Recommendation for a COUNCIL RECOMMENDATION on the 2016 national reform programme of Latvia and delivering a Council opinion on the 2016 stability programme of Latvia
Date: 2016-05-18
Institutions: European Commission, Secretariat-General
Subjects: Latvia, apprenticeship, budget deficit, economic policy, economic reform, fiscal policy, health care system, pension scheme, social assistance, stability programme

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   EUROPEAN COMMISSION  Brussels, 18.5.2016  COM(2016) 334 final   Recommendation for a COUNCIL RECOMMENDATION on the 2016 national reform programme of Latvia   and delivering a Council opinion on the 2016 stability programme of Latvia  
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2016 national reform programme of Latvia  

and delivering a Council opinion on the 2016 stability programme of Latvia 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Articles 121(2) and 148(4) thereof, 

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of 
the  surveillance  of  budgetary  positions  and  the  surveillance  and  coordination  of  economic 
policies1, and in particular Article 5(2) thereof, 
Having regard to the recommendation of the European Commission2, 
Having regard to the resolutions of the European Parliament3, 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

Having regard to the opinion of the Economic and Financial Committee, 

Having regard to the opinion of the Social Protection Committee, 

Having regard to the opinion of the Economic Policy Committee, 

Whereas: 

(1) 

On  26  November  2015,  the  Commission  adopted  the  Annual  Growth  Survey4, 
marking  the  start  of  the  2016  European  Semester  of  economic  policy  coordination. 
The priorities of the Annual Growth Survey were endorsed by the European Council 
on  17-18  March  2016.  On  26  November  2015,  on  the  basis  of  Regulation  (EU) 
No 1176/2011,  the  Commission  adopted  the  Alert  Mechanism  Report5,  in  which  it 
did  not  identify  Latvia  as  one  of  the  Member  States  for  which  an  in-depth  review 
would  be  carried  out.  On  the  same  day,  the  Commission  also  adopted  a 
recommendation for a Council recommendation on the economic policy of the euro 
area6.  This  recommendation  was  endorsed  by  the  European  Council  on  18-19 
February  2016  and  adopted  by  the  Council  on  8  March  2016.  As  a  country  whose 
currency is the euro and in view of the close interlinkages between the economies in 

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OJ L 209, 2.8.1997, p. 1. 
COM(2016) 334 final. 
P8_TA(2016)0058, P8_TA(2016)0059, and P8_TA(2016)0060. 
COM(2015) 690 final. 
COM(2015) 691 final. 
COM(2015) 692 final. 

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(2) 

(3) 

(4) 

(5) 

(6) 

the  economic  and  monetary  union,  Latvia  should  ensure  the  full  and  timely 
implementation of the recommendation. 
The 2016 country report for Latvia7 was published on 26 February 2016. It assessed 
Latvia’s progress in addressing the country-specific recommendations adopted by the 
Council  on  14 July  2015  and  Latvia's  progress  towards  its  national  Europe  2020 
targets. 

On 14 April 2016, Latvia submitted its 2016 national reform programme and its 2016 
stability  programme.  To  take  account  of  their  interlinkages,  the  two  programmes 
have been assessed at the same time. 

recommendations  have  been  addressed 

Relevant  country-specific 
the 
programming  of  the  European  Structural  and  Investment  Funds  for  the  2014-2020 
period.  As  foreseen  in  Article  23  of  Regulation  (EU)  No  1303/2013,  where  it  is 
necessary  to  support  the  implementation  of  relevant  Council  recommendations,  the 
Commission may request a Member State to review and propose amendments to its 
Partnership  Agreement  and  relevant  programmes.  The  Commission  has  provided 
further  details  on  how  it  would  make  use  of  this  provision  in  guidelines  on  the 
application of the measures linking the effectiveness of the European Structural and 
Investment Funds to sound economic governance8.  

in 

In its 2016 stability programme, Latvia has requested a temporary deviation of 0.5 % 
of  GDP  from  the  required  adjustment  path  towards  the  medium-term  budgetary 
objective in 2017 to take account of major structural reforms with a positive impact 
on  the  long-term  sustainability  of  public  finances,  notably  for  the  ongoing  health 
sector reform based on the Health Strategy for 2014-2020. The details of the reform 
are  summarised  in  the  stability  programme.  The  objective  is  to  increase  public 
financing for the health sector to 4% of GDP by 2020 relative to 3% of GDP in 2015. 
The full implementation of the reform is estimated to increase employment by 0.6% 
and  the  GDP  level  by  2.2%  by  2023,  which  will  have  a  positive  impact  on  the 
sustainability of public finances in the long run. The positive impact on growth and 
the long-term sustainability of public finances is assessed to be plausible.  Latvia can 
currently  be  assessed  as  qualifying  for  the  requested  temporary  deviation  in  2017, 
provided that it adequately implements the agreed reforms, which will be monitored 
under  the  European  Semester.  However,  the  amount  of  the  allowed  temporary 
deviation is conditional on the respect of the minimum benchmark (i.e. a structural 
deficit of 1.7% of GDP). As a result, the Commission 2016 spring forecast indicates 
scope for an additional temporary deviation of 0.1% of GDP in 2017. 

Latvia is currently in the preventive arm of the Stability and Growth Pact. In its 2016 
stability  programme,  the  government  plans  a  gradual  improvement  in  the  headline 
balance  to  reach  0.5%  of  GDP  in  2019.  The  planned  adjustment  path  towards  the 
medium-term  budgetary  objective  –  a  deficit  of  1%  of  GDP  in  structural  terms  – 
takes into account the requested deviations related to the systemic pension reform in 
2017  and  2018  and  for  the  major  structural  reform  in  the  healthcare  sector  in  the 
period  2017-2019.  According  to  the  stability  programme,  the  government  debt-to-
GDP ratio is expected to rise to 40% in 2016 before declining to 38% in 2018. The 
macroeconomic  scenario  underpinning  these  budgetary  projections  is  plausible. 
However,  the  measures  needed  to  support  the  planned  deficit  targets  from  2017 

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SWD(2016) 82 final. 
COM(2014) 494 final. 

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onwards have not been sufficiently specified. Based on the Commission 2016 spring 
forecast, the overall assessment points to a risk of some deviation in 2016 and, under 
unchanged policies, in 2016 and 2017 taken together. Based on its assessment of the 
stability  programme  and  taking  into  account  the  Commission  2016  spring  forecast, 
the  Council  is  of  the  opinion  that  Latvia  is  expected  to  broadly  comply  with  the 
provisions of the Stability  and Growth Pact. Nevertheless, further measures will be 
needed to ensure compliance in 2016.  

The  labour  supply  is  constrained  by  a  declining  working  age  population  and  wage  
growth exceeds productivity, threatening cost-competitiveness. Measures to increase 
employability  and  improve  human  capital  are  therefore  necessary  to  support 
competitiveness.  

Latvia's at risk-of-poverty and social exclusion rate is among the highest in the EU. 
Preparatory  work  is  on-going  to  introduce  a  minimum  income  level,  but  its 
implementation  is  uncertain  and  its  universal  application  is  being  diluted,  due  to 
fiscal  costs.  Furthermore,  the  adequacy  of  social  assistance  benefits  has  not  been 
improved since 2009, preventing effective poverty reduction. The minimum income 
level reform is expected to reduce the current fragmentation of social assistance and 
provide an incentive for employment.  

The  coverage  of  activation  measures  remains  low,  particularly  for  the  long-term 
unemployed.    In  combination  with  poor  health  and  insufficient  social  services,  this 
hampers  effective  reintegration  in  the  labour  market.  Increasing  the  take-up  of 
activation measures would boost employment.  

The low public financing of healthcare, inherent structural weaknesses, high out-of-
pocket  payments  and  suboptimal  cost-effectiveness  leave  much  of  the  population 
with  unmet  healthcare  needs.  While  access  to  healthcare  for  critical  medical  cases 
has been given priority, financial constraints limit the supply of services in general. 

(7) 

(8) 

(9) 

(10) 

(11)  While  Latvia  has  made  progress  in  reforming  the  higher  education  system,  namely 
by  providing  incentives  that  reward  quality  and  establishing  an  independent 
accreditation  system,  improvements  of  vocational  education  and  training  are 
necessary,  particularly  with  respect  to  reforming    curricula  and  setting  up  a 
regulatory  framework  for  apprenticeship-type  schemes,  in  order  to  improve  their 
quality  and  availability.  Social  partners  can  play  a  role  in  the  development  of 
apprenticeship-type schemes, as outlined in the Vocational Education Law. 

(12) 

(13) 

Investments are being held back by innovation issues, shortcomings in the business 
environment and the shrinking size of the labour force. Poor innovation drive and a 
fragmented  research  base  hamper  Latvia's  rapid  and  efficient  transition  towards 
higher  value-added  and  more  knowledge-intensive  activities.  Low  protection  for 
investors in the application of the insolvency system, coupled with inefficiencies in 
public administration, further inhibit investments.  

The  government  has  taken  steps  to  reduce  the  current  fragmentation  of  the  public 
research  base,  improve  its  quality  and  enhance  the  business  sector's  innovation 
capacity.  Despite  progress,  both  public  and  business  investments  in  research  and 
innovation remain very low compared with the EU average. The consolidation of the 
research base needs to be continued, along with increasing the number of reserchers 
and  the  quality  of  research.  Full  implementation  of  reforms  based  on  the  Smart 
Specialisation Strategy and the full use of all existing policy tools would incentivese 
private investments in innovation.  

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(14) 

(15) 

(16) 

(17) 

The insolvency regime is perceived by business as an obstacle to investment, given 
that assets recovery rates are low and insolvency administrators are subject to little 
supervision. 

Latvia  has  introduced  several  successful  initiatives  to  improve  the  efficiency  and 
quality of the justice system. However, although it is comprehensive, the conflict of 
interest  prevention  regime  for  public  officials  is  complex  and  rigid,  prioritising 
formal  compliance  over  the  merits  of  individual  cases.  Moreover,  the  Corruption 
Prevention  Office  has  been  weakened  by  internal  tensions,  destabilising  it  and 
reducing  public  trust  in  its  operations  and  its  willingness  to  prioritise  high  profile 
cases. 

General  inefficiencies  in  public  administration,  due  largely  to  high  staff  turnover, 
delays in the public service reform and weak project management, are not conducive 
to a favourable investment environment. Public sector remuneration is not properly 
linked to responsibilities.   

In  the  context  of  the  European  Semester,  the  Commission  has  carried  out  a 
comprehensive  analysis  of  Latvia’s  economic  policy  and  published  it  in  the  2016 
country report. It has also assessed the stability programme and the national reform 
programme and the follow-up given to the recommendations addressed to Latvia in 
previous  years.  It  has  taken  into  account  not  only  their  relevance  for  sustainable 
fiscal  and  socioeconomic  policy  in  Latvia  but  also  their  compliance  with  EU  rules 
and guidance, given the need to strengthen the EU's overall economic governance by 
providing EU level input into future national decisions. The recommendations under 
the European Semester are reflected in recommendations 1 to 3 below. 

(18) 

In  the  light  of  this  assessment,  the  Council  has  examined  the  stability  programme, 
and its opinion9 is reflected in particular in recommendation 1 below. 

HEREBY RECOMMENDS that Latvia take action in 2016 and 2017 to: 

1. 

2. 

3. 

Ensure  that  the  deviation  from  the  adjustment  path  towards  the  medium-term 
budgetary  objective  in  2016  and  2017  is  limited  to  the  allowance  linked  to  the 
systemic  pension  reform  and  the  major  structural  reform  in  the  healthcare  sector. 
Reduce  the  tax  wedge  for  low-income  earners  by  exploiting  a  growth-friendly  tax 
shift towards environmental and property taxes and improving tax compliance. 

Improve the adequacy of social assistance benefits and step up measures supporting 
recipients  in  finding  and  retaining  work,  including  through  increased  coverage  of 
activation measures. Speed up the curricula reform in vocational education, establish 
with  the  involvement  of  social  partners  a  regulatory  framework  for  apprenticeship-
type  schemes  and  increase  their  offer.  Improve  the  accessibility,  quality  and  cost-
effectiveness of the healthcare system. 

Pursue  the  consolidation  of  research  institutions  and  provide  incentives  for  private 
investment  in  innovation.  Strengthen  the  conflict  of  interest  prevention  regime  and 
set  up  a  common  legal  framework  for  all  public  employees.  Increase  the 
accountability and public oversight of insolvency administrators.  

9 

Under Article 5(2) of Council Regulation (EC) No 1466/97. 

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Done at Brussels, 

For the Council 
The President 

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