doctoral programmes and integrate some colleges
into universities. Legislative restrictions on the use of foreign languages in study
programs remain unchanged and universities have little incentive to attract
foreign teaching staff. Encouragingly, changes to state-financed study places
will be continued with an increased proportion going to STEM (science,
technology, engineering and mathematics) fields.
                                                                                                         

3.4.                
Structural measures
promoting sustainable growth and competitiveness

Box 4: Potential impact of
structural reforms on growth – a benchmarking exercise
Structural
reforms are crucial for boosting growth. It is therefore important to know the
potential benefits of these reforms. Benefits of structural reforms can be
assessed with the help of economic models. The Commission uses its QUEST model
to determine how structural reforms in a given Member State would affect growth
if the Member State narrowed its gap vis-à-vis the average of the three best EU
performers on key indicators such as the degree of competition or labour market
participation. Improvements on these indicators could raise GDP by about 9.3%
in a 10-year period. Some of the reforms could have an effect even within a
relatively short time horizon. The model simulations corroborate the analysis
of Sections 3.4 and 3.5, according to which the largest gains would likely stem
from improving competition, in particular in the electricity and gas markets.
In addition, the simulations support the priority placed by the authorities on
reforming active labour market policies and social welfare payments. As
discussed in Section 3.3, moreover, improvements to the education system could also have a noticeable long-term impact on GDP of
2.3% over a 50-year horizon (see note).
Table: Structural
indicators, targets, and potential GDP effects[26]

Source:
Commission services. Note: Simulations assume that all Member States undertake
reforms which close their structural gaps by half. The table shows the
contribution of each reform to total GDP after five and ten years. If the
country is above the benchmark for a given indicator, we do not simulate the impact
of reform measures in that area; however, the Member State in question can
still benefit from measures taken by other Member States.[27]
* The long-run effect of increasing the share of high-skilled
labour in the population could be 2.0% of GDP and of decreasing the share of
low-skilled labour could be 0.3%.** EU average is set as the benchmark.
Latvia’s main challenges include
pursuing the transition to higher value-added products and more innovation in
all phases of the business cycle, and ensuring energy security. The
shortage of qualified staff, poor and fragmented infrastructure and the lack of
cooperation between research institutions and businesses are preventing
improvements in R&D and result in inadequate commercialisation of research
results. Latvia remains isolated from EU energy networks and is highly
dependent on gas supplied by Russia. Further efforts to improve connectivity
with the EU’s electricity and gas networks are needed to improve
competitiveness and the functioning of the energy market. Latvia also lacks a stable and cost-efficient regulatory framework to support renewable
energy, especially in the heating sector. There are considerable challenges to
closing infrastructure gaps and improving the regulatory framework to fulfil EU
obligations on collection and recycling.
  
In 2013, Latvia received a CSR on improving
energy efficiency, connectivity with EU energy networks, and taking steps
towards liberalisation of the natural gas market, including clear rules for
third-party access to storage capacity. The Council recommended that Latvia take further steps to modernise research institutions based on the ongoing
independent assessment. The analysis in this SWD leads to the conclusion that Latvia has
made limited progress on measures taken to address connectivity to EU energy
networks and some progress on measures to address energy efficiency. The
analysis shows
that Latvia has made limited progress in addressing the recommendation on the modernisation
of research institutions.
Research, development and innovation
The effectiveness of public funding was
until recently undermined by a lack of independent, external evaluation of scientific
institutions. The results of the first independent assessment undertaken
by the Nordic Council became available at the end of 2013 and showed that only
10% of the research units evaluated can be considered high level international
research centres. The government has announced that, on the basis of this
assessment, by July 2014 it will prepare specific measures for structural
reforms in the research and innovation system. 
The cabinet of ministers approved a new
regulation on state funding distribution for basic science financing in November
2013,
under which scientific performance and the number of doctorates and master’s degrees
will be used as criteria for allocating funding. The government has
established a Research and Innovation Strategic Council under the direct
supervision of the Prime Minister. Its effectiveness in ensuring better
coordination and performance assessment between the state, academic and
business sectors in priority areas will need to be monitored.
Latvia’s public
R&D intensity was only 0.66% of GDP in 2012 and it is not on track to reach
its Europe 2020 objective of devoting 1.5% of GDP to R&D by 2020.
Public R&D investment in recent years came largely from major programmes
funded by EU structural funds, so dependency on tender-based,
project-oriented EU financing has increased. It will not be possible to further
develop the public research system without increased national support for the basic
functions of scientific institutions. In this context, it is odd that the
authorities have proposed a substantial reduction of EU and national public
financing in 2013.[28]
Business R&D intensity has fallen and
reached only 0.15% of GDP in 2012 (putting it 26th in the EU). However,
from July 2014 an amendment to corporate taxation will apply to certain R&D
costs and may have a positive effect on corporate R&D expenditure. Other
R&D&I investment incentives include corporate income tax rebates on
large-scale investment projects and EU funds supported program for high value
added investments.
Energy markets and infrastructure
      
The Commission has supported the Baltic
Energy Market Interconnection Plan (BEMIP) to achieve full market liberalisation
in 2013-2015. Since November 2012, the market for industrial
users is fully liberalised, while the household sector will follow in early
2015 after delays in setting up a support scheme to protect vulnerable consumers.
  Latvia also joined the regional Scandinavian–Baltic Nord Pool Spot market for
electricity contracting in June 2013; however, the participation of Latvian
market players was limited, particularly in summer 2013. The Estonian and
Latvian electricity cross-border connection is mostly congested, aggravated by
leasing the capacity of one of the high-voltage transmission lines to a Russian
operator. Wholesale prices in the Baltic region should fall when the three interconnector
projects, financially supported by the EU, become operational: Estlink 2,
inaugurated in March 2014, the third Estonian-Latvian electricity
interconnector and the Lithuanian-Swedish (Nord-Balt) connection, to be unveiled
by 2016–2017. Overall, cooperation between transmission system operators and
the development of necessary infrastructure has been inadequate to improve the functioning
of wholesale electricity markets.
Latvia has adopted legislation
to gradually open up the gas market from April 2014 that gives third-party
access to the distribution infrastructure. However,
partial unbundling of the distribution infrastructure from April 2014 as
required under EU legislation and stipulation of measures to fully open up the
gas market were postponed until 2017. Preparatory works for ending gas market
isolation and supply diversification have not progressed substantially. As soon
as one of the Baltic States will be connected to diverse gas supply sources, Latvia will be required by the EU legislation to ensure a fully functioning gas market. In
this respect, a preliminary agreement has been reached on the regional liquid
natural gas (LNG) terminal to be operated on both sides of the Gulf of Finland,
with exact locations still to be determined in Finland and Estonia. The situation will be reassessed with regard to the way forward in the upcoming
months. The LNG terminal in Lithuania is expected to start operation in late
2014. Lastly, the issue of Inčukalns gas storage ownership and management has
become particularly important as the economic and geopolitical risks related to
Russian gas supply have come to the fore.  
Energy efficiency,
renewable energy and GHG emissions
Latvia’s second National Energy
Efficiency Action Plan put forward a rather balanced mix of policy measures for
the main sectors of economy, partly with a view to prompt transposition and
effective implementation of the Energy Efficiency Directive by June 2014. In
particular, further investments to increase energy efficiency and the uptake of
renewable energy are planned in regional heating systems to reduce reliance on
imported gas. However, overall details on the implementation of measures are
missing, including details on energy efficiency investments in residential
buildings,
industry and transport sectors. Measures to promote the higher uptake
of energy performance contracting (e.g. legal and financial) and training for
the building workforce (e.g. with the support of the Build Up initiative) would
further support this process.
The proportion of renewables in the final
energy consumption mix reached 35.8% in 2012. The renewable
energy proportion in the heating sector has slightly increased due to cohesion
policy investment in renovating district heating networks and replacing fossil
fuels with renewables in some regional co-generation plants. As regards the
renewable energy support framework, the authorities are
facing difficulties in devising a predictable legal environment and sufficient incentives
for cost-efficient investment in clean energy.   
Greenhouse gas emissions from transport accounted
for 27% of total emissions in 2011. The transport
sector represents around 30% of total energy consumption, partly due to
insufficient development of public transport, the poor record on vehicle fuel
efficiency, a relatively low level of excise duties and an ageing car fleet. Latvia has implemented a number of measures to decarbonise the transport sector: increased taxes
on fuels, exemptions for biofuels, and registration tax for passenger cars based
on differentiated CO2 emissions levels. However, these measures do not appear sufficient
to affect behaviour. Latvia has also taken action to promote electric vehicles.
In February 2014, the government adopted a short-term Electromobility Strategy
2014–16 focusing on the development of battery-charging infrastructure and the
electric vehicle market.
Waste management
Latvia faces
considerable challenges in closing infrastructure gaps and in improving its
regulatory framework to fulfil EU obligations on collection and recycling. In
2012, Latvia landfilled 84 % of municipal waste against the EU average of 33%. Only
12% was recycled and 4% composted (EU average: 27% and 14%); therefore it is
unlikely that Latvia will meet the 2016 (50%) and 2020 (75%) landfill diversion
targets. The National Waste Management Plan 2013–2020 does not identify a clear
national strategy to achieve these targets and ensure certainty to encourage
private investment. Significant investments are required to put in place infrastructure
and increase waste recycling capacity (packaging and biodegradable waste), make
improvements in market instruments (taxation of polluting products, extended
producer responsibility), and adapt administrative and regulatory measures to
facilitate recovery, including composting.
Transport
The European-gauge railway
infrastructure project Rail Baltic is a high priority project for Latvia and other Baltic States.
The project, which is planned to be completed by 2023, will be submitted for
funding from the Connecting Europe Facility. As a result of different
priorities of the three Baltic States, there have been significant delays in
the process, including setting up a joint project company and a tendering
procedure for a study to assess the technical feasibility and environmental impacts
of the project.
The poor quality of road infrastructure
remains a major concern for Latvia, hindering the competitiveness of the economy
and ports and contributing to a high level of road accidents. Structural
and Cohesion funds are gradually improving the situation, but there is still
the need to increase national funding and develop a viable long-term funding
mechanism for road maintenance. Latvia has adopted a 2014–2020 plan to improve
national roads, but it still largely relies on EU funding.
In 2013 the State Audit Office published
a critical report on the performance of Riga port, according to which
it could improve its competitiveness through better cost and revenue
management, more efficient land allocation, improved land connectivity and supply
chain functioning. This is also in line with the findings of the December 2013
World Bank study on the competitiveness of the three biggest Latvian ports. In
view of the recent events in Ukraine, it is becoming increasingly important to
reduce the overly high dependence on Russian goods in port turnover.

3.5.                
Modernisation of public administration

Latvia continues to face
challenges in strengthening the judiciary and modernising public administration
to improve the business environment. Lengthy civil
and commercial case proceedings in courts of first instance and rather low
clearance rates have led to a significant backlog of court cases; court
decisions often take years and there are notable deficiencies in insolvency
proceedings. Tackling complex economic and financial crimes is a particular
challenge. State owned asset management and public administration efficiency
and motivation could be greatly improved with targeted reforms. In the customs
area, Latvia has significant potential to improve its performance in terms of
time taken to process imports and exports to reduce business costs and
facilitate trade. 
Judicial reforms
In 2013, Latvia received a CSR on the
efficiency and quality of the judiciary and reducing the backlog and length of
proceedings, including insolvency proceedings. Latvia was also invited to put
in place a comprehensive human resources policy and to take steps to implement
the mediation laws and streamline the arbitration court system. The analysis in
this SWD leads to the conclusion that Latvia has made some progress on measures
taken to address this recommendation (for the full CSR assessment see the
overview table in section 4).
Work
is ongoing to strengthen the regulatory framework and improve the
administrative capacity of the judiciary sector. The
main challenges include implementing amendments proposed by the Ministry of
Justice to civil, administrative and criminal procedural laws, establishing a
comprehensive human resource policy linked to the professional evaluation of
judges that started in January 2013, reforming the system of arbitration
courts, and implementing the Law on Mediation that would alleviate the workload
of courts. Several provisions in the Code of Civil Procedure have been amended
to streamline the legal process and others are under preparation, i.e. for
auctions of immovable property and enforceable titles, introducing electronic processing
of documents. Work in parliament is ongoing on the insolvency law (third
reading). The amendments under discussion aim to prevent problems observed in
practice: e.g., setting a two-month deadline for the debtor to submit an
application for insolvency proceedings; providing for the director’s or board’s
liability for insolvency; enhancing the role of insolvency practitioners in
identifying ‘prima facie’ false claims and reducing the discharge periods for
natural persons[29].
Insolvency procedures, including appointment of insolvency administrators, have
faced a number of weaknesses such as lack of transparency and accountability. 
There
is a positive trend as regards the length of proceedings and the capacity of
courts to handle workload.[30] It has been decided to allocate additional judges and
administrative staff to courts in the Riga region in 2014 to help level out
court workload, reduce the backlog and shorten the length of proceedings. A
professional evaluation process for judges, including the training modules
attended, started in January 2013. The use of ICT tools has improved as regards
registering and managing cases, and for communication between courts and
parties in judicial proceedings. Further involvement of the Judicial Council in
the reforms and in strengthening the management of courts is key. Significant
EU funds financing will be allocated to the judiciary in the 2014-2020
financing period.    
Public
administration reforms
There are no plans to implement a comprehensive
public administration reform based on an independent needs assessment.
Although Latvia has a strategic framework for human resource development in
public administration since 2013, it only applies to the central public
administration and has so far failed to ensure credible reforms related to, inter
alia, hiring and career development. Overall, to reduce the exit of
best-performers from public service and improve the quality of policy-making,
it is becoming more important to align the unified wage grid with efficiency
and quality considerations, even if it requires additional budget financing.
Unfortunately, proposed reforms as regards professional hiring of senior staff
have not yet been implemented. Also, a comprehensive national training strategy
for public administration - that could be implemented by the Public Administration School if a more centralised financing was made available - is lacking. Positively,
additional financing has been granted within the 2014 budget to the lowest paid
wage grid categories (policemen, firemen, cultural experts, social staff), as
well as for further equalisation of salary levels for similar work across
different ministries/institutions.
A
comprehensive reform of establishing a centralised State Owned Enterprise (SOE)
manager under the Prime Minister, the gradual transfer of ministries’ stakes in
SOEs to this manager, minority and non-core-activity share divestments and an
independent selection of board and council members of SOEs is significantly
delayed. SOE reform may be one of the key
conditions for acceding to OECD, so the government may at least decide in short
term on independent selection of board and council members of SOEs. However,
currently SOE management board members' salaries are capped and low compared to
the private sector making it difficult to attract professional, high-level
experts; besides, there are limitations on combining board position responsibilities
with other engagements. The authorities are also expected to revisit
privatisation plans for some bigger state assets (e.g., Mobile Company or
Lattelecom) and continue divestments of minority shares, as initiated by the
Privatisation Agency in case of State Social Insurance Agency holdings.
The authorities have not devoted
adequate attention and resources to tackling complex economic and financial
crimes.
Some institutions like the Financial police and the Economic crimes police need
more staff, training, and resources to perform their tasks effectively,
especially when dealing with complex, cross-border crimes. According to the
Deputy Director-General of the State Revenue Service, former SRS officials
often participate in elaborate VAT fraud schemes; slow court proceedings, top
lawyers defending alleged criminals and mild penalties for people convicted of
tax crimes encourage such crimes.[31]
Amendments
to the Code of Administrative Violations are now in force, establishing
administrative penalties for breaching procedures in public procurement,
public-private partnerships and the award of concessions. This is likely to bring a greater degree of discipline and
accuracy to public procurement decisions. In addition, local governments are now
obliged to use centralised procurement, the consequences for suppliers who fail
to deliver according to procurement contracts are more severe and small
procurement contracts must be published online. 
Commendably,
the Competition Council has prepared amendments to the Competition Law as
regards greater institutional and financial independence. The proposed amendments should strengthen the Council's capacities
to prevent experienced staff from leaving and intervene effectively against
actions of public and private bodies restricting competition. One of the key
proposals refers to independent budgeting of the institution, which would
ensure greater financial independence similar to other regulators (e.g.,
financial, utilities regulators).

4.        
Conclusions

Macroeconomic, fiscal and political
stability has allowed Latvia to achieve one of the fastest GDP growth rates in
the EU. The outlook for 2014 and 2015 is mostly encouraging, but the recent
Russian-Ukrainian crisis may have a strong negative bearing. Latvia met its medium-term budgetary objective in 2012 and in 2013. The Spring Forecast
projects low deficits around 1% of GDP in 2014-15. The level of government debt
is projected to fall to 33% of GDP in 2015 as repayments to the EU take effect.
However, there are some indications that big-item reforms like electricity
market liberalisation, reforms of higher education and science, social
assistance, and management of state-owned enterprises have slowed down or been put
on hold primarily due to the upcoming October 2014 general elections. Overall,
a greater sense of urgency seems warranted. Lastly, since Latvia joined the euro area on 1 January 2014, it is all the more important to maintain the
pace of reforms and maintain competitiveness and fiscal prudence.
The analysis in this staff working
document leads to the conclusion that Latvia has made some progress in addressing
the country-specific recommendations issued in 2013. Substantial
progress has been achieved as regards meeting the budgetary targets and fiscal
governance has been strengthened with the establishment of the Fiscal Council.
The tax measures implemented by the authorities go in the right direction but
they will bring only a moderate improvement in the tax burden for low-income
earners, with the situation improving more significantly for families with
children. Latvia has slightly shifted taxation to other tax bases, including
environmental taxes.
Substantial progress has been achieved
to strengthen financial stability linked to non-resident banking business and some
progress has been made to improve the employability of young people, in
particular under the Youth Guarantee Implementation Plan. Reforms have been
implemented in the field of vocational education and training, mainly through
improved quality and accessibility of work-based learning. Limited progress was
made to reform the social assistance system, in which ambitious reforms based
on the June 2013 World Bank study are needed to address poverty and social
exclusion. No progress was made as regards higher education and science reforms,
as several good reform initiatives have been scaled down or postponed. It
remains to be seen how the independent assessment of research institutions will
be used for quality-based financing allocations (limited progress).
Some progress was made on energy policy,
although full liberalisation of the electricity market was abruptly postponed
until 2015, as further action was deemed necessary to support vulnerable
households. Energy efficiency performance is being improved but a stable and
cost-effective support scheme for renewable energy needs to be devised. The gas
market has been partially liberalised as of April 2014, but market opening is
planned for 2017 at the earliest. Some progress was achieved with significant amendments
to judicial procedures and the Insolvency Law, but it is too early to assess
the results. Credible public administration reforms have not been implemented.
The policy plans submitted by Latvia address most of the challenges identified in this staff working document. The national
reform programme confirms Latvia’s commitment to address shortcomings in the
areas of the labour market, higher and vocational education and science, energy
efficiency and judicial reforms, while the stability programme demonstrates Latvia’s commitment to maintaining a structural budgetary position which is based on the mid-term
objective, with any deviation limited to the incremental impact of systemic pension
reform. Sometimes, however, planned measures are unspecified and unambitious,
in particular as regards further improvements in social assistance to address poverty
and social exclusion and higher education and science reforms.
Overview table (CSRs, 2020 Targets)[32]
 2013 commitments || Summary assessment 
 CSR 1: Reinforce the budgetary strategy to ensure that the deviation from the MTO only reflects the incremental impact of the systemic pension reform. Within this strategy, reduce taxation of low-income earners by shifting taxation to areas such as excise duties, recurrent property taxes and/or environmental taxes. Maintain efforts to improve tax compliance and combat the shadow economy. Continue strengthening the fiscal framework through effective implementation of the Fiscal Discipline Law and multi-annual budgeting.     || Latvia has made some progress in addressing CSR 1: • Substantial progress as regards the MTO. • Some progress in reducing taxation of low-income earners, as the tax wedge has been brought closer to the EU average. However, the focus on low-income earners has been only partial. • Some progress in shifting taxation to other tax bases and environmental taxes: a new excise tax on liquefied petroleum; euro vignette as of July 2014; a new tax on water use for hydroelectric power plants; an increase in environmental taxes for non-eco-friendly products (packaging); landfill tax increased as of January 2014. • Some progress in improving tax compliance and combating the shadow economy. • Substantial progress in strengthening the fiscal framework. 
 CSR 2: Continue to use micro and macro prudential policies to prevent possible vulnerabilities that could arise from future credit growth and non-resident banking activities. || Latvia has made substantial progress in addressing CSR 2: • Substantial progress in implementing additional macro-prudential measures to supervise non-resident banking, in particular in the context of the assessment of Latvia’s readiness to join the euro area. These include additional liquidity and capital adequacy requirements for non-resident banks, regular on- and off-site checks, strengthening the Deposit Guarantee Fund, etc. Latvia has aligned monetary policy and supervisory tools with those in the euro area. 
 CSR 3: Tackle long-term and youth unemployment by increasing coverage and the effectiveness of active labour market policies and targeted social services. Improve the employability of young people, for example through a Youth Guarantee, establish comprehensive career guidance, implement reforms in the field of vocational education and training, and improve the quality and accessibility of apprenticeships. || Latvia has made some progress in addressing CSR 3: • Some progress in increasing coverage and the effectiveness of the ALMPs (profiling, quality evaluation, strengthened job search assistance). • Limited progress in providing targeted social services. Steps were taken to strengthen cooperation between PES and social services and to increase capacity of social work. • Some progress in improving the employability of young people. The Youth Guarantee Implementation Plan was developed and submitted to the Commission. • Some progress in implementing reforms in the field of vocational education and training and improved quality and accessibility of apprenticeships. Nevertheless, there is still ample scope for expanding work-based learning in VET. Implementing other VET reforms remains a longer-term challenge. • Limited progress in establishing comprehensive career guidance. 
 CSR 4: Tackle high rates of poverty by reforming social assistance for better coverage, by improving benefit adequacy and activation measures for benefit recipients. Reinforce the delivery mechanisms to effectively reduce child poverty. || Latvia has made some progress in addressing the CSR 4: • Limited progress in reforming social assistance. Reform proposals based on sound evidence are being prepared; however, their implementation is uncertain. • Substantial progress in addressing child poverty. Latvia has significantly increased various child-related benefits and implemented other measures (childcare vouchers, relieving parents of the costs associated with school supplies etc.). 
 CSR 5: Implement the planned reforms of higher education concerning, in particular, the establishment of a quality-rewarding financing model, reform of the accreditation system, consolidation of the institutions and promotion of internationalisation.   Take further steps to modernise research institutions based on the ongoing independent assessment. || Latvia has made no progress in addressing the education and training part of CSR 5 of the Council Recommendation: • No progress in establishing a quality-rewarding financing model. • No progress in reforming the accreditation system (the opportunity to use independent international accreditation agencies was not used, and no concrete steps taken to bring the accreditation system in line with international practice). • Limited progress in consolidating institutions. • Limited progress in promoting internationalisation (the legislative restrictions to the use of foreign languages in teaching remained unchanged).   Latvia has made limited progress in addressing CSR 5 of the Council Recommendation regarding the modernisation of research institutions: • The results of the international independent assessment were available only at the end of 2013. Only 10 % of the research institutions were assessed as high level international research centres and structural changes are needed to improve the competitiveness of the system. The government has announced that proposals for structural reforms will be presented by 1 July 2014. 
 CSR 6: Continue improving energy efficiency, especially of residential buildings and district heating networks, provide incentives for reducing energy costs and shift consumption towards energy efficient products.   Improve connectivity with EU energy networks and take steps towards liberalisation of the natural gas market, including provision of clear rules for third-party access to storage capacities. || Latvia has made some progress in addressing CSR 6 of the Council Recommendation as regards energy efficiency: • Some progress was achieved to improve energy efficiency in the residential buildings sector, including partial transposition of the Energy Performance of Buildings Directive.   Latvia has made limited progress in addressing CSR 6 of the Council Recommendation as regards connectivity with EU networks: • Limited progress was achieved in area of energy markets and infrastructure, in particularly in the gas sector. Latvia is encouraged to introduce liberalisation and market opening in parallel to efforts to build interconnectors. In particular, Latvia should make efforts to integrate its electricity and gas markets better with Lithuania and Estonia. In this regard, implementation of the BEMIP plan should continue. 
 CSR 7: Complete pending reforms to improve the efficiency and quality of the judiciary and reduce the backlog and length of proceedings, including as regards insolvency. Put in place a comprehensive human resources policy and take steps to implement the mediation laws and streamline the arbitration court system. || Latvia has made some progress in addressing CSR 7: • Measures include legislative amendments to the Code of Civil Procedure, Law on Judicial Power, insolvency law, arbitration law and mediation law. It is too early to assess the results as some amendments are still undergoing the legislative procedure. The evaluation of the effectiveness of court proceedings and their cost continues. The backlog and length of proceedings have been reduced in 2012-2014. 
 Europe 2020 (national targets and progress) 
 Policy field target ||  Progress achieved 
 Early school leaving target: 10% || The early school leaving rate was 13.3% in 2010, 11.6% in 2011, 10.6% in 2012 and 9.8% in 2013. Significant progress has been made and the target has been achieved. Women perform more than twice as well as men: 5.8% against 13.6% in 2013. 
 Tertiary education target: 34-36% || The tertiary attainment rate was 32.3% in 2010, 35.9% in 2011, 37.2% in 2012 and 40.7% in 2013. Significant progress has been made and the target has been achieved. Women perform almost twice as well as men: 53.1% against 28.3% in 2013. 
 R&D target: 1.5% of GDP || The R&D target is proving to be very ambitious. Taking into account the current decline in R&D intensity, Latvia seems unable to reach its target for 2020. The business R&D intensity decreased in 2012 by 23% compared to 2011, attaining 0.15% of GDP in 2012 (ranked 26th in EU). Public R&D increased only by 1.3% compared to 2011, reaching 0.51% in 2012. 
 Change in non-ETS greenhouse gas emissions || Change in non-ETS greenhouse gas emissions between 2005 and 2012: 1%. According to the latest national projections submitted to the Commission and taking into account existing measures, it is expected that the target will be missed by 1% in 2020 as compared with 2005. 
 2020 Renewable energy target: 40%   Proportion of renewable energy in all modes of transport: 10% || RES share of final energy consumption in 2012: 35.8% RES share of energy used in transport: 3.3% 
 Energy Efficiency target: 0.67 Mtoe (28PJ)   By 2020 level of 5.37 Mtoe primary consumption and 4.47 Mtoes final energy consumption || Latvia notified the policy measures it plans to adopt to implement Article 7 of the Energy Efficiency Directive.   
 Employment rate target set in the 2012 NRP: 73% || Employment rate: 66.3% in 2011, 68.1% in 2012. The employment rate increased further in 2013 and reached 70.5% in 3Q2013. Latvia is on track to reach its Europe 2020 target.  
 Target on the reduction of population at risk of poverty and/or living in jobless households: — 121 000 || Reduction of the number of people at risk of poverty and/or living in jobless households in 1 000 was -134 in 2011, -146 in 2012 and -154 in 2013. Thus, Latvia has already reached its poverty target. The challenge will be to prevent the at-risk-of-poverty rate from increasing as the economy recovers. 

Annex 

Standard Tables
Table
 I. Macro-economic indicators
Table
II. Comparison of macroeconomic developments and forecasts
Table
III. Composition of the budgetary adjustment
Table
IV. Debt dynamics
Table
V. Sustainability indicators
Table
VI. Taxation indicators
Table
VII. Financial market indicators
Table
VIII. Labour market and social indicators
Table
IX. Product market performance and policy indicators
Table
X. Green Growth
List of indicators used in Box 4 on the potential impact on growth of structural reforms. 
Final goods sector mark-ups: Price-cost
margin, i.e. the difference between the selling price of a good or service and
its cost. Final goods mark-ups are proxied by the mark-ups in selected services
sectors (transport and storage, post and telecommunications, electricity, gas
and water supply, hotels and restaurants and financial intermediation but
excluding real estate and renting of machinery and equipment and other business
activities[33]).

Source: Commission services estimation
using the methodology of Roeger, W. (1995). "Can imperfect
Competition explain the Difference between primal and dual Productivity?" Journal
of Political Economy Vol. 103(2) pp. 316-30, based on
EUKLEMS 1996-2007 data. 
Entry costs: Cost of
starting a business in the intermediate sector as a share of income per capita.
The intermediate sector is proxied by the manufacturing sector in the model. 
Source: World Bank, Doing Business
Database. www.doingbusiness.org. 2012 data.
Implicit consumption tax rate:
Defined as total taxes on consumption over the value of private consumption. In
the simulations it is used as a proxy for shifting taxation away from labour to
indirect taxes. The implicit consumption tax-rates are increased (halving the
gap vis-à-vis the best performers) while labour tax-rates are reduced so that
the combined impact is ex-ante budgetary neutral.
Source: European Commission, Taxation
trends in the European Union, 2013 edition, Luxembourg, 2013. 2011 data.
Shares of high-skilled and low-skilled: The
share of high skilled workers is increased, the share of low-skilled workers is
reduced (halving the gap vis-à-vis the best performers). Low-skilled correspond
to ISCED 0-2 categories; high-skilled correspond to scientists (in mathematics
and computing, engineering, manufacturing and construction). The remainder is medium-skilled.

Source: EUROSTAT. 2012 data or latest
available. 
Female non-participation rate: Share
of women of working age not in paid work and not looking for paid work in total
female working-age population
Source: EUROSTAT. 2012 data or latest
available.
Low-skilled male non-participation
rates: Share
of low-skilled men of working age not in paid work and not looking for paid
work in total male working-age population
Source: EUROSTAT. 2012 data or latest
available.
Elderly non-participation rates (55‑64
years): Share
of the population aged 55‑64 years not in paid work and not looking for paid
work in total population aged 55‑64 years.
Source: EUROSTAT. 2012 data or latest
available.
ALMP: Active Labour
Market Policy expenditures as a share of GDP over the share of unemployed in
the population. 
Source: EUROSTAT. 2011 data or latest
available.
Benefit replacement rate: Share
of a worker's pre-unemployment income that is paid out by the unemployment
insurance scheme. Average of net replacement rates over 60 months of
unemployment. 
Source:
OECD, Benefits and Wages Statistics. www.oecd.org/els/benefitsandwagesstatistics.htm.
2012 data.
[1] COM(2013) 800 final.
[2] COM(2013) 790 final.
[3] Aside from the 16 Member States identified
in the AMR, Ireland was also covered by an in-depth review, following the
conclusion by the Council that it should be fully integrated into the normal
surveillance framework after the successful completion of its financial
assistance programme.
[4] The Stability Programme explains that the MTO for the purposes of
the Stability and Growth Pact has been changed to match the minimum
requirement, taking into account differences in the assessment of the cyclical
position of the economy between the national authorities and the European
Commission, in order to avoid risk of sanctions stemming from a possible
divergence from the MTO which is more stringent than the minimum requirement.
The national framework will at the same time continue relying on the target of
a structural deficit of 0.5% of GDP, which is embedded in the national Fiscal
Discipline Law. 
[5] Cyclically adjusted balance net of one-off and temporary measures,
recalculated by the Commission services on the basis of the information
provided in the programme, using the commonly agreed methodology.
[6] As Latvia became a full member of EMU on 1 January 2014, it did not
submit a Draft Budgetary Plan in 2013.
[7] For example, the Commission projects an increase in the ratio of
indirect taxes to GDP, reflecting the implementation of the new energy tax and
some consumption and natural resources tax increases, while the ratio remains
unchanged in the programme's scenario. On the other hand, the Commission
projects a more gradual decline in the ratio of government investments to GDP
(and of some other expenditure categories affected by the absorption of EU
funds), as projects related to the 2007-2013 financial perspective are being
finalised: as of end 2013, absorption at national level of funds related to the
2007-2013 financial perspective was around 70% in Latvia. 
[8] Projections presented by the authorities in the programme, however,
indicate a smaller positive output gap in 2014 and correspondingly a smaller
deterioration of the structural balance, by ¼ percentage points. Moreover, the
authorities project the output gap to remain stable in 2015-2016 and even to
narrow in 2017, whereas according to Commission's recalculations based on the
information in the programme and using the common methodology, the positive
output gap continues widening, reaching 3.5% of potential output by the end of
the programme period.
[9] As of end-2013, the authorities held 6% of GDP in currency and
deposits.
[10] See Table V. The medium-term sustainability gap (S1) indicator
shows the upfront adjustment effort required, in terms of a steady improvement
in the structural primary balance to be introduced until 2020, and then
sustained for a decade, to bring debt ratios back to 60% of GDP in 2030, including
financing for any additional expenditure until the target date, arising from an
ageing population. The following thresholds were used to assess the scale of
the sustainability challenge: (i) if the S1 value is less than zero, the
country is assigned low risk; (ii) if a structural adjustment in the primary
balance of up to 0.5 p.p. of GDP per year until 2020 after the last year
covered by the autumn 2013 forecast (year 2015) is required(indicating an
cumulated adjustment of 2.5 pp.), it is assigned medium risk; and, (iii) if it is greater than 2.5 (meaning
a structural adjustment of more than 0.5 p.p. of GDP per year is necessary), it
is assigned high risk.
[11] See Table V. The long-term sustainability gap (S2) indicator shows
the immediate and permanent adjustment required to satisfy an inter-temporal
budgetary constraint, including the costs of ageing. The S2 indicator has two
components: i) the initial budgetary position (IBP) which gives the gap to the
debt stabilising primary balance; and ii) the additional adjustment required
due to the costs of ageing. The main assumption used in the derivation of S2 is
that in an infinite horizon, the growth in the debt ratio is bounded by the
interest rate differential (i.e. the difference between the nominal interest and
the real growth rates); thereby not necessarily implying that the debt ratio
will fall below the EU Treaty 60% debt threshold. The following thresholds for the S2 indicator were used: (i) if the
value of S2 is lower than 2, the country is assigned low risk; (ii) if it is
between 2 and 6, it is assigned medium risk; and, (iii) if it is greater than
6, it is assigned high risk.
[12] The 2013 Convergence Programme envisaged that the personal income
tax (PIT) rate would be cut by 2 percentage points in 2014 and by 2 pps in
2015. The amended strategy adopted as part of the 2014 budget package envisages
a more gradual lowering of the PIT rate: by 1 pp in 2015 and by 1 pp in 2016.
In 2014, the emphasis shifted from the rate cut to increasing PIT non-taxable
thresholds: raising the universal threshold from EUR 64 to EUR 75 and the allowance
for dependants from EUR 114 to EUR 165, after an increase from EUR 100 to EUR
114 from 1 July 2013. In addition, the social security contributions (SSC) rate
was reduced by 1 pp in 2014, from 35.09% to 34.09%, and ‘a cap’ was introduced
to limit the maximum annual SSC tax base to EUR 46 400 from 2014.
[13] The IMF considers the labour tax wedge in the three Baltic States as a major driver of structural unemployment. It finds that reductions in the
tax wedge explain about 30% of the variation in structural unemployment and
that a reduction in the tax wedge by 10pps would lead to a reduction in
structural unemployment by 2 to 4 pps, all else equal. See IMF (2014): 'Baltic
Cluster Report – Selected Issues: Unemployment in the Baltics', pp. 69-90, Washington, May 2014.
[14] From 1 January 2014, the excise tax rate was increased for natural
gas not used in agriculture and industry, other gaseous hydrocarbons and
tobacco products. In addition, the environment tax base was broadened and for a
number of natural resources, the rate was raised by 20-25%. A new road toll tax
(euro vignette) will be introduced from 1 July 2014.
[15] http://www.eea.europa.eu/publications/monitoring-co2-emissions-from-new-cars.
[16] http://ec.europa.eu/taxation_customs/resources/documents/common/publications/studies/vat-gap.pdf. When
interpreting indicators in the study, due consideration should be given to
significant changes in the economic structure of Latvia in the adjustment
phase. 
[17] European Commission (2014a) Employment and Social Developments in
Europe 2013, http://ec.europa.eu/social/main.jsp?catId=738&langId=en&pubId=7684&visible=1
Chart 5, Chart 10.
[18] European Commission (2014b) Report from the Commission to the
Council and the European Parliament Seventh report under Article 12 of
Regulation (EEC, Euratom) No 1553/89 on VAT collection and control procedures,
COM(2014) 69 final.
[19] For further details, see the 2014 Joint
Employment Report, COM(2013)801, which includes a scoreboard of key employment
and social indicators.
[20] The unemployment rate of persons with disabilities (29%) is above
the EU average of 17.4% (2012).
[21] Latvia presented a Youth Guarantee Implementation Plan, entitled
"The national Youth Guarantee Implementation Plan 2014-2018" in
December 2013.
[22] Pursuant to the Council Recommendation of
22 April 2013 on establishing a Youth Guarantee (2013/C 120/01): "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 a
period of four months of becoming unemployed or leaving formal education".
[23] Latvia has the highest levels of unmet medical needs in the EU, in
marked contrast to its neighbours.
[24] According to the 2014 Special Eurobarometer on corruption, informal
payments in healthcare are quite widespread in Latvia (http://ec.europa.eu/public_opinion/archives/ebs/ebs_397_en.pdf).
[25] As from 2014, higher education institutions have two options: either
continuing with the current accreditation system managed by the Ministry of
Education and Science or choosing a foreign agency included in the European
Quality Assurance Register. However, they have little incentive to choose the
latter option, as it is more costly.
[26] Final goods sector
mark-ups is the difference between the selling price of a good/service and its
cost. Entry cost refers to the cost of starting a business in the intermediate
sector. The implicit consumption tax rate is a proxy for shifting taxation away
from labour to indirect taxes. The benefit replacement rate is the % of a worker's pre-unemployment income that is
paid out by the unemployment scheme. For a detailed explanation of indicators see
Annex.
[27] For a detailed
explanation of the transmission mechanisms of the reform scenarios see:
European Commission (2013), "The growth impact of structural
reforms", Chapter 2 in QREANo. 4. December 2013.
Brussels; http://ec.europa.eu/economy_finance/publications/qr_euro_area/2013/pdf/qrea4_section_2_en.pdf
[28] Following
the change to the operational programme ‘Entrepreneurship and Innovations’
(adopted by the Commission on 19 December 2013), ERDF funding for priority 2.1,
Science and Innovations, has been reduced by EUR 14.2 million, and national
public funding has been reduced by EUR 65.2 million, but national private
co-financing increased by EUR 57.8 million. Latvia has introduced national
budget over-commitments for this priority as the project failure rate within
these activities is quite high.
[29] See the Commission Recommendation on a new approach to business
failure and insolvency of 12 March 2014: http://ec.europa.eu/justice/civil/files/c_2014_1500_en.pdf.
[30] The time taken to bring civil and commercial disputes before the
first instance courts fell from 330 days in 2010 to 252 days in 2012. The clearance
rate for civil and commercial disputes before the courts of first instance
increased from 86% in 2010 to 111% in 2012. Source: The 2014 EU Justice
Scoreboard: http://ec.europa.eu/justice/effective-justice/scoreboard/index_en.htm.
[31] Presentation by K. Čerņeckis, Head of Financial Police, during the
public discussion ‘Fight against financial crime and corruption: success
stories in Europe and lessons for Latvia’ held by the European Commission in Riga on 14 March 2014.
[32] The following categories are used to assess progress in
implementing the 2013 country-specific recommendations: No progress: The
Member State has neither announced nor adopted any measures to address the CSR.
This category also applies if a Member State has commissioned a study group to
evaluate possible measures. Limited progress: The Member State has announced some measures to address the CSR, but these measures appear insufficient
and/or their adoption/implementation is at risk. Some progress: The Member State has announced or adopted measures to address the CSR. These measures are
promising, but not all of them have been implemented yet and implementation is
not certain in all cases. Substantial progress: The Member State has adopted measures, most of which have been implemented. These measures go a
long way in addressing the CSR. Fully addressed: The Member State has adopted and implemented measures that address the CSR appropriately.
[33] The real estate sector is excluded because of statistical difficulties
of estimating a mark-up in this sector. The sector renting of machinery and equipment
and other business activities is conceptually part of intermediate goods
sector.