COMMISSION STAFF WORKING DOCUMENT Country Report Latvia 2017 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2017 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011 {COM(2017) 90 final} {SWD(2017) 67 final to SWD(2017) 93 final}
Date: 2017-02-22
Institutions: European Commission, Secretariat-General
Subjects: EU employment policy, EU investment, Latvia, economic development, economic recovery, euro area, fiscal policy, macroeconomics, multilateral surveillance, structural adjustment

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 22.2.2017  SWD(2017) 79 final   COMMISSION STAFF WORKING DOCUMENT Country Report Latvia 2017 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2017 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011  {COM(2017) 90 final} {SWD(2017) 67 final to SWD(2017) 93 final}  
 
 
CONTENTS 

Executive summary 

1. 

Economic situation and outlook 

2. 

Progress with country-specific recommendations 

3. 

Reform priorities 

3.1.  Public finances and taxation 

3.2. 

Financial sector 

3.3. 

Labour market, education and social policies 

3.4. 

Investment 

3.5. 

Sectoral policies 

3.6.  Public administration 

A.  Overview Table 

B.  MIP Scoreboard 

C. 

Standard Tables 

References 

LIST OF TABLES 

1.1. 

1.2. 

2.1. 

Financial soundness indicators, all banks in Latvia 

Key economic, financial and social indicators — Latvia 

Summary table on 2016 CSR assessment 

B.1. 

The MIP Scoreboard for Latvia 

C.1. 

Financial market indicators 

C.2. 

Labour market and social indicators (A) 

C.3. 

Labour market and social indicators (B) 

C.4. 

Product market performance and policy indicators 

C.5.  Green growth 

1 

4 

10 

12 

12 

18 

21 

29 

32 

36 

41 

45 

46 

51 

7 

9 

10 

45 

46 

47 

48 

49 

50 

 
 
 
 
 
 
 
LIST OF GRAPHS 

1.1. 

Labour market trends in Latvia 

1.2.  Minimum wage as a percentage of average earnings 

1.3. 

1.4. 

1.5. 

1.6. 

1.7. 

1.8. 

Sectoral wage differences 

At-risk-of-poverty or social exclusion rate and its components 

Lending trends 

Net international investment position 

Nominal wage growth in Latvia in comparison with wage benchmarks 

Real unit labour cost breakdown (% change) 

3.1.1.  Government expenditure growth plans 

3.1.2. 

Tax wedge of single earners, various income levels, 2015 

3.2.1.  Funding of non-financial corporations 

3.3.1.  Coverage of activation-support, 2014 

3.3.2.  Expenditure on and participation in activation measures, 2016 

3.3.3. 

Labour market outcomes by skills level and by gender 

3.3.4.  Self-reported unmet needs for medical examination, 2014 

3.3.5.  Health expenditure in 2014 

3.4.1. 

Investment by institutional sector as a share of GDP 

3.4.2. 

Implementation of EU funds 

3.5.1.  Greenhouse gas emissions 

3.6.1.  Corruption perception 

LIST OF BOXES 

2.1. 

Contribution of the EU budget to structural change in Latvia 

3.1.1.  Fiscal and distributional impacts of tax reforms 

3.2.1.  Selected highlight: Altum – single development financing institution 

3.4.1. 

Investment challenges and reforms in Latvia 

4 

5 

5 

6 

7 

8 

8 

8 

12 

14 

19 

21 

22 

22 

25 

25 

29 

29 

33 

38 

11 

16 

20 

30 

 
 
 
 
EXECUTIVE SUMMARY 

This report assesses Latvia’s economy in the light 
of  the  European  Commission’s  Annual  Growth 
Survey  published  on  16 November 2016.  In  the 
survey  the  Commission  calls  on  EU  Member 
States  to  redouble  their  efforts  on  the  three 
elements  of  the  virtuous  triangle  of  economic 
policy — boosting investment, pursuing structural 
reforms and ensuring responsible fiscal policies. In 
so  doing,  Member  States  should 
focus  on 
enhancing  social  fairness  in  order  to  deliver  more 
inclusive growth. 

Latvia  has  experienced  subdued  economic 
growth  in  recent  years,  but  the  short-term 
outlook  is  more  positive.  Real  GDP  growth  has 
been  below  3 %  since  2013  and  is  estimated  as 
having been particularly  weak  in 2016. Growth  is 
driven by productivity gains, but employment and 
investment  dynamics  have  been  weak.  A  pick-up 
in  economic  growth  is  expected  in  2017  (2.8 %) 
the  need  for 
and  2018  (3.0 %),  fuelled  by 
investments  and  the  upturn  in  the  EU  financing 
cycle. 

environment 

is  affected  by  uncertainty  and 
Investment 
in  EU  funding.  The 
the temporary  trough 
investment 
by 
is  weakened 
uncertainty  stemming  from  both  the  external 
situation and domestic economic policies. There is 
continued  uncertainty  about  possible  tax  reforms, 
in  case  of 
the  weak 
investment  protection 
insolvency  and 
informal  economy. 
large 
Delays  in  the  use  of  EU  funds  under  the  new 
programming period have caused investment to be 
postponed 
in  2016.  However,  EU-financed 
projects  are  expected  to  resume  from  2017. 
Moreover,  after  a  prolonged  period  of  debt 
reduction companies and households can allow for 
credit expansion for investment. 

the 

Consumer  spending  is  supported  by  dynamic 
wage  developments  and  has  contributed 
significantly  to  GDP  growth.  Continued  strong 
wage  growth  is  driven  by  demand  for  labour, 
especially  for  high-skilled  workers,  a  falling 
population and increases in the national minimum 
wage.  

Despite  weak  demand  from  trading  partners, 
Latvia  runs  a  limited  external  deficit.  Positive 
net non-trade flows with the rest of the world, such 
as  labour  income,  compensate  for  a  small  trade 
deficit.  The  trade  deficit  is  the  result  of  strong 

1 

domestic  demand,  leading  to  import  outpacing 
export  growth,  which  has  experienced  adverse 
external conditions in the last two years. The trade 
balance is expected to deteriorate slightly in 2017 
and 2018 in line with the recovery of investments. 
In terms of stocks, the net international investment 
position  has  been  gradually  improving,  although 
from a large debtor position (above 60 % of GDP). 

Emigration  and  skills  mismatches  limit  labour 
supply.  Net  outward  migration  and  low  fertility 
rates have reduced the working-age population. As 
a  result,  age  dependency  has  increased,  putting  a 
strain  on  public  resources  for  social  and  health 
services.  Because  of  a  declining  labour  force, 
employment  growth  has  been  weak,  while 
unemployment  has  been  falling  only  slowly. 
Employment  prospects  are  better  in  centres  of 
economic  activity  and  for  high-skilled  workers. 
Unemployment is  more  prevalent  among  the  low-
skilled and those living in rural areas.  

Inequality  remains  high  and  affects  the  labour 
market.  The  tax-benefit  system  in  Latvia  is  less 
effective  at  reducing  inequality  than  in  other  EU 
countries.  The  high  tax  wedge  on  low  wages 
discourages  formal  employment.  Weaknesses  in 
providing  public  services  affect  the  quality  of  the 
workforce in terms of education, skills and health. 
Finally,  the  weak  social  protection  results  in  high 
poverty 
for  people  with 
rates, 
disabilities and the elderly. 

especially 

Budgetary targets are prudent, but revenue and 
expenditure  plans  remain  to  be  fully  defined. 
The government position improved to a balance in 
2016, but is projected to record a deficit of 1 % of 
GDP  in  2017  and  2018.  However,  the  stated 
objective to increase the tax-revenue-to-GDP ratio 
is  not  yet  substantiated  and  expenditure  plans 
beyond the annual budget underrepresent spending 
needs.  Government  debt  was  at  40 %  of  GDP  at 
the end of 2016 and is projected to decline over the 
coming years. 

the 

2016 

Overall,  Latvia  has  made  limited  progress  in 
addressing 
country-specific 
recommendations. Some progress has been made 
in  the  consolidation  of  research  institutions,  in 
strengthening private sector innovation incentives, 
in 
improving 
tax  compliance, 
vocational  education,  with  the  involvement  of 
social partners, in increasing the accountability and 

improving 

in 

 
 
Executive summary 

needs  takes  time  and  little  progress  was  made 
in  2016.  The regulatory  framework  for  work-
based learning has been adopted, but it has not 
been effectively implemented yet. Participation 
in lifelong learning remains low. 

  Investment 

innovation 
in  research  and 
remains  low.  Public  research  relies  on  EU 
funds  and  its  effectiveness  is  hampered  by 
internationalisation. 
fragmentation  and 
low 
The framework 
business 
innovation  is  in  place.  The  first  monitoring 
report will be published in 2017.  

supporting 

for 

and 

public 

  Health outcomes remain problematic due to 
low 
structural 
funding 
impediments.  The  healthcare  system  remains 
underfunded as public healthcare expenditure is 
low.  While  public  funding  has 
increased 
somewhat  in  2017,  specific  measures  for  the 
medium  term  are  still  to  be  spelled  out. 
Furthermore, 
and 
untransparent  public  purchasing  of  health 
services  and  supplies  create  corruption  risks 
and inefficiencies.  

constraints 

access 

  The high proportion of people living at risk 
of  poverty  or  social  exclusion  remains 
a major  social  and  economic  challenge. 
Weaknesses 
in  basic  social  safety  nets 
contribute  to  high  poverty  and  inequalities. 
The reform 
level 
announced  in  2014  was  intended  to  raise  the 
adequacy  of  social  benefits.  The  reform  was 
supposed  to  be  implemented  in  2017,  but  has 
been  abandoned  and  a  replacement  plan  is  in 
preparation. 

of  minimum 

income 

public  oversight  of  insolvency  administrators  and 
in supporting social assistance recipients in finding 
and retaining work. However, limited progress has 
been  made  in  shifting  the  tax  burden  away  from 
low-wage  earners,  in  improving  the  adequacy  of 
social  assistance  benefits, 
the 
accessibility,  quality  and  cost-effectiveness  of  the 
healthcare  system,  in  strengthening  arrangements 
to  prevent  conflicts  of  interest  and  in  setting  up  a 
common legal framework for all public employees. 

improving 

in 

Regarding progress in reaching the national targets 
the  Europe  2020  strategy,  Latvia  has 
under 
attained its employment rate target in 2016 and is 
performing  well  on  renewable  energy,  energy 
efficiency,  reducing  greenhouse  gas  emissions, 
reducing  early  school  leaving,  increasing  tertiary 
education  attainment  and  reducing  poverty.  More 
effort is needed in R&D investment.  

The main findings of the analysis contained in this 
report,  and  the  related  policy  challenges,  are  as 
follows: 

  Latvia’s 

tax 

is  not 

very 
structure 
growth-friendly  and,  despite  some  progress, 
tax compliance remains a challenge. The tax 
wedge  on  low-wage  earners  remains  high, 
while  the  revenue potential  of  taxes  which  are 
less detrimental to growth is underused, such as 
taxes  on  consumption,  property  and  capital. 
Simulations  show  that  a revenue–neutral  tax 
shift  would  have  positive  employment  and 
GDP  growth  effects,  while  also  reducing 
income  inequality.  Moreover,  property  tax 
evasion  is  more  difficult  than  labour  tax 
evasion.  

  Activation of unemployed remains relatively 
low.  The  involvement  of  the  unemployed  in 
active labour market measures is low relative to 
other Member States. The support measures are 
insufficiently  developed  for  the  low-skilled, 
long-term  unemployed  and  persons  with 
disabilities, with some improvements expected 
as of 2017. 

  The attractiveness of vocational education is 
being  improved,  but  the  curriculum  reform 
is  progressing  slowly.  Vocational  schools  are 
being  modernised,  but  the  curriculum  reform 
aligning  education  with  contemporary  skills 

  A  public  sector  reform  aims  to  increase 
the quality  and  efficiency  of  the  central 
administration, but local authorities are not 
covered.  Efficiency  gains  are  expected  by 
simplifying procedures, making better use of IT 
solutions  and  increasing  pay.  However,  there 
are  no  reforms  planned  at  local  government 
level,  which  accounts  for  a  large  share  of 
public employment and has not seen significant 
efficiency gains from past reforms. Also, there 
is  little  oversight  and  few  incentives  for 
efficiency of the local authorities.  

2 

 
 
Executive summary 

  Energy  market  integration  continues  with 
improving  network  connections  and  the 
gradual  liberalisation  of  the  gas  markets  in 
the  broader  Baltic  Sea  region.  Unbundling 
and  full  opening  of 
the  gas  market  for 
competition is a priority area of action in 2017. 
Significant  investments  in  electricity  and  gas 
domestic 
interconnections, 
infrastructure and synchronising  the  electricity 
grids  with  the  European  network  will  be 
crucial.  Support 
for  electricity 
schemes 
generation  from  fossil  fuels  in  co-generation 
and  from  renewable  energy sources have  been 
complex,  costly 
for  consumers  and  not 
conducive to additional investments. 

strengthening 

remain  as  public  officials’ 

  Policies  on  the  prevention  of  conflicts  of 
interest  are  formalistic.  Conflicts  of  interest 
may 
income 
declarations  have  not  been  verified  with 
sufficient diligence. Longstanding infighting at 
the  Corruption  Prevention  and  Combating 
Bureau  continued  in  2016,  which  has  lowered 
the  effectiveness  of  the  Bureau  and  dented 
public  trust.  More  independence  and  powers 
have been granted to the director of the Bureau 
and  a  transparent  selection  of  the  director  is 
pending.  

has 

  The  legal  framework  for  supervision  of 
been 
administrators 
insolvency 
completed,  but  challenges  remain. 
In 
response to fraudulent behaviour by insolvency 
administrators, important steps have been taken 
to 
interest. 
Moreover, more supervisory powers have been 
granted  to  the  Insolvency  Administration,  but 
their effective application remains to be seen. 

restrict  possible  conflicts  of 

  Governance  of  state-owned  enterprises  has 
improved  for  the  central  government,  but 
oversight  at  local  government  level  remains 
limited. Consolidated reporting on state-owned 
enterprises and competition-based management 
selection have been implemented at the central 
such  governance 
government 
standards  are  not  yet  applied  at  the  local 
government level. 

level,  but 

3 

 
 
1.  ECONOMIC SITUATION AND OUTLOOK 

GDP growth 

In  2016,  GDP  growth  was  relatively 
low 
(+1.6 %),  but  is  bound  to  pick-up  in  2017  and 
2018  to  2.8 %  and  3.0 %  respectively  (Table 
1.2).  Since  the  crisis,  economic  growth  has  been 
driven  by  productivity  gains,  as 
labour  and 
investment  dynamics  are  subdued.  Latvia  still 
faces risks from its external environment, while on 
the domestic side, its capacity to make the most of 
opportunities  from  EU  funds  will  be  critical  to 
support growth. 

In 2016, economic growth was notably affected 
by  a  temporary  drop  in  investment,  linked  to 
the  slow  implementation  of  EU  funds.  The 
situation  is  set  to  improve  already  in  2017  with  a 
rebound  in  investment  (Section  3.4).  On  the 
private side, the capacity utilisation rate is back to 
its pre-crisis historical high while borrowing costs 
and  conditions  are  expected  to  keep  gradually 
improving.  Hence,  private  investment  is  expected 
to recover in the coming years. On the public side, 
EU  funds  are  expected  to  bottom-up  in  2017  and 
2018  and  foster  public  investment  (see  Section 
3.4). 

and 

hold 

trade 

Consumption 
steady. 
is 
Consumption  has  supported  growth  and 
expected  to  continue  to  do  so,  supported  by 
cumulated wage increases. Exports have withstood 
adverse  external  conditions  in  the  last  two  years, 
but  imports  are  supported  by  more  favourable 
domestic  demand.  Overall,  trade  is  expected  to 
have  had  a  negative  impact  on  growth  in  2016 
(-1.0 pp). This negative contribution is expected to 
persist  in  2017  and  2018  with  the  recovery  of 
investment. 

Inflation was slightly negative in 2016 (-0.1 %). 
The  fading  of  the  base  effects,  combined  with  a 
projected  increase  in  energy  prices  and  continued 
strong  wage  increases  are  expected  to  drive 
inflation up to close to 2 % in the coming years. 

Labour market 

Employment  remains  stable  despite  negative 
demographic  trends  (Graph 1.1).  The  working 
age  population  continues  to  fall  by  around  1 %  a 
year, as a result of negative natural growth and net 
emigration.  The  decline  in  labour  supply  puts 

4 

upward pressure on activity and employment rates. 
Employment is projected to see a small decline in 
temporary 
2016,  predominantly  due 
before 
of 
shedding 
recovering in the following years.  

construction  workers, 

the 

to 

Graph 1.1: 

Labour market trends in Latvia 

Source: European Commission 

The improvement in the labour market does not 
reach  all  segments  equally.  The  decline  in 
unemployment has slowed and the unemployment 
rate  remained  above  the  EU  average  at  9.5 %  in 
Q3-2016.  Work  opportunities  are  lower  for  the 
older  population  (50+), 
low  and 
medium  qualification  levels  and  among  those 
living 
long-term 
unemployment  rate  continues  to  decline  and  is  at 
the  EU  average.  On  the  positive  side,  youth 
unemployment  and  the  share  of  young  people  not 
in  education,  employment  or  training  (age  group 
15-24) are well below the EU average (1). 

regions.  The 

those  with 

rural 

in 

One  in  five  workers  receives  the  minimum 
wage.  The  national  minimum  wage  was  raised 
considerably in 2014 and 2015 (from EUR 289 to 
EUR 360 a month). For 2016 and 2017, minimum 
wage growth is estimated to be below the average 
wage growth (rising to EUR 370 and to EUR 380 
respectively).  21 %  of  all  workers  receive  the 
minimum  wage  (2),  with  a  higher  share  in  less 

(1)  at 16.3 % and 10.5 % respectively in 2015 
(2)  The  share  of 

the  population 

is  paying  social 
contributions  based  on  the  minimum  wage  is  as  high  as 
35%,  but  this  also  includes  self-employed  and  people 
receiving social insurance benefits. 

that 

-15%-10%-5%0%5%10%04050607080910111213141516*17*18*growth rate (%)change in participationchange inunemploymentchange in working agepopulationemployment 
 
 
                                                           
1. Economic situation and outlook 

Graph 1.3: 

Sectoral wage differences 

developed regions. This is high compared to other 
European  countries,  although  there  may  be  some 
underreporting  of  wages  (Graph 1.2).  In  less 
developed  regions,  the  minimum  wage  level  can 
negatively affect employment growth. In 2016, the 
minimum wage stood at 66 % of the average wage 
in  the  eastern  regions,  compared  to  45 %  of  the 
national  average  wage.  In  2016,  a  broader  set  of 
economic factors (such as regional unemployment) 
were  included  in  the  government  regulation  on 
minimum wage setting.  

Graph 1.2:  Minimum wage as a percentage of average 

earnings 

Wages are measured as gross monthly fulltime equivalent 
wages, based on self-reported data. The considered sectors 
are (NACE rev2 codes in brackets): agriculture, forestry and 
fishing (A); industry (without construction) (C, D, E); 
construction (F); wholesale, retail and repair (G), 
transportation and storage (H), accommodation and food 
service (I), Information and communication (J), Finance and 
insurance (K), real estate, professional, scientific and tech. 
activities, administrative and support services (LMN); public 
administration and defence (O), education (P), human 
health and social work (Q), and other activities (RSTU). 
Source: EU SILC 2008 and EU SILC 2015 

Poverty and inequalities 

Income  inequality  and  poverty  remain  high. 
The main income inequality indicator – the ratio of 
the  highest  to  the  lowest  income  quintile  or 
S20 /S80  ratio (3) - stands at 6.5. This is above the 
EU average where the top 20 % earn 5.2 times the 
income  of  the  bottom  20 %,  and  this  ratio  has 
stagnated since 2011. The Gini coefficient, another 
measure  of  income  inequality,  is  also  among  the 
highest in the EU at 35.4 in 2015 compared to 31.0 
on average in the EU. The Gini coefficient is also 
stable  since  2010.  In  addition,  net  wealth  (4) 
inequality  is  among  the  highest  in  the  EU  (ECB 
2016). 

The  tax  and  benefit  system  remains 
less 
effective  in  reducing  income  inequalities  than 
the EU average. Taxes and benefits bring income 
inequalities  down  by  14  points  of  the  Gini 

(3)  The income quintile share ratio is calculated as the ratio of 
total  income  received  by  the  20 %  of  the  population  with 
the highest income (the top quintile) to that received by the 
20 % of the population with the lowest income (the bottom 
quintile).  

(4)  Difference between total assets and total liabilities. 

Average earnings for 2015 and 2016 are taken from the 
Central Statistical Bureau of Latvia. The 2016 average wage 
is estimated as the simple average of average earnings for 
2016Q1 and Q2 and may therefore be a slight 
underestimation. 
Source: Eurostat, Central Statistical Bureau of Latvia, 
calculation by European Commission 

in 

Wage disparities are stable or declining. Across 
sectors, wage growth is relatively uniform (Graph 
1.3).  The  highest  wage  growth  is  observed  in 
higher  technology services  (finance  and  insurance 
or information and communication). Wage growth 
is  also  high 
lower-pay  sectors  such  as 
agriculture  and  low-paid  services  (wholesale  and 
retail  trade,  transport,  accommodation  and  food 
service  activities).  Across  wage  levels,  wage 
growth has favoured the lowest paid workers: from 
2007  to  2015,  wages  of  the  lowest  paid  quarter 
rose by 9.9 % per year, compared to 7.2 % for the 
highest  paid  quartile.  Since  the  crisis,  the  highest 
wage  growth  for  these  low-paid  workers  was 
observed in 2014 and 2015, in line with substantial 
minimum wage increases. 

5 

2025303540455055600809101112131415*16*Percentage of average earnings (%)EU minLatviaEU max020040060080010001200140016001800ABEFGHIJKLMNOPQRSTUEUR / month20082015 
 
 
                                                           
1. Economic situation and outlook 

Government debt is estimated to peak at 39.4 % 
of  GDP  in  2016,  largely  due  to  the  pre-financing 
of  a  large  debt  redemption  in  early  2017,  before 
decreasing  thereafter.  Debt  servicing  costs  are 
falling  in  line  with  the  current  low  interest  rate 
environment.  The  interest  expenditure  to  GDP 
ratio  is  projected  to  drop  from  1.3 %  in  2015  to 
1 % of GDP in 2017. 

Financial sector 

Despite post-crisis deleveraging, Latvia still has 
the  largest  banking  sector  among  the  Baltic 
countries.  Bank  assets  amounted  to  EUR 31.9 
billion  in  2015  (131 %  of  GDP).  The  banking 
sector  is  dominated  by  Nordic  banks.  Other 
financial  institutions  remain  limited  in  size  with 
pension  funds  at  EUR 2.7  billion  (11 %  of  GDP) 
and  insurers  assets  totalling  EUR 1.1 billion  (5 % 
of GDP). 

Lending  to  companies  picked  up  after  a  three 
year  contraction.  By  November  2016,  overall 
lending  growth  reached  2.4 %  annually.  Net 
lending  to  domestic  businesses  increased  in  2016 
after three years of deleveraging, growing 3.8 % y-
o-y by December (Graph 1.5). However, loans for 
house purchases continued to fall, albeit at an ever 
slower  pace,  as  the  post-crisis  deleveraging  of 
mortgage  exposure  continued.  According  to  the 
Bank  of  Latvia,  the  creditworthiness  of  domestic 
borrowers continues to improve in general. At the 
same  time,  recent  changes  to  facilitate  personal 
insolvency led banks to be more careful in granting 
credit.  In  this  regard,  Latvia  is  lagging  behind  its 
Baltic  neighbours:  both  Lithuania  and  Estonia  are 
recording much higher credit growth. 

coefficient  in  Latvia  against  21  points  in  the  EU 
average.  This  situation  is  due  to  both  the  very 
limited  progressivity  of  the  tax  system  (Section 
3.1.3  and  Box  3.1.1)  and  the  limited  social 
protection system (Section 3.3.4). Relative poverty 
(5) has been increasing since 2011 (Graph 1.4), as 
economic  growth  favours  the  economically  active 
population. The low adequacy of social assistance 
benefits  and  pensions  does  not  provide  effective 
protection  against  poverty  (Section  3.3.4).  In 
addition,  inequalities  are  also  reflected  in  non-
financial  aspects  such  as  access  to  health  care 
(Section  3.3.3)  and  quality  learning  opportunities 
between rural and urban schools (Section 3.3.2). 

Graph 1.4:  At-risk-of-poverty or social exclusion rate and 

its components 

Source: Eurostat EU-SILC 

Public finance 

While  the  fiscal  position  remains  sound,  public 
investment  fluctuations  and  uncertainty  over 
future  tax  policies  weigh  on  the  business 
environment. The government is expected to have 
been balanced in 2016. At the same time, delays in 
implementing  EU–funded  projects  have  disrupted 
public  investment,  risking  insufficient  absorption 
capacity  in  the  construction  sector  from  2017 
onwards (see Section 3.4). The announced stability 
of  tax  policy  was  undermined  by  last  minute 
changes  to  the  2017  budget  and  uncertainty  over 
the upcoming tax strategy (see Section 3.1). 

(5)  Percentage of people having income below 60 % of median 

equivalised disposable income 

6 

010203040500506070809101112131415% of populationAt-risk-of-poverty-or-social-exclusion rateAt-risk-of-poverty rateSevere material deprivationPeople living in low work intensity households 
 
                                                           
1. Economic situation and outlook 

Graph 1.5: 

Lending trends 

Table 1.1: 

Financial soundness indicators, all banks in 
Latvia 

(1) ECB aggregated balance sheet: loans excl. to gov and 
MFI / deposits excl. from gov and MFI 
(2) Differs from Table 1.2. Includes EU and non-EU foreign-
controlled subsidiaries and branches operating in Latvia. 
Source: ECB 

The banking sector's profitability held up well. 
Both  the  return  on  equity  (10.7 %)  and  the  return 
on  assets  (1.2 %)  were  well  above  the  euro  area 
averages (4.4 % and 0.3 %, respectively). In 2015, 
average  return  on  assets  in  the  Latvian  banking 
sector was the highest among EU countries, which 
was also due to the high lending margins. 

On  the  liabilities  side,  deposits  have  been 
growing  since  2012.  This  trend  helped  the  banks 
rebalance  their  funding  structure.  The  loan-to-
deposit  ratio  declined  to  110 %,  which  is  a 
sustainable  level.  Specialised  banks  account  for 
42%  of  these  deposits  and  service  non-resident 
clients.  Issues  related  to  this  business  model  are 
discussed in Section 3.2. 

External position 

The trade and current account deficits are set to 
widen  in  2017  and  2018.  In  nominal  terms, 
energy prices are expected to widen the small trade 
deficit, but Latvia is doing relatively better than its 
trade partners. In all - i.e. accounting for economic 
flows  other  than  trade  -  Latvia  is  even  in  a  net 
lending position, leading to a slow improvement in 
the  net  international  investment  position.  It  is 
expected  to  have  reached  –60 %  in  Q3-2016 
(Graph  1.6).  While  at  a  high 
this 
level, 
indebtedness  mostly 
foreign  direct 
investment in Latvia in the financial and real estate 
sectors (European Commission, 2016a). 

reflects 

on 

1.8)  may  weigh 

Strong  growth  in  nominal  unit  labour  costs 
external 
(Graph 
competitiveness. Wage growth is driving domestic 
demand  and  GDP  growth.  Thus,  it  contributes  to 
convergence  and  counteracts  net  emigration. 
However,  unemployment  remains  relatively  high 
among lower-skilled workers, and wage growth is 
only  weakly  matched  by  productivity  growth. 
These  developments  can  signal  risks  to  cost 

Source: European Central Bank 

The  cost  of  credit  is  relatively  high  in  Latvia. 
Bank  average  interest  spreads (6)  for  new  loans 
to  about  2.7  percentage  points  for 
amount 
businesses 
for 
and  2.9  percentage  points 
households.  Latvian  households  had  among  the 
highest  interest  rate  spreads  in  EU  for  their 
mortgages in 2016, just after Ireland. On corporate 
lending,  only  Greek  and  Portuguese  companies 
have to pay higher margins. The cost of credit has 
been  falling  in  recent  years,  but  very  slowly.  The 
main factors behind this situation are risk aversion 
stemming  from  the  crisis  and  the  high  degree  of 
market  concentration,  implying  higher  pricing 
power for banks. 

soundness 

indicators  point 

Financial 
to 
continued stability in the banking sector. Banks 
are  well  capitalised  and  in  June  2016  the  Tier  1 
capital adequacy ratio was 15.6 % (Table 1.1). The 
quality  of  bank  assets  continued  to  improve  with 
the  average  ratio  of  non-performing  loans  (NPL) 
decreasing from the crisis peak of 16 % to 4.4 % in 
mid-2016  The  ratio  of  coverage  of  NPLs  with 
provisions amounted to 53.7 %, slightly above the 
euro area average. 

(6)  Difference  between  weighted  average  interest  rates  on 

loans and deposits. 

7 

-8-6-4-20246Dec-11Apr-12Aug-12Dec-12Apr-13Aug-13Dec-13Apr-14Aug-14Dec-14Apr-15Aug-15Dec-15Apr-16Aug-16y-o-y growth rate %Loans to NFCLending for house purchase(%)2010201120122013201420152016Q2Non-performing loans15.310.17.95.67.75.14.4Coverage ratio60.474.876.279.347.248.753.7Loan to deposit ratio (1)206.7193.3161.7132.3119.4109.3109.3Tier 1 ratio (2)10.913.514.516.517.519.015.6Return on equity (2)-19.74.54.98.810.210.7-Return on assets-1.70.50.60.91.01.2- 
 
                                                           
 
 
 
1. Economic situation and outlook 

Graph 1.8: 

Real unit labour cost breakdown (% change) 

competitiveness.  Indeed,  since  2012,  nominal 
wage  growth  has  been  above  the  rates  that  would 
be  consistent  both  with  internal  labour  market 
conditions  and  with  a  stable  evolution  of  cost 
competitiveness  (Arpaia  and  Kiss  2015,  and 
Graph 1.7). 

Graph 1.6:  Net international investment position 

Source: European Commission 

risks 

overall 

to  Latvia’s 

Despite  recent  losses  in  export  market  share, 
external 
the 
competitiveness  remain  limited.  While  some 
indicators 
the  cost 
reveal  concerns  about 
competitiveness of the Latvian economy, non-cost 
developments are more favourable. Exports quality 
is 
they  are  becoming  more 
technologically-intensive.  In all,  Latvia  is  deemed 
to remain on the normal trajectory of a catching-up 
economy  where  both  prices  and  real  GDP  grow 
faster than in more advanced trading partners.  

improving  and 

Source: European Commission 

Graph 1.7:  Nominal wage growth in Latvia in comparison 

with wage benchmarks 

Source: European Commission, update of Arpaia and Kiss 
(2015) 

8 

-140-120-100-80-60-40-2002040600809101112131415% of GDPGeneral GovernmentPrivate sectorMFI (excl central bank)Central Bank (incl reserves)Net int'l investment position (NIIP)-0.2-0.10.00.10.20.30.497990103050709111315growth rate (%)Actual nominal wage growthBenchmark 1: Predicted nominal wage growth rateBenchmark 2: Wage growth consistent with constantULC-based REER-15-10-50510152025303501020304050607080910111213141516*17*18*Rate of change (%)Inflation (GDP deflator growth)Real Compensation per EmployeeProductivity Contribution (negative sign)Nominal unit labour costnominal ULC in Euro Area 
 
 
 
 
 
 
1. Economic situation and outlook 

Table 1.2: 

Key economic, financial and social indicators — Latvia 

(1) Sum of portfolio debt instruments, other investment and reserve assets 
(2,3) domestic banking groups and stand-alone banks. 
(4) domestic banking groups and stand-alone banks, , EU and non-EU  foreign-controlled subsidiaries and EU and non-EU  
foreign-controlled branches. 
(*) Indicates BPM5 and/or ESA95 

Source: European Commission, ECB 

9 

2004-20082009201020112012201320142015201620172018Real GDP (y-o-y)7.5-14.3-3.86.24.02.92.12.71.62.83.0Private consumption (y-o-y)10.7-16.02.83.03.15.01.33.53.63.93.9Public consumption (y-o-y)3.7-10.7-8.13.00.31.62.13.01.73.02.5Gross fixed capital formation (y-o-y)15.5-33.3-19.824.014.4-6.00.12.8-22.013.04.9Exports of goods and services (y-o-y)12.2-12.913.412.09.81.13.92.62.02.63.1Imports of goods and services (y-o-y) 13.2-31.712.422.05.4-0.20.52.13.64.14.5Output gap5.6-11.2-12.2-5.5-2.00.10.81.01.41.61.4Potential growth (y-o-y)7.1-1.0-2.7-1.30.20.81.42.51.22.63.2Contribution to GDP growth:Domestic demand (y-o-y)10.4-22.1-4.37.15.21.81.23.3-2.55.23.9Inventories (y-o-y)-0.5-3.80.34.8-3.50.3-1.1-0.85.1-1.50.0Net exports (y-o-y)-2.511.50.2-5.72.30.82.00.3-1.0-0.9-0.9Contribution to potential GDP growth:Total Labour (hours) (y-o-y)0.2-1.4-1.6-1.4-1.2-0.9-0.8-0.3-0.10.10.2Capital accumulation (y-o-y)3.6-0.3-1.5-0.70.1-0.3-0.4-0.2-1.8-0.7-0.2Total factor productivity (y-o-y)3.30.60.40.81.32.02.63.03.23.23.2Current account balance (% of GDP), balance of payments-15.67.82.1-3.2-3.6-2.7-2.0-0.8...Trade balance (% of GDP), balance of payments-15.6-0.8-1.3-5.1-4.6-3.7-1.9-1.1...Terms of trade of goods and services (y-o-y)0.80.20.13.0-2.80.6-1.20.73.2-2.0-0.2Capital account balance (% of GDP)1.32.42.02.13.02.53.22.8...Net international investment position (% of GDP)-62.9-82.4-82.2-74.2-67.9-66.5-64.3-62.5...Net marketable external debt (% of GDP) (1)-33.3-44.8-43.7-34.8-28.9-24.7-21.2-16.8...Gross marketable external debt (% of GDP) (1)97.0139.1153.4130.9124.8118.4128.1126.5...Export performance vs. advanced countries (% change over 5 years)103.065.531.638.220.816.117.612.82...Export market share, goods and services (y-o-y)12.3-1.8-4.87.04.12.40.8-3.9...Net FDI flows (% of GDP)-4.6-0.6-1.5-4.9-3.3-1.6-1.6-2.3...Savings rate of households (net saving as percentage of net disposable income)-6.55.9-4.4-15.0-15.6-16.1-14.7-12.7...Private credit flow, consolidated (% of GDP)23.7-8.72.5-2.1-2.00.9-11.80.7...Private sector debt, consolidated (% of GDP)89.9125.4134.0115.598.192.696.388.8...of which household debt, consolidated (% of GDP)34.550.449.840.433.229.626.624.5...of which non-financial corporate debt, consolidated (% of GDP)55.375.084.275.164.963.069.764.3...Corporations, net lending (+) or net borrowing (-) (% of GDP)-9.212.812.28.16.16.48.17.05.24.13.4Corporations, gross operating surplus (% of GDP)29.827.730.633.432.832.031.029.727.526.426.1Households, net lending (+) or net borrowing (-) (% of GDP)-4.26.60.4-5.7-5.8-5.1-5.3-3.7-2.4-2.0-2.0Deflated house price index (y-o-y)12.2-34.9-8.74.0-0.46.64.2-2.7...Residential investment (% of GDP)4.82.41.61.92.32.22.51.8...GDP deflator (y-o-y)12.5-9.8-1.06.43.61.31.50.40.61.52.6Harmonised index of consumer prices (HICP, y-o-y)9.03.3-1.24.22.30.00.70.20.11.92.0Nominal compensation per employee (y-o-y)23.2-10.9-6.62.47.75.58.66.94.85.35.5Labour productivity (real, person employed, y-o-y)5.30.03.14.62.50.63.51.4...Unit labour costs (ULC, whole economy, y-o-y)17.1-10.9-9.4-2.15.04.94.95.42.92.72.9Real unit labour costs (y-o-y)4.1-1.3-8.5-8.01.43.53.35.02.31.20.3Real effective exchange rate (ULC, y-o-y)12.3-12.5-10.7-2.82.44.44.42.92.01.60.9Real effective exchange rate (HICP, y-o-y)3.75.1-7.90.7-1.5-1.02.81.31.2-3.7.Tax rate for a single person earning the average wage (%)28.728.330.831.031.130.429.829.1...Tax rate for a single person earning 50% of the average wage (%)25.7*26.628.928.829.028.427.627.1...Total Financial sector liabilities, non-consolidated (y-o-y)33.2-8.8-2.3-3.04.70.216.17.5...Tier 1 ratio (%) (2).10.210.011.511.712.312.012.4...Return on equity (%) (3).-31.0-36.92.8-1.310.513.213.8...Gross non-performing debt (% of total debt instruments and total loans and advances) (4).13.615.310.17.95.67.75.1...Unemployment rate8.517.519.516.215.011.910.89.99.79.59.0Long-term unemployment rate (% of active population)3.14.58.88.87.85.74.64.5...Youth unemployment rate (% of active population in the same age group)14.633.336.231.028.523.219.616.317.8..Activity rate (15-64 year-olds)71.173.573.072.874.474.074.675.7...People at risk of poverty or social exclusion (% total population)39.537.938.240.136.235.132.730.9...Persons living in households with very low work intensity (% of total population aged below 60)6.87.412.612.611.710.09.67.8...General government balance (% of GDP)-1.4-9.1-8.5-3.4-0.8-0.9-1.6-1.30.0-1.0-1.0Tax-to-GDP ratio (%)28.327.628.128.028.828.929.329.530.431.231.1Structural budget balance (% of GDP)..-2.2-1.3-0.1-0.9-1.5-1.6-0.7-1.6-1.6General government gross debt (% of GDP)12.636.647.442.841.339.040.736.339.436.535.0forecast 
 
 
 
 
2.  PROGRESS WITH COUNTRY-SPECIFIC RECOMMENDATIONS 

the 

implementation  of 

Progress  with 
the 
recommendations  addressed  to  Latvia  in  2016 
to be seen in a longer term perspective since the 
introduction of the European Semester in 2011. 

Latvia  has  advanced  on  a  number  of 
recommendations since 2012, but several issues 
remain  open.  The  excessive  government  deficit 
was  corrected  in  2012  and  fiscal  discipline  has 
been  broadly  observed  since  then.  The  fiscal 
framework  has  been  set  up  and  implemented. 
Latvia has made progress in higher education and 
judiciary  reform  and  on  integration  with  the  EU 
energy market, although full implementation is not 
yet achieved or will require an effort over several 
years.  The  long-standing  recommendations  on 
work-based  learning  and  insolvency  have  been 
completed  in  terms  of  regulatory  framework,  but 
effective 
still  missing. 
Activation measures for unemployed have recently 
improved  in  quality,  but  supply  is  still  low  as 
compared to other Member States. Finally, growth-
friendly  tax  shifting  away  from  low  wages, 
assistance, 
increasing 
healthcare  and  public  sector  reforms  have  not 
delivered satisfactory results. 

implementation 

adequacy 

social 

of 

is 

Implementation  of  the  recommendations  has 
slowed  down  in  the  recent  years.  Over  2012-
2014,  Latvia  made  ‘some’  progress  with  the 
overall  implementation  of  the  country-specific 

Table 2.1: 

Summary table on 2016 CSR assessment 

financial 

recommendations,  due  to  reforms  initiated  under 
the 
assistance  programme,  post-
programme  surveillance  and  the  euro  adoption 
process.  More  recently,  as  the  economic  situation 
has  normalised  and  external  pressure  has 
decreased,  the  urgency  of  policy  measures  has 
abated,  leading  to  a  slowdown  in  the  reform 
process to ‘limited’ in recent years.  

the 

Overall, Latvia has made limited progress (7) in 
addressing 
country-specific 
2016 
recommendations. Some progress has been made 
in  vocational  education, 
in  supporting  social 
benefits recipients in finding and retaining work, in 
improving  the  insolvency  regime,  in  supporting 
research  and  innovation  and  in  tax  collection. 
Progress  has  been  limited  in  the  tax  shift,  in 
improving 
the  adequacy  of  social  assistance 
benefits,  in  strengthening  the  conflict  of  interest 
regime and in healthcare. No progress was made in 
public sector reform. While small improvements or 
preparatory  steps  have  been  taken  in  these  areas, 
there  is  no  clarity  or  certainty  on  the  measures 
addressing the related recommendation. 

(7)  Information  on  the  level  of  progress  and  actions  taken  to 
address  the  policy  advice  in  each  respective  subpart  of  a 
CSR is presented in the overview table in the Annex. This 
overall  assessment  does  not  include  an  assessment  of 
compliance with the Stability and Growth Pact. 

* This overall assessment of CSR1 does not include an assessment of compliance with the Stability and Growth Pact 
Source:  European Commission 

10 

Latvia Overall assessment of progress with 2016 CSRs: Limited CSR 1: 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. Limited progress *  Limited progress in shifting the tax burden away from low wages.   Some progress in improving tax compliance.  CSR 2: 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. Limited progress  Limited progress in improving adequacy of social assistance benefits.   Some progress in supporting social assistance recipients in finding work.   Some progress in improving vocational education.   Limited progress in improving healthcare system. CSR 3: 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. Some progress  Some progress in supporting research and innovation.  Limited progress in strengthening the conflict of interest prevention regime and setting up a common legal framework for all public employees.  Some progress in increasing the accountability and public oversight of insolvency administrators.   
 
 
                                                           
 
 
 
2. Progress with country-specific recommendations 

11 

 Box 2.1: Contribution of the EU budget to structural change in LatviaLatvia is a major beneficiary of the European Structural and Investment Funds (ESI Funds) with an allocation up to EUR 5.6 billion by 2020. This is equivalent to around 3% of GDP annually (over 2014-2017) and 67% of the total public investment (1). By 31 December 2016, an estimated EUR 1.8 billion, which represents about 32 % of the total allocation for ESI Funds, have already been allocated to concrete projects. Financing under the European Fund for Strategic Investments, Horizon 2020, the Connecting Europe Facility and other directly managed EU funds is additional to the ESI Funds. By end 2016, Latvia has signed agreements for EUR 255 million for projects under the Connecting Europe Facility. The EIB Group approved financing under EFSI amounts to EUR 91 million, which is expected to trigger nearly EUR 315 million in total investments (as of end 2016). ESI Funds helped progress on a number of structural reforms in 2015 and 2016 via ex-ante conditionalities (2) and targeted investment. Examples include the adoption of the smart specialisation strategy which focuses on investments on growth areas; in healthcare the setting up of a national strategic policy framework and preparing a healthcare infrastructure mapping to increase the efficiency of healthcare investments; in education by developing evidence-based early school leaving (ESL) prevention strategy. These reforms have prepared the ground for better implementation of public investment projects in general, including those financed from national sources and from the other EU instruments mentioned above. In addition to that, administrative reforms support is available through targeted financing under the European Social Fund, advice from the Structural Reform Support Service and, indirectly, through technical assistance.  The relevant CSRs focusing on structural issues were taken into account when designing the 2014-2020 programmes. These include the consolidation of research institutions by linking financing to performance and in higher education by better focussing education to the needs of the economy; improving access and quality of healthcare by developing healthcare infrastructure focusing on priority healthcare areas; improving the quality of vocational education and training through consolidating the school network, updating the curricula and expanding the work-based learning components; strengthening activation and social inclusion measures to improve employability of persons with disabilities, elderly and long-term unemployed, as well as strengthening the capacity of social work; and improving efficiency of the judicial system by strengthening the capacity of law enforcement agencies and development of e-justice. Latvia has also received support from the Youth Employment Initiative (YEI) to combat youth unemployment and 14 000 young people have benefited from it.  In addition to the challenges specifically identified in past CSRs, the funds address wider structural obstacles to growth and competitiveness. These include reducing bottlenecks in infrastructure via improving accessibility through reconstructed TEN-T network roads (reduction of roads in bad and very bad condition from 46,3% to 10%) and regional roads (reduction of roads in bad and very bad condition from 53,7% to 26%); electrification of the railway network (reducing the CO2 emissions from 225 to 180 thousand t/year); incentivising innovation and private investments (increasing the share of innovative enterprises to 40%); supporting employment (100 000 unemployed will participate in active labour market policy measures). https://cohesiondata.ec.europa.eu/countries/LV                                                            (1) National public investment is defined as gross capital formation + investment grants + national expenditure on agriculture and fisheries. (2) Before programmes are adopted, Member States are required to comply with a number of ex-ante conditionalities, which aim at improving framework and conditions for the majority of public investments areas. For Members States that did not fulfil all the ex-ante conditionalities by the end 2016, the Commission has the possibility to propose the temporary suspension of all or part of interim payments  
 
 
 
 
 
3.  REFORM PRIORITIES 

3.1.  PUBLIC FINANCES AND TAXATION 

3.1.1.  BUDGETARY PLANS 

Graph 3.1.1:  Government expenditure growth plans 

The  fiscal  situation  is  benign,  in  the  short  run. 
The government deficit target for 2017 is 1.1 % of 
GDP.  The  Commission  winter  forecast  projects  a 
deficit of 1%. The outlook has improved based on 
the  better-than-expected  outturn  of  a  balanced 
fiscal position for 2016 (see Table 1.2). The 2017 
revenue  measures  such  as 
budget  contains 
tax  and 
an increase 
tax  payment  date 
a postponement  of 
for 
commercial  vehicle 
taxes,  as  well  as  some 
improving  tax  collection  and  increasing  indirect 
taxes. Expenditure increases are targeted at health, 
internal security and education. 

the  microenterprise 

in 

is  not  yet  reflected 

Government  expenditure  plans  beyond  the 
annual  budget  do  not  fully  reflect  policy 
priorities.  Insurance-based  social  expenditure  is 
projected  to  continue  increasing,  as  is  defence  — 
projected  to  reach  the 2 %  of  GDP  target  in  2018 
(Graph 3.1.1).  However,  the  intended  increase  in 
health  financing 
the 
expenditure plans after 2017 (Section 3.3.3). Other 
spending  needs  also  appear  underrepresented. 
Most  government  expenditure  items  are  fixed  in 
the  plans  for  following  three  years.  Decisions  on 
spending  priorities  from  available  resources  or  by 
reallocation  are  decided  at  the  time  of  the  annual 
budget preparation. In several cases this means that 
some reform priorities never obtain financing, as in 
the example of the minimum income level reform 
(Section 3.3.4). 

in 

An  ageing  population  already  has  a  negative 
impact on public finances. The population above 
the pension age increased by some 0.4 % annually 
in  2013-2015,  while  the  working  age  population 
fell by 1.6 %. This population trend is expected to 
continue,  which  implies  higher  social  and  health 
spending  needs  to  be  financed  by  a decreasing 
number  of  workers.  As  a  result,  the government’s 
share in GDP is bound to increase over time. 

Source: The medium term budgetary plans for 2017-2019  

structural 

to 
setting 

environment.  While 
targets 

A  comprehensive  medium-term  budgetary 
the 
strategy  would  give  predictability 
the 
business 
budgetary 
is  based  on  a well-defined 
framework described below, the approach to filling 
the  targets  with  policy  content  is  not  equally 
transparent  and  predictable.  Aligning  expenditure 
plans  with 
and 
demographic pressures set the stage for discussions 
on revenue plans. While there is scope to improve 
the  efficiency  of  the  current  budgetary  spending 
through  expenditure 
it  would  be 
optimistic  to  fully  rely  on  such  savings.  The  tax 
strategy  announced  for  April  2017  provides 
an opportunity  to  define  a realistic  medium-term 
budgetary  plan  encompassing  both  expenditure 
needs and revenue options to finance them.  

reviews, 

reform 

needs 

3.1.2.  FISCAL FRAMEWORK AND EXPENDITURE 

REVIEW 

A  well-defined  fiscal  framework  provides  the 
basis  for  fiscal  policy.  The  budgetary  targets  are 
set  in  accordance  with  the  fiscal  rules  and 
monitored  by  the  independent  Fiscal  Discipline 
Council,  which  also  endorses  the  macroeconomic 
forecasts  used  for  budgetary  planning.  The 2017 
budget  target  for  the  first  time  includes  the  fiscal 

12 

-200-1000100200300400500600700800201720182019EUR millionSocialDefenceHealthOther 
 
 
3.1. Public finances and taxation 

the  highest 

A growth-friendly tax shift would have positive 
employment  and  GDP  growth  effects.  The  tax 
wedge  on  low-wage  earners  (at  67 %  of  the 
average wage) remains high at 41.9 % in 2015, one 
of 
in  EU  (EU  average:  37 %) 
(Graph 3.1.2).  This  weighs  on  economic  activity 
and employment. At the same time, the aggregate 
burden of capital taxes in Latvia is low. Latvia has 
scope  to  reduce  the  taxation  of  low-income 
earners,  which  could  be  offset  by  increasing  tax 
revenue  from  consumption,  property,  and  capital 
taxes  (European  Commission,  2015c).  Stylised 
simulations  show  that  a  revenue  neutral  and 
growth-friendly  tax  shift  away  from  low-income 
earners  would  boost  employment  and  GDP 
growth,  while  also  improving  income  equality 
(Box  3.1.1).  Moreover,  as  property  tax  evasion  is 
more difficult than labour tax evasion, it could also 
benefit tax compliance.  

implemented  so 

far  have  had 
Measures 
a limited  effect  on  reducing  the  tax  wedge  on 
labour.  Between  2016  and  2020,  the  existing  flat 
basic  tax  allowance  is  being  increased  for  low-
income  earners  and  reduced  for  high-income 
earners. This makes the tax system somewhat more 
progressive  (see  Box 3.1.1), but  the  tax  wedge  on 
low-income  earners  will  be 
reduced  only 
marginally  to  41.5%  in  2020  —  still  a  high  rate. 
The  scope  of  the  solidarity  tax (9)  introduced  in 
2016  is  relatively  small  as  it  covers  a  limited 
number of tax payers. 

(9)  Solidarity tax for salaries exceeding EUR 48 600 per year 
is  taxed  at  the  level  of  social  contributions,  but  without 
accruing benefit rights. 

security  reserve,  as  required  by 
Discipline Law. (8)  

the  Fiscal 

and 

sectors 

An  expenditure  review  across  line  ministries 
was  launched  in  2016.  It  aims  to  identify 
inefficiencies,  assess  and  update  performance 
budgeting  information,  and  develop  tools  for 
the 
determining  cost-effectiveness.  Moreover, 
health 
underwent 
education 
a particularly  thorough  investigation.  The  review 
involved  public  and  independent  experts  on  fiscal 
and  sector  specific  issues.  The  resulting  reports 
provide a good insight into the budgets of the line 
ministries 
the 
implementation of which will be monitored by the 
government.  The 
identified 
2016 
of  GDP. 
of 
expenditure 
The expenditure  review  is  set  to  be  part  of 
the annual  budget  planning  process  and 
its 
methodology is planned to be refined in 2017. 

recommendations, 

review 
0.2 % 

savings 

issue 

and 

3.1.3.  TAXATION 

The  World  Bank  and  OECD  suggest  a 
fundamental  reform  of  labour  taxation  and  a 
tax  shift  to  capital  and  real  estate,  while 
improving  compliance  (World  Bank,  2016b; 
OECD,  2015).  Effective  tax  rates  on  labour  are 
high  and  the  equity  and  progressivity  of  the  tax 
system  could  be  improved.  Policy  options  for 
Latvia  include  a  progressive  personal  income  tax 
and/or  social  contributions,  and  a  more  uniform 
treatment  of 
interest, 
income  derived 
dividends  and  capital  gains  and  labour  income. 
The  current  non-uniform  treatment  of  capital  is 
inefficient,  generates  inequalities  and  provokes 
arbitrage.  For  consumption  taxes,  the  main  issue 
for  Latvia  is  the  persistently  low  tax  compliance, 
rather than tax rates. Recurrent property taxes have 
an  additional  revenue  potential  and  are  least 
distortive.  Postponing  the  market-based  valuation 
should be avoided. Tax collection can be improved 
through  simplified  compliance,  better  use  of  IT 
tools  and  investment  in  personnel.  Improving  tax 
collection has a large revenue potential. 

from 

(8)  The assessment of the 2016 draft budgetary plan of Latvia 
provides  further  details  on  the  Fiscal  Discipline  Council:  
http://ec.europa.eu/economy_finance/economic_governanc
e/sgp/pdf/dbp/2016/lv_2016-11-16_swd_en.pdf 

13 

 
                                                           
                                                           
3.1. Public finances and taxation 

property  cadastral  values with  their  market  values 
and  a  pick-up  in  property  prices  have  generated 
more tax revenue. An increase in property tax base 
on  agricultural  land  is  capped  at  10 %  annually. 
Moreover,  inefficiencies  in  tax  administration 
persist  in  terms  of  equal  treatment  of  similar 
properties and use of tax rebates. 

Tax compliance remains a challenge for Latvia. 
Latvia’s shadow economy is estimated at 21 % of 
GDP  in  2015,  down  by  over  2  percentage  points 
from  2014,  but  still  approximately  6  pps.  more 
than  in  Estonia  and  Lithuania  (Sauka  &  Putniņš, 
2016). During 2013-2015, by far the highest level 
of  shadow  activity  was  linked  to  the  construction 
sector (40 %), followed by retail (25%). The same 
estimates show that the underreporting of business 
income  decreased  in  2015  (20 %  of  actual  profits 
were  intentionally  concealed  from  the  authorities) 
compared 
it  was  still 
considerably  higher  than  in  Estonia  (7.5 %)  and 
Lithuania  (10.5 %).  The  estimated  underreporting 
of  employees  in  Latvia  remained  unchanged  at 
around  10 %  of  the  actual  number  of  employees, 
which  is  still  the  highest  of  all  three  Baltic 
countries.  The  estimated  share  of  envelope  wages 
out  of  total  wages  has  declined  steadily  in  Latvia 
over  2010-2015  (estimated  at  18 %  of  actual 
salaries in 2015) (Sauka & Putniņš, 2016).  

to  2014  (22 %),  but 

In  2016,  a  number  of  measures  to  improve  tax 
compliance  entered  into  force.  In  particular, 
penalties  for  interfering  with  the  programming  of 
cash registers were increased and credit institutions 
and providers of payment services were obliged to 
report  suspicious  transactions.  In  addition,  the 
State Revenue Service was tasked with prohibiting 
the changing of board members, the reorganisation 
or  the  liquidation  of  companies  suspected  of  tax 
evasion.  To  step  up  the  fight  against  envelope 
wages,  the  Parliament  adopted  legislative  changes 
in  March  2016  envisaging  criminal  liability  for 
employers paying envelope wages on a large scale. 

The VAT gap in Latvia continues its downward 
trend,  but  still  largely  exceeds  the  EU  average. 
The  gap  fell  from  26 %  of  the  VAT  total  tax 
liability in 2013 to 23 % in 2014 (10). The fall was 

(10)  The  VTTL  is  the  theoretical  tax  liability  according  to  tax 
law.  The  VAT  gap  is  estimated  using  a  “top-down” 
approach 
to  six 
that  applies  respective  VAT  rates 
components of VAT revenue (namely final consumption of 
households;  final  consumption  of  government  and  non-

Graph 3.1.2:  Tax wedge of single earners, various income 

levels, 2015 

Source: European Commission, based on OECD Tax-benefit 
models. 

Measures  affecting  small  businesses  were 
reversed  at  the  last  minute.  The  introduction  of 
minimum social contributions was cancelled, given 
their negative impact on part-time employment and 
small  businesses.  The  plan 
to  discontinue 
the micro-enterprise tax was also dropped. In order 
to  compensate  for  the  revenue  foregone,  the 
standard  rate  of  the micro-enterprise  tax  has  been 
increased  from  9 %  to  15 %  yielding  some  0.2 % 
of GDP, which is paid into social contributions. 

The  micro-enterprise  tax  remains  prone  to 
abuse  and  provides  low  social  guarantees  for 
workers.  In  2016,  11 %  of  the  workforce  was 
employed  under  the  micro-enterprise  tax  scheme. 
In  2015,  most  new  employees  under  the  scheme 
came from the regular tax regime — no new work 
places were created. Abuse of the scheme as a tax 
optimisation tool and the low social guarantees for 
workers contributed to the plan to close it. The tax 
reduces 
rate 
the attractiveness of the scheme, but does not solve 
its  compliance  and  social  security  problems. 
The authorities plan to replace the micro-enterprise 
tax  with  a  better  targeted  support  scheme  for  real 
small business.  

somewhat 

in  2017 

increase 

Property  tax  is  bringing  in  more  revenue. 
Revenue from the recurrent property tax increased 
to  0.9 %  of  GDP  in  2016  from  0.8 %  of  GDP  in 
2013. The tax is applied to cadastral values, which 
follow  the  market  valuations.  The  alignment  of 

14 

0102030405060700.50.6711.251.67%LatviaEU minEU maxEU28 
 
                                                           
3.1. Public finances and taxation 

the 

the 

risk 

Demand for healthcare is likely to expand in the 
long run, putting additional pressure on public 
expenditure.  The  baseline  projections  of  the 
2015 Ageing Report are based on the low starting 
position  in  terms  of  health  expenditure  in  Latvia. 
Under 
age-related 
scenario, 
expenditure  is  projected  to  increase  by  1.8 %  of 
GDP  between  2013  and  2060  —  a  notably 
different position relative to the baseline scenario, 
although  still  below 
the  EU  average.  Non-
demographic  factors  are  estimated  to  be  a  key 
driving  force  of  health  expenditures.  Demand  for 
increase  with  higher 
to 
healthcare 
economic  wealth,  as  growing  living  standards 
change people’s attitudes towards their own health. 
Therefore,  an  upward  convergence  in  healthcare 
coverage and costs to the EU average (as shown by 
the  Cost  convergence  scenario  of  the  Ageing 
report)  would  put  pressure  on  public  expenditure. 
Risks to the sustainability of public finances can be 
limited  by  ensuring  cost-effectiveness  of  any 
healthcare expenditure increase. 

likely 

is 

also  accompanied  by  the  introduction  of  new 
measures  against  tax  fraud  in  2014,  such  as 
the creation of a new register of ‘high risk’ entities 
and the obligation for the tax authorities to provide 
information on such individuals to the commercial 
register. However, the VAT gap is still higher than 
the average VAT gap of 14 % in 2014 for the EU 
as  a  whole  (Centre  for  Social  and  Economic 
Research, 2016).  

Environmental  tax  rates  have  been  increased 
and  are  geared  towards  behavioural  change. 
Environmental tax revenue stood at 2.7 % of GDP 
in 2014 close to the EU average. The 2017 budget 
changed  the  vehicle  taxation  system  by  replacing 
the  vehicle  registration  tax  with  an  increase  in 
taxation  based  on  CO2 
the annual  vehicle 
emissions, in a budgetary neutral way. This should 
provide an incentive to reduce CO2 emissions per 
km,  which  are  among  the  highest  in  the  EU. 
The natural  resource  tax  rate  is  increased  for 
a number  of  tax  objects,  in  order  to  encourage 
the effective use of resources (see Section 3.5.1 on 
municipal waste). 

3.1.4.  LONG-TERM FISCAL SUSTAINABILITY 

public 

policies, 

Latvia  scores  favourably  on  medium  and  long-
term  fiscal  sustainability.  However,  the  low 
future  pension  adequacy  is  cause  for  concern. 
Despite  increasing  dependency  ratios,  based  on 
pension 
projected 
current 
expenditure  as  a  percentage  of  GDP  is  the  lowest 
in the EU Ageing Report (European Commission, 
2015d).  Latvia’s  projected  future  public  pension 
expenditure is low mainly due to its high reliance 
on  funded  pensions,  and  the  low  projected  future 
pension  adequacy  (European  Commission;  the 
Social  Protection  Committee,  2015)  (see  Section 
5.3 on current pension adequacy). This implies that 
a  high  proportion  of  pensioners  will  be  receiving 
very  low  pensions,  which  may  be  politically  and 
socially  unsustainable.  Therefore,  the  projections 
of  the  2015 Ageing  Report  are  subject  to  risk  of 
policy  changes  to  address  inadequate  income  in 
old age. 

institutions 

profit 
intermediate 
consumption;  gross  fixed  capital  formation;  and  other, 
largely country-specific, adjustments). 

serving  households; 

15 

 
                                                                                   
3.1. Public finances and taxation 

(Continued on the next page) 

16 

 Box 3.1.1: Fiscal and distributional impacts of tax reformsLatvia is recommended to reduce the tax wedge for low-income earners by exploiting a growth-friendly tax shift (see Section 2 and Annex A). The World Bank also proposes policy options for a more equitable and growth-friendly tax system for Latvia. This box presents the results of simulations by the Commission services (1) focusing on some reform scenarios for addressing the country-specific recommendation for Latvia: (1) the ongoing reform aiming at reducing the tax wedge on low income earners, (2) a more fundamental reform of the flat tax towards a progressive system, and (3) a possible tax shift from low income earners to property owners. The first reform has a marked positive impact on the lowest income earners, but comes at a fiscal cost. The second reform scenario generates additional tax revenues by targeting the highest income earners, while leading to more limited gains for the low income earners. Finally, the tax shift in the third scenario has both a redistributional effect and is budget neutral. 1. NON-TAXABLE ALLOWANCE REFORM  The personal income tax (PIT) is a flat tax. Some progressivity is nevertheless provided by a non-taxable allowance. This non-taxable allowance is being reformed introducing a progressive differentiation by income level. The reform is carried out gradually with the first step in 2016 and full implementation in 2020. The reform will lower the effective tax rate by up to three percentage points for the poorest 20 % of the population in 2020 (2), one point being already gained in 2016. The estimated disposable income gains are close to 2 % for the lowest half of income distribution in 2020 (Graph 1a). The gains for the poorest groups are limited by their lower work intensity. For the richer fractions of the population the disposable income gains gradually decline and the reform is detrimental to the richest 10 % (-0.5 % in disposable income). The fiscal cost is estimated at 0.1 % of GDP in 2016 and 0.3 % of GDP in 2020.  2. A PROGRESSIVE PERSONAL INCOME TAX SCENARIO One of the proposals by the World Bank (World Bank, 2016b) is to introduce a progressive PIT rate to increase redistribution across income groups. The lowest rate (19%) would apply up to the minimum wage (EUR 360 per month), the 23% rate would apply between EUR 360 and EUR 1 300. Above EUR 1 300 the marginal tax rate would be increased to 29 % (3). This reform would yield some 0.3-0.4 % of GDP in tax revenue. It would be beneficial to 42 % of the population and detrimental to only 9 % concentrated among the richest. It would lower the implicit tax rate for half of the population by almost one percentage point, but would increase the tax rate for the richest 10 % by three points. The income redistribution and income equality would increase significantly (Graph 1a).  3. A GROWTH FRIENDLY TAX SHIFT SCENARIO A revenue neutral tax shift from low-income earners to property taxes is expected to be growth friendly. Our stylised simulation assumes an increase in the non-taxable allowance to the point that no PIT is paid at the minimum wage. The estimated fiscal cost of around 0.5% of GDP is compensated by an increase in the property tax.                                                             (1) Simulations 1 and 2 have been conducted by the Joint Research Centre of the European Commission to analyse the fiscal and distributional impact of the reforms using EUROMOD, the tax-benefit microsimulation model for the EU. EUROMOD simulates benefit entitlements and tax liabilities (including social security contributions) of individual and households according to the tax-benefit rules in place in each Member State. The simulations are based on representative survey data from the European Statistics on Income and Living Conditions (EU-SILC) and cover the main elements of direct taxation and social contributions as well as non-contributory benefits. Simulation 3 has been conducted by the Commission based on the Quest model (http://ec.europa.eu/economy_finance/research/macroeconomic_models_en.htm). (2) The simulation of the reform in 2020 assumes annual nominal wage growth of around 5% in 2016-2020. (3) http://www.baltic-course.com/eng/analytics/?doc=122413  
 
 
 
 
 
3.1. Public finances and taxation 

Box (continued) 

17 

 The tax wedge for low-income single earners would be reduced from around 40% to 28 % – a relatively low level according to the EU standards. Reduced labour costs would stimulate employment among low income groups with an increase of 0.5 % in the first year and 2.2 % over four years. Consumption by low income groups would pick up to 8 %, while it would be slightly reduced for the medium and high income groups (0.5 %-0.8 %) due to the property tax hike. The reform is expected to have a small positive effect on GDP, as employment and consumption gains offset the impact on investment, predominantly housing (Graph 1b). Moreover, income equality is expected to notably improve. This tax shift implies a stronger redistribution than that of the non-taxable allowance reform (0.5 % of GDP instead of 0.3 %) and it is budget neutral. The associated increase in the property tax remains, however, credible, as it would only bring Latvia closer to the EU average. Revenue from recurrent property taxes were 0.8 % of GDP in 2014, compared to an EU average of 1.6 % of GDP.    -0.3-0.2-0.100.10.20.30.40.50.6% change from the baselineGraph 1b: Macroeconomic effect of a 0.5% of GDP tax shift from low-income earners to propertyGDPConsumptionInvestment-5-4-3-2-1012312345678910% change in mean disposable incomedecile of equivalised disposable incomeGraph 1a: Distributional effect of personal income tax (PIT) policy changesNon-taxable allowance in 2020Progressive personal income taxSource:European Commission (Euromod)Source: European Commission (Quest) 
 
 
 
 
3.2.  FINANCIAL SECTOR 

Latvia’s  banking  sector  is  dominated  by  Nordic 
banks  serving  local  clients.  However,  specialised 
banks  serving  non-residents  are  an  important  part 
of  the  sector.  After  a  protracted  post-crisis  period 
of  deleveraging,  credit  supply  is  growing  again 
(see  Section  1).  Two  main  developments  in  the 
sector  are  related  to  money  laundering  operations 
uncovered  in  some  non-resident  banks  and  the 
diversification of sources of financing. 

3.2.1.  ANTI-MONEY LAUNDERING SUPERVISION 

Latvia is a regional financial centre for non-EU 
businesses and high net worth individuals from 
neighbouring  countries.  Non-resident  deposits 
account  for  42 %  of  total  deposits  and  30 %  of 
assets 
in  Latvia’s  banking  sector  and  are 
concentrated  in  specific  banks.  Demand  deposits 
account  for  around  88 %  of  total  non-resident 
deposits and are invested in liquid financial assets. 
The  non-resident  banks (11)  generate  their  income 
mostly  from  net  interest  income  on  loans  to  non-
residents  and  on  their  securities  portfolios.  Their 
exposure  to  the  real  economy  is  relatively  small. 
Non-resident banks account for 12 % of total loans 
to residents and 9 % of their deposits. 

The  very  nature  of  the  non-resident  banking 
business entails specific risks, notably linked to 
the origin of the funds. Therefore, the sector has 
higher minimum capital and liquidity requirements 
than  banks  serving  the  domestic  economy,  and  is 
subject  to  closer  and  more  frequent  supervisory 
action  by  the  regulator.  The  presence  of  the  non-
resident  banks  has  certain  consequences  for  the 
whole  Latvian  financial  sector,  with  some  spill-
overs  to  the  other  Baltic  markets.  All  banks  are 
subject  to  the  reputational  risks  created  by  non-
resident  banks (12).  Also,  all  banks  incur  costs  of 
compliance  with  the  new  anti-money  laundering 
regulations and other supervisory initiatives by the 
Financial  and  Capital  Market  Commission 
(FCMC),  while  capital  and  regulatory  standards 
have tightened in many parts of the world. 

(11)  Defined as banks which grant  more than 50 % of loans to 
non-residents and receive more than 50 % of deposits from 
non-residents. 

(12)  For  example,  in  reaction  to  the  fraud  cases  in  2015 
Deutsche Bank has cut off some Latvian banks from direct 
processing of US dollar transactions. 

Supervisory  action  revealed  the  involvement  of 
Latvian  non-resident  banks  in  several  fraud 
cases over the last year. Privatbank, ABLV bank, 
Latvijas Pasta banka and Trasta komercbanka were 
linked  with  the  illegal  withdrawal  of  funds  from 
three  Moldovan  banks  and  money  laundering. 
Following  enforcement  actions,  the  three  former 
institutions  were  sanctioned  with  multi-million 
euro  fines  and  the  latter  lost  its  licence  in  March 
fined  banks (13) 
2016.  Other 
include  Baltic 
International  Bank,  which  participated  in  illegal 
withdrawals  of 
liquidated 
for 
DeltaBank 
weakness of AML internal control system used for 
providing 
to  non-resident 
customers. Two more administrative investigations 
were ongoing at the time of reporting. 

from 
in  Ukraine,  and  Swedbank 

financial 

services 

funds 

the 

A  new  Compliance  Control  Department  has 
been  created  within  the  FCMC.  The  FCMC’s 
strategy  to  deal  with  non-resident  banks  is  based 
on  three  principles:  compliance,  transparency  and 
concentration.  Risk-based  approach  is  used  as 
basic principle for AML supervision on the whole 
banking  sector.  According  to  the  supervisor,  the 
banks  should  bear  full  responsibility  for  their 
business conduct and incur the costs of compliance 
and  non-compliance.  Since  mid-2015,  the  FCMC 
has  launched  thorough  checks  of  non-resident 
customers  and  stepped  up  on-  and  off-site 
inspections.  All  non-resident  banks  underwent 
special  auditing  by  international  audit  companies, 
whose  conclusions  had  to  be  followed  up  on.  A 
national  risk  evaluation  according  to  the  World 
Bank methodology and a Moneyval assessment are 
scheduled for 2017. The financial intelligence unit 
is preparing  a report summarising  the  conclusions 
of those assessments.  

3.2.2.  ACCESS TO FINANCE 

of 

Bank  lending  still  plays  a  dominant  role  in 
funding 
corporations 
non-financial 
(Graph 3.2.1).  The  Latvian  capital  market  has  a 
substantial  development  potential  and  may 
complement  bank  loans  as  the  source  of  funding 
for companies. The equity market remains shallow 
measured  by  local  capitalisation  (5.2 %  of  GDP), 
although the stock exchange is fully integrated into 

(13)  The Ministry of Finance estimated total revenue from fines 

in the 2016 budget at 20 million euro. 

18 

 
 
                                                           
                                                           
3.2. Financial sector 

Graph 3.2.1:  Funding of non-financial corporations 

(1) Data on venture capital not available 
Source: European Central Bank, AMECO 

Public  support  for  access  to  finance  is  being 
actively  promoted,  but  it  is  still  at  an  early 
stage. Public financial funds primarily offer SMEs 
guarantees and loans for growth, largely supported 
by European Structural and Investment Funds. The 
government  supported  the  creation  of  the  Baltic 
the  European 
Innovation  Fund,  managed  by 
Investment  Fund,  to  provide  growth  capital  for 
SMEs  and  promote  the  development  of  Latvia’s 
venture  capital  market.  The  rollout  of  the  new 
support  schemes  started  at  the  end  of  2016  for 
financial 
by 
the government  agency  Altum  (Box 3.2.1).  It  is 
expected  in  2017  for  financial  products  to  be 
procured to third parties. 

directly  managed 

products 

the  Nordic  OMX-Nasdaq  group.  The  role  of 
corporate  bond  issuance  is  still  relatively  small. 
The  debt  securities  market  in  Latvia  consists 
almost  exclusively  of  government  paper.  While 
Latvia  ranks  fourth  in  the  European  Innovation 
Scoreboard  for  venture  capital,  such  investments 
remain  small.  The  annual  gross  operating  surplus 
of  Latvian  companies  is  higher  than  the  EU 
average,  suggesting  that  companies  have  the 
potential  to  finance  investment  from  retained 
earnings. A draft financial sector development plan 
has been announced to support lending and capital 
market  development,  as  well  as  to  ensure  the 
competitiveness of Latvia’s financial sector. 

Latvian  stock  market  capitalization  continues 
to develop gradually. At the end of 2015, Latvian 
registered  public  offering  of  securities  in  the  total 
capitalization  amounted 
to  3.2  billion  euro, 
compared  to  1.9  billion  euro  at  the  end  of 
2012 (14).  The  largest  share  or  35.1%  of  the  total 
market  capitalization  was  still  made  up  of  public 
debt securities, followed by equities with a 33.8% 
share  and  corporate  debt  securities  reaching 
30.3%. 

Corporate  debt  securities  market  is  the  fastest 
growing  segment.  The  number  of  corporate  debt 
emissions in 2015 increased almost threefold from 
15  to  42  offerings,  while  the  public  offering  of 
equities  in  this  period  decreased  from  32  to  27. 
This  market  segment  activation  has  been  largely 
promoted by a favourable tax treatment. 

(14)  Statistics  on  securities  market,  2015,  Latvian  Central 

Depository. 

19 

00.0050.010.0150.020.0250.030102030405060Listed sharesDebtsecuritiesMFI loansGrossoperatingsurplusVenturecapital (rhs)%of GDP% of GDPLVEU 
                                                           
 
 
 
3.2. Financial sector 

20 

 Box 3.2.1: Selected highlight: Altum – single development financing institutionLatvia has been very active in enhancing access to finance for SMEs. A range of financial instruments for SMEs have been made available (public loans, public guarantees and microfinance measures) and a number of venture capital, pre-seed and seed capital funds have been established since 2011, to help young and innovative businesses throughout the different stages of growth. Previously, the support instruments were managed by different entities, now a single public development institution is in charge. The new one-stop-shop for public financial support for businesses 'Altum' (the joint stock company Development Financing Institution Altum) was created in 2014 and merged with the other two existing institutions in 2015, completing the consolidation of the support activity in a single entity. At the end of 2015, Altum managed a portfolio of financial instruments of the total value of 1.5 % of GDP, made up of 8 900 projects, of which 90 % were loans and guarantees and 10 % venture capital funds. Altum provides financial and non-financial support, including counselling, training, mentoring, in various fields such as energy efficiency of buildings, agricultural business and even housing loan guarantees for families with children. Altum is also the contact point for the European Investment Bank and the European Investment Fund in Latvia. A substantial part of funding is provided for by European Structural and Investment Funds, with a 2014-2020 allocation from the European Regional Development Fund exceeding 0.6 % of GDP. ALTUM cooperates with all major banks in the country and it also operates as a fund of funds providing indirect financial support through acceleration, seed and start-up as well as expansion capital funds. ALTUM operations have only been recently rolled out, but stakeholders are appreciative of its work and of the design of the system, which has the potential to improve access to finance in Latvia.  
 
 
 
 
 
3.3.  LABOUR MARKET, EDUCATION AND SOCIAL POLICIES 

11 % of the unemployed and half of them are long-
term unemployed.  

Graph 3.3.1:  Coverage of activation-support, 2014 

3.3.1.  LABOUR MARKET 

The  decreasing  working  age  population  is  a 
challenge  for  labour  supply  and  for  the  social 
security and health systems. In the short run, the 
negative impact on labour supply is projected to be 
compensated  by  an  increasing  employment  rate, 
which  reached  73.1 %  in  Q3-2016  (above  the 
national  EU  2020  target  of  73 %,  see  Annex  A). 
However,  in  the  medium  and  long  run  unused 
labour  potential  will  be  exhausted,  leading  to  a 
contraction  of  the  workforce,  unless  there  is  a 
change  in  the  migration  pattern.  Since  young 
people  are  overrepresented  among  emigrants, 
future  dependency  rates  are  projected  to  increase 
significantly.  

there 

is  a 

Labour shortages exist both for low-paid jobs in 
some  sectors  and  for  jobs  where  specific  skills 
are  needed.  Unfilled  vacancies  registered  by  the 
State  Employment  Agency  tend  to  represent  low-
paid jobs with relatively poor working conditions. 
Low wages for public and health sector employees 
is  a  reason  for  unfilled  vacancies.  At  the  same 
shortage  of  high-skilled 
time, 
professionals  —  ICT  specialists,  engineers,  top 
managers 
administration 
professionals  (CEDEFOP,  2016).  For  advanced 
digital  skills  Latvia  ranks  only  25th  in  the  EU (15) 
(though the gap for basic digital skills is somewhat 
narrower  —  ranking  Latvia  16th  in  the  EU) 
(European  Commission,  2016b).  Future  skills 
shortages  are  expected  in  the  engineering  and 
healthcare sectors as these sectors employ an older 
workforce  and  these  skills  are  expected  to  be  in 
high demand also in the future. 

and  business 

and 

The  unemployment  rate  is  gradually  declining, 
but  regional  disparities  persist.  The  registered 
unemployment rate is lower in centres of economic 
activity  like  Riga  city  (around  5 %),  but  high  in 
rural  regions  (around  18 %  in  Latgale  region). 
Around  42 %  (Q3-2016)  of  the  unemployed  are 
long-term  unemployed.  Almost  half  of  the  long-
term  unemployed  (44 %)  are  without  a  job  for 
more than four years, making a return to the labour 
market  more  difficult.  Around  54 %  of 
the 
registered  long-term  unemployed  are over  the  age 
of 50. Persons with disabilities account for around 

(15)  The  advanced  digital  skills  and  development  indicator  is 
calculated  based  on  the  number  of  ICT  specialists  and 
STEM graduates. 

Note: Number of participants per 100 persons wanting to 
work (on average at any given moment) 
Source: European Commission (Eurostat), LMP database. 

based 

past 
and 

to  be  effective 

on 
incentives’ 

Activation of the unemployed remains low. The 
involvement  of  the  unemployed  in  active  labour 
market  policies  (ALMPs)  is  lower  than  in  most 
other  EU  countries  (Graph 3.3.1).  Financing  of 
largely  relies  on  EU  funds,  which 
ALMPs 
temporarily  dropped  in  2015  due  to  the  transition 
between  the  two  programming  periods,  but  has 
increased  in  2016  and  2017.  About  half  of  the 
ALMP measures consists of training (Graph 3.3.2), 
in 
which  have  been  shown 
improving  the  labour  market  prospects  of  the 
evaluations. 
unemployed, 
‘Employment 
‘supported 
targeted 
employment  and 
towards  disadvantaged  unemployed  people.  The 
former  largely  consists  of  wage  subsidies,  which 
are  relatively  expensive  per  participant  and  have 
not been rigorously evaluated yet. The share of the 
public works programme has slowly decreased, but 
still  remains  the  most  popular  measure  for  the 
long-term unemployed. Public works are generally 
least  effective 
considered 
activation  instruments.  In  spite  of  the  observed 
regional  disparities  in  unemployment  rates,  the 
take-up  of  regional  mobility  support  remains 
below  expectations,  largely  due  to  the  fact  that 
mobility  to  Riga  is  only  partially  eligible  for 
support. 

rehabilitation’  are 

to  be  among 

the 

21 

010203040506070ROBGEELVSILTSKITPLCZATPTESIENLFIDEHUFRSEBEDKLU 
 
                                                           
 
3.3. Labour market, education and social policies 

Graph 3.3.2:  Expenditure on and participation in activation 

measures, 2016 

prioritising  those  over  45  in  the  lifelong  learning 
measures. Additional new measures targeting those 
over  50  have  been  prepared,  including  public 
campaigns to promote active ageing, assessment of 
skills  and  health  status  of  older  workers  followed 
by 
individualised  support  (if  necessary)  and 
support  to  employers  in  adjusting  the  workplaces 
to  the  ageing  workforce.  However,  most  of  these 
measures are not yet implemented on the ground. 

Graph 3.3.3:  Labour market outcomes by skills level and by 

gender 

Source: National data based on the Eurostat methodology 

the 

the  disadvantaged 
for 
Activation  support 
unemployed  is  set  to  expand.  Support  measures 
for 
long-term  unemployed,  persons  with 
disabilities  and  other  disadvantaged  unemployed 
people will substantially increase and their share of 
financing  in  the  total  ALMP  envelope  is  set  to 
increase  from  14%  in  2015  to  32%  in  2017. 
The measures 
specialised 
consultations,  health  and  professional  suitability 
assessment,  mentoring,  motivational  programmes, 
and  addiction  treatment.  Persons  with  disabilities 
will  also  benefit  from  social  entrepreneurship 
measures to be launched in the beginning of 2017.  

include 

will 

Supporting longer working lives is crucial given 
Latvia’s  demographic  challenges  and  high 
projected  dependency  ratios.  Employment  rates 
of  older  workers  (55-64)  are  above  the  EU 
average,  but  unemployment  rates  are  also  high  in 
this  age  group  (9.4 %  in  Q2-2016)  compared  to 
other  EU  countries  (EU  average  6.5 %  in  Q2-
2016).  A  relatively  high  percentage  of  pensioners 
wish  to  stay  employed  (38 %  in  Latvia;  EU 
average  28 %).  High  activity  rates  among  older 
workers  may  be  partially  motivated  by  relatively 
low  pensions.  The  main  obstacles  for  older 
individuals  to  find  a  job  are  poor  health  (both 
low 
physical  and  mental),  outdated 
education 
language 
proficiency, and care responsibilities (World Bank, 
2015).  The government  has  taken  measures  to 
support  the skills  development  of  older  workers, 

lack  of  Latvian 

skills, 

and 

(1) Wages are measured as gross monthly fulltime 
equivalent wages, based on self-reported data. They mostly 
refer to 2014 incomes (latest available data). Employment 
rates refer to 2015 (latest available annual data). 
Source: Eurostat, DG EMPL calculations based on EU SILC 
2015 

The  variation  in  labour  market  outcomes  by 
education  level  is  somewhat  wider  in  Latvia 
than  in  many  other  EU  countries.  The  labour 
market  for  highly  skilled  workers  is  rather  tight, 
and  the  unemployment  rate  for  workers  with 
tertiary  education  is  only  3.8 %  (EU  average 
4.9 %, Q3-2016). However, unemployment among 
the  low-skilled  (20.3 %  in  Latvia  v  16.3 %  in  the 
EU) is more prevalent also in the EU comparison. 
This  suggests  the  importance  of  up-skilling  to 
relieve  the  labour  market  tensions  at  the  higher 
skilled segment of the labour market and improve 
the  labour  market  prospects  of  the  lower-skilled 
workers.  Having  a  higher  qualification  also  has  a 
substantial impact on wages (Graph 3.3.3). 

22 

0%10%20%30%40%50%60%70%80%90%100%ExpendituresParticipantsStart-up incentivesDirect job creationSupportedemployment andrehabilitationEmploymentincentivesTraining020406080100120020040060080010001200140016001800malefemalemalefemalemalefemalelow-skilledmedium-skilledhigh-skilled% of 20-64 age groupEUR per monthemployment rate LV (rhs)employment rate EU28 (rhs)wage (lhs) 
 
 
3.3. Labour market, education and social policies 

to  work  more  than  40  hours  per  week,  provided 
that  the  additional  hours  are  not  in  the  same 
school.  This  could  encourage  teachers  to  work 
extra hours to increase their salary, without paying 
sufficient  attention  to  the  quality  of  teaching 
(European Commission, 2016e). 

in  mathematics  and 
Students'  proficiency 
science  has  deteriorated,  but  scientific  subjects 
are  receiving  more  attention.  The  proportion  of 
low  achievers  among  15-year-olds’  in  the  2015 
OECD  Programme 
International  Student 
for 
Assessment  (PISA)  in  mathematics  (21  %)  and 
science (17 %) worsened compared to the previous 
2012 round, although it continues to be better than 
the  EU  average 
(OECD,  2016b;  European 
Commission, 2016f). As a policy effort, diagnostic 
tests  in  science,  technology,  engineering  and 
mathematics  (STEM)  subjects  have  recently  been 
introduced in the last years of basic education and 
in  upper  secondary  education.  However,  it  is  still 
too  early  to  assess  whether  these  tests  are  able  to 
improve  STEM  proficiency.  Promoting  STEM 
subjects  also  requires  modern  approaches 
to 
teaching and learning. The new competence-based 
framework  curriculum,  aiming  at  modernising 
teaching  methods  in  general  education,  is  being 
piloted  in  80  schools  in  2016-2017  (rather  than 
2015-2016,  as  originally  planned).  Its  success 
depends largely on teachers’ ability and motivation 
to implement it.  

Latvia  has  a high  proportion  of  the  population 
with  secondary  education  but  no  professional 
qualification.  Around  one  third  of  secondary 
school (17)  graduates  do  not  continue  their  studies 
in  either  vocational  education  and  training  (VET) 
or  higher  education.  Yet,  the  labour  market 
prospects for people holding VET qualification are 
better  than  for  those  holding  general  secondary 
education, and this applies both to recent graduates 
and to the population as a whole. 

The  attractiveness  of  VET  has  improved,  but 
there  has  been  little  progress  on  curricula 
reform  in  2016.  Modernisation  of  buildings  and 
equipment  has  been  a  priority.  Currently  7  VET 
schools  (out  of  41)  are  fully  modernised  and  by 

(17)  In  2015,  63%  of primary  school  graduates  continued  their 
studies in general secondary education, 32% in VET 

3.3.2.  EDUCATION 

The  demographic  decline  exposes  overcapacity 
and quality-disparities in the education system. 
Student-to-teacher  ratios  and  average  class  sizes 
are among the lowest in the OECD in both primary 
and secondary education (OECD, 2016c) (16). This 
is  due  to  the  number  of  small  schools  in  rural 
areas. The number of schools and higher education 
institutions and staffing levels remain high relative 
to  the  dwindling  number  of  students  (OECD, 
2016d).  Maintaining  excessive  education  capacity 
is  costly.  Moreover,  learning  outcomes  in  rural 
schools  significantly  lag  behind  those  of  urban 
schools  (OECD,  2016b;  European  Commission, 
2016e).  This  has  a  link  to  low  remuneration  of 
teachers based on the number of students.  

Conditions on the minimum number of students 
are  set  to  reduce  the  number  of  schools  and 
teachers. Minimum numbers of students per class 
are set to gradually increase until 2018. These are 
criteria  for  the  financing  of  schools,  including 
teacher  salaries.  A  number  of  small  schools,  in 
which students of different ages are taught together 
in one classroom, are expected to be merged. The 
minimum student number criteria are less stringent 
for  younger  grades  allowing  schools  to  remain 
close  to  home.  The reform  aims  at  increasing  the 
quality and efficiency of general education.  

To  improve  the  quality  of  education,  a  new 
teacher  remuneration  model  was  introduced  in 
September  2016.  Under  the  previous  system, 
municipalities  received  government  funding  for 
teacher  salaries  on  the  basis  of  the  number  of 
students  enrolled  at  the  beginning  of  the  school 
year.  Municipalities  and  school  principals  had 
substantial  discretion  as  to  how  they  handled  the 
funds.  As  a  result, 
teachers’  salaries  varied 
considerably from one municipality to another for 
the same amount of work (European Commission, 
2015f; OECD, 2014). The new model is based on a 
clearer  definition  of  teachers’  base  salaries.  The 
model  provides  for  a  30-hour  working  week, 
including  contact  hours  and  preparatory  work 
(Government of Latvia, 2016). This makes teacher 
remuneration 
transparent. 
However, the model implicitly allows for teachers 

and  more 

fairer 

(16)  For  the  year  2016-2017,  authorities  report  an  increase  of 
the  student-to-teacher  ratio  to  11.95 %  from  8.67 %  the 
previous year. 

23 

 
                                                           
                                                           
3.3. Labour market, education and social policies 

remunerations  schemes,  to  be  completed  in  April 
2018. 

Participation  in  lifelong  learning  is  low.  In 
Latvia,  only  5.7 %  of  adults  participate 
in 
education  or  training  (every  4  weeks),  which  is 
below  the  EU  average  of  10.7 %.  Latvia  has 
learning 
prepared 
programme  for  employed  adults  with  a  special 
focus  on  workers  in  high  social  risk  groups,  such 
as those over 45 or low-skilled. The programme is 
expected to start at the beginning of 2017.  

an  EU-funded 

lifelong 

3.3.3.  HEALTHCARE 

including 

Health  indicators  remain  poor  and  there  is 
ample  room  for  improvement.  Life  expectancy 
and the number of healthy life years are among the 
lowest  in  the  EU  (OECD,  2016a).  While  poor 
health  outcomes  result  from  a  complex  set  of 
factors, 
choices; 
the accessibility,  quality  and  cost-effectiveness  of 
healthcare  services  play  a  prominent  role.  A  high 
proportion  of  Latvians  report  unmet  healthcare 
needs, 
factors 
(Graph 3.3.4) (19).  Low  efficiency  of  the  current 
health spending further aggravates the situation of 
the  limited  resources  (Medeiros  &  Schwierz, 
2015).  

lifestyle 

notably 

cost 

due 

to 

(19)  This proportion has declined in 2015 and 2016. 

passed 

implementing 

2023  27  schools  will  be  fully  modernised (18).  In 
2016,  secondary  legislation  to  create  sectoral 
expert  councils  and  procedures  for  updating 
the 
curricula  was 
amendments  to  the  Vocational  Education  Law 
adopted  in  2015.  The  sectoral  expert  councils 
comprise  representatives  from  employers,  trade 
unions  and  government  and  have  wide  ranging 
powers  including  involvement  in  VET  curricula, 
school  networks  and  work-based  learning.  The 
curricula reform started in 2010 and is expected to 
be finalised in 2021. In 2016, limited progress was 
the  development  of  occupational 
made  on 
standards,  qualification  exams  or  modular  VET 
programmes as implementation of projects relying 
on  EU  funding  had  not  yet  started.  The  social 
partners, especially employers, have been involved 
in many aspects of the VET reforms. 

should 

adopted 

the  programme 

The  regulatory  framework  for  work-based 
learning  is  adopted,  but  it  remains  to  be  seen 
how  it  works  in  practice.  In  2016,  secondary 
legislation 
stipulating 
was 
the requirements  for 
implementing  work-based 
learning. The VET school and the employer should 
develop individual learning plans and at least 25 % 
of 
in 
the company.  If  they  cannot  justify  of  sufficient 
pedagogical  competence,  in-company  trainers  are 
required  to  complete  at  least  72  hours  of  specific 
training.  The  company  can  choose  between 
an employment contract with the student that pays 
at  least  the  minimum  wage  or  a  tax-free  stipend 
determined  by  the  employer.  Support  for  work-
based  learning  and  practical  training  using  EU 
funds is available, the project is expected to start in 
February 2017.  

take  place 

is 

Latvia 
implementing  higher  education 
reforms. It is introducing a new model for higher 
education  financing,  with  elements  that  reward 
quality.  An  independent  national  accreditation 
agency  was  also  set  up  in  2015-2016  (European 
Commission, 2016a). In 2016, a World Bank study 
was  commissioned  to  assess  the  governance  of 
higher  education  institutions  with  a  view  to 
funding 
enhancing 
and 
mechanisms, 

recruitments 

governance, 

academic 

internal 

(18)  In  Latvia,  the  art  and  music  schools  under  Ministry  of 
Culture  are  also  defined  as  VET  schools.  If  these  are 
excluded  form  calculation,  then  19  VET  schools  in 
traditional  sense  (out  of  30)  will  be  fully  modernized  by 
2023. 

24 

 
                                                           
                                                           
3.3. Labour market, education and social policies 

Graph 3.3.4:  Self-reported unmet needs for medical 

Graph 3.3.5:  Health expenditure in 2014 

examination, 2014 

Source: Eurostat 

and 

payments 

Access to healthcare is severely limited by large 
out-of-pocket 
inefficient 
allocation  of  services.  Public  spending  on  health 
is  remarkably  low  (3.7 %  of  GDP  against  the  EU 
average  of  7.2 %  in  2014,  Graph  3.3.5)  and  is 
controlled  by  a  quota  system,  which  is  not 
sufficiently  linked  with  quality  of  healthcare 
services  and  based  on  outdated  costings.  This 
system  implies  an  uneven  distribution  of  state-
funded healthcare services, because as soon as the 
number  of  services  reaches  the  defined  limit, 
patients must pay for the service out-of-pocket (20) 
or  wait  for  the  following  year.  Thus  long  waiting 
times  and  high  level  of  out-of-pocket  payments, 
total  health 
which  account 
expenditure  (OECD,  2016a),  are  among 
the 
highest in the EU.  

for  38.5 %  of 

(20)  Official  expenses  for  medical  care  not  reimbursed  by 

insurance 

Source: World Health Organisation 

to  make 

Access  constraints  and  non-transparent  public 
financing  of  health  services  create  corruption 
risks.  Patients  are 
informal 
likely 
payments (21),  to  jump  waiting  lists  or  receive 
preferential treatment. The number of patients who 
report  having  used  unofficial  payments,  gifts  or 
acquaintances  is  above  the  EU  average  (TNS 
Opinion  &  Social;  European  Commission,  2014). 
Moreover,  allocation  of  public  financing  among 
service  providers  is  non-transparent  and  poorly 
linked  to  quality  and  effectiveness  of  healthcare 
services (Ministry  of  Finance,  2016).  This  creates 
corruption risks and inefficiencies. 

The  ageing  health  workforce 
faces  an 
unbalanced  skills  mix  and  earns  low  wages. 
Low pay is one of the key reasons for shortages of 
some  health  professionals  in  Latvia.  In  particular, 
the  number  of  nurses  is  very  low  (4.8  per  1 000 
population,  which  is  the  third  lowest  in  the  EU). 
While the number of physicians is around the EU 
average,  two  thirds  of  general  practitioners  are 
aged 50 and over and are expected to retire in the 
coming  years  (World  Bank,  2016a).  Workforce 
plans,  including  for  remuneration,  are  part  of  the 
broader  strategy  for  the  health  sector  expected  in 
April 2017.  

Poor health outcomes raise questions about the 
effectiveness of the health system. The amenable 
mortality rate in Latvia is the highest in the EU and 

(21)  Outside the official payment channels 

25 

048121620EU28LVEELT% of respondentsOther reasonsWaiting listToo far to travelToo expensive012345678910LVEELTEU 28% of GDPPublicPrivate out-of-pocketOther private 
 
                                                           
 
                                                           
3.3. Labour market, education and social policies 

preventable  mortality (22)  is  the  second  highest  in 
the EU. These data indicate a need to improve the 
effectiveness  and  quality  of  care,  in  particular  for 
cardiovascular disease, which accounts for 57 % of 
all deaths. This underlines the importance of more 
focus on prevention and health promotion so as to 
tackle  the  high  prevalence  of  risk  factors.  Within 
for  2014-2020, 
the  Public  Health  Strategy 
substantial financial resources (from the European 
Social Fund and the state budget) are envisaged for 
health  promotion  and  prevention  activities, 
including  health  network  development  guidelines 
in  the  priority  disease  areas.  However,  actual 
financing  increases  for  the  sector  lag  behind  the 
plans. 

There  has  been  some  progress  in  increasing 
the efficiency  of  the  healthcare  system,  but 
further  steps  are  needed.  A  number  of  hospitals 
have been closed in recent years and simultaneous 
efforts  have  been  made  to  move  care  out  of 
hospitals  to  community settings.  The World  Bank 
(2016a)  suggests  a  further  rationalisation  of  the 
hospital  sector.  The  implementation  plan  for 
financing  system  based  on  diagnosis-related 
groups  (DGRs)  was  approved  in  2015  for  three 
years  and  six  hospitals  have  already  been 
providing  information  to  the  Ministry  of  Health. 
Moreover,  further  improving  access  to  out-patient 
and primary care deserves a systemic approach. 

still  at 

The  reform  of  the  health  care  system  has  been 
the 
progressing,  but  parts  are 
programming  stage.  The  government  has  agreed 
to continue to pursue universal healthcare coverage 
and to increase healthcare spending to 12% of the 
general government expenditure, but no budgetary 
plans  are  set  out  yet.  Quality  of  financial 
management  will  be  increased  by  moving  to 
strategic  purchasing  of  services  and  relying  more 
on DRG-based payment mechanisms. The detailed 
elements of the reform on infrastructure (including 
primary  care),  human  resources  development 
(including wages), strategic purchasing and quality 
monitoring system will be included in the national 
Policy  Planning  Document,  which  is  supposed  to 
be presented by April 2017. 

(22)  Amenable  mortality  is  mortality  that,  in  theory,  could  be 
prevented  by  timely  access  to  good-quality  healthcare; 
preventable  mortality  concerns  deaths  which  could  have 
been avoided by preventive public health interventions. 

The  structural  reform  clause  for  healthcare  is 
applied from 2017. Latvia has an allowance from 
its  structural  fiscal  target  for  the  structural  reform 
in  the  healthcare  sector of 0.5%  of  GDP  in  2017-
2019. In 2017, Latvia can use 0.1% of GDP of this 
allowance.  The  first  measures  of  the  package  for 
2017  include  early  diagnostics  and  treatment  of 
oncology  patients,  improving  treatment  success 
and  cost-effectiveness.  These  measures  appear  to 
have  a  positive  effect  on  public  financing  in  the 
medium-run,  though  the  effect  could  be  more 
clearly presented by the authorities. The remaining 
measures for 2017 are expected to be announced in 
February 2017.  

The introduction of e-health is slow and poorly 
communicated.  The  mandatory  use  of  e-
prescriptions and e-sick leave certificates has been 
postponed to September 2017. The pilot phase was 
shorter  than  planned  in  2016  and  the  medical 
professionals  were  not  ready  to  subscribe  to  the 
product.  According  to  the  national  authorities  all 
services have been developed and work is ongoing 
to  increase  take-up (23).  A  centralised  e-health 
system  is  one  of  the  preconditions  for  ensuring 
quality  and  cost  efficiency  of  the  healthcare 
services. So far, quality and financial management 
systems are underutilised. 

3.3.4.  SOCIAL POLICIES 

Although  the  poverty  or  social  exclusion  rate 
declined  over  recent  years,  relative  poverty 
remains among the highest in the EU. The high 
poverty  level  is  influenced  by  low  spending  on 
social  protection  and  the  low  impact  of  social 
transfers  on  poverty  reduction  (see  Section 1  on 
recent trends and Graph 1.4).  

The  social  assistance  system  is  weak  and  does 
not provide effective protection against poverty. 
The  main  social  assistance  benefit  —  guaranteed 
minimum  income  (GMI)  —  tops  up  income  to 
reach EUR 50 per month per person and is usually 

(23)  By 1 February 2017, NHS had concluded contracts for the 
use of the e-Health System with 84% of pharmacies, 16% 
of general practitioners, 29% of other medical institutions. 
Two  e-health  hotline  have  been  set-up  for  citizens  and 
professionals.  In  January  2017,  an  eHealth  pilot  testing 
working  group  of  specialist  was  established  to  evaluate 
eHealth system functionalities. 

26 

 
                                                           
                                                           
3.3. Labour market, education and social policies 

the poorest 10 % are lower at 7 % with fiscal costs 
of 0.1 % of GDP. 

families  has  slightly 
Social  assistance  for 
improved.  In  January  2017, 
the  Parliament 
adopted legislative amendments stipulating that the 
family  state  benefits (28)  are  excluded  from  the 
income test, increasing the amount and coverage of 
GMI  benefit 
children. 
Additionally,  the  collection  and  transparency  of 
data about social assistance benefits has improved.  

families  with 

for 

Inactivity  traps  affect  only  a  small  proportion 
of  benefit  recipients,  but  could  increase  with  a 
rise in benefits. Currently, the GMI is reduced by 
one euro for every euro of additional income. This 
design of the benefit withdrawal contributes to an 
inactivity trap (World Bank 2016b), which can be 
limited by a more gradual withdrawal in view of a 
possible increase in generosity of social assistance. 
To  smoothen  the  transition  from  social  assistance 
benefits to work, from 2017 wage income up to the 
minimum  wage  is  excluded  from  the  means  tests 
for  the  first  three  months  of  employment.  While 
this  would  create  an  incentive  to  seek  work,  its 
effect is limited in time.  

The elderly represent the age group that is most 
exposed  to  poverty.  The  at-risk-of  poverty  or 
social exclusion rate for the elderly stands at 42 % 
(among  the  highest  in  the  EU  and  11  percentage 
points  (pps.)  above  the  rate  for  the  general 
population).  The  incomes  of  the  elderly  have 
increased  at  a  slower  pace  than  for  the  general 
population.  Moreover, 
indicators  measuring 
current  pension  adequacy  (29)  demonstrate  that 
pensions  in  Latvia  replace  a  lower  proportion  of 
income  than  in  most  other  EU  countries.  The 
minimum  pension  as  a  percentage  of  median 
income  is  the  lowest  in  the  EU  (European 
Commission;  the  Social  Protection  Committee, 
2015).  While  the  gender  pension  gap  is  relatively 

(28)  These  are  non-means-tested  monthly  benefits  for  children 
aged  1-15,  or  until  19  as  long  as  they  remain  in  full  time 
education and unmarried.   

(29)  The  relative  median  income  ratio  (65+)  is  defined  as  the 
ratio  of  the  median  equivalised  disposable  income  of 
people aged above 65 to the median equivalised disposable 
income  of  those  aged  below  65.  The  indicators  stands  at 
0.71,  while 
(2014). 
Aggregate  replacement  ratio  is  defined  as  the  ratio  of  the 
median  individual  gross  pensions  of  65-74  age  category 
relative  to  median  individual  gross  earnings  of  50-59  age 
category, excluding other social benefits. The ratio is 0.44 
for Latvia and 0.56 for the EU. 

the  EU 

is  0.94 

average 

supplemented  by  a  housing  benefit (24),  but  the 
level  of  the  benefits  vary  considerably  from 
municipality  to  municipality.  Less  than  a  third  of 
in  need  (defined  as  having  monthly 
people 
incomes below EUR 129) receive GMI or housing 
benefits (25). The GMI level has not been changed 
since  2009,  and  it  was  agreed  to  keep  the  level 
unchanged  in  2017.  Latvia  spends  little  on  social 
assistance  as  a  percentage  of  GDP  in  comparison 
to  other  countries  (26).  Different  studies  have 
assessed  Latvia’s  minimum  income  scheme  as 
inadequate 
2015a; 
Bradshaw & Marchal, 2015; World Bank, 2013). 

(European  Commission, 

social 

The  plans  adopted  in  2014  to  reform  social 
assistance  will  not  be  implemented  as  planned. 
In  2014,  the  government  adopted  a  concept  paper 
on the minimum income level to be set at 40 % of 
income.  Various 
equalised  household  median 
benefits 
benefits, 
(state 
unemployment benefits, minimum pensions, social 
assistance  benefits)  would  be  linked  to  this  level. 
Implementation  was  supposed  to  start  from  2017, 
however, these plans have been abandoned while a 
future 
replacement  plan 
is  uncertain (27).  No  budgetary 
orientation 
allocation has been made to give any guarantee of 
implementation.  

in  preparation, 

security 

is 

The  absence  of  minimum  income  level  reform 
negatively  affects 
the poorest  households. 
Assuming the minimum income level of EUR 155 
in 2016, a EUROMOD  simulation demonstrates a 
21 % increase in disposable income for the poorest 
10%  of  the  population.  This  is  estimated  to  cost 
0.3 %  of  GDP,  mostly  for  means-tested  benefits 
and  less  for  pensions.  However,  an  increase  in 
GMI  to  the  minimum  income  level  under  the 
current  income  test  system  would  create  labour 
market disincentives. A simulation assuming GMI 
at  50 %  of  the  minimum  income  level  (EUR 78) 
combined with the benefit withdrawal by 50 % for 
any  additional 
labour 
incentives.  However,  disposable  income  gains  for 

income  caters  for 

the 

(24)  The  levels  of  housing  benefit  and  GMI  according  to 
Ministry  of  Welfare  data  (Jan-Oct  2016),  the  average 
monthly  housing  benefit  was  60  EUR  per  household  or 
13.56 EUR per person. 
(25)  Ministry of Welfare data 
(26)  Eurostat data on spending on social exclusion and housing 

benefits 

(27)  A  new  plan  for  2017-2020  is  expected  to  be  submitted  to 

the government in the first quarter of 2017. 

27 

 
                                                           
                                                           
3.3. Labour market, education and social policies 

gender  equality  are  particularly  relevant  in  the 
context of the increasing gender pay gap in Latvia. 

The social protection of persons with disabilities 
is weak. While the employment and activity rates 
for  persons  with  disabilities  in  Latvia  are  better 
than  the  EU  average, the poverty  rates  are  among 
the  worst  in  Europe.  43 %  of  persons  with 
disabilities  are  exposed  to  poverty  or  social 
exclusion,  and  the  difference  in  poverty  rates 
between people with and without disabilities is the 
second highest in the EU. The at-risk-of poverty or 
social  exclusion  rates  for  people  with  severe 
disability (31)  are  even  higher  —  51 %.  Latvia 
spends  only  1.2 %  of  GDP  on  disability  related 
benefits  (EU  average  2 %)  and  the  mean  gross 
disability  benefits  as  a  percentage  of  the  financial 
poverty  threshold  is  60 %,  which  is  among  the 
lowest  in  the EU  (ANED,  2016).  The  number  of 
people  with  disabilities  has  been  increasing  to  a 
large extent due to the ageing population. 

Poor people in particular struggle to get access 
to  adequate  housing.  A  high  percentage  of  poor 
households  live  in  overcrowded,  poor  quality 
housing  (27.3 %  v  an  EU  average  of  12.4 %  in 
2015)  with  children  living  in  poverty  being 
especially  exposed  (45.6 %  v  18.0 %  in  the  EU). 
Overcrowding rates are high, both for the poor and 
for the population in general (respectively, 49.4 % 
v 29.7 % EU and 39.1 % v 14.1 % EU average in 
2015).  Social  housing  only  accounts  for  0.4 %  of 
the total housing stock. 

(31)  EU-SILC definition 

the  gender  gap 

in  old-age  poverty 

low, 
is 
considerable  —  more  than  15 pps.  (30).  This  is 
mainly due to a high gender gap in life expectancy 
and the absence of survivors’ pensions for spouses. 

Latvia has taken some steps to address pension 
adequacy  concerns.  The  parliament  adopted 
legislative  amendments,  entering  into  force  on 
1 January  2016,  to  the  Law  on  State  Pensions 
stipulating that pensions will be indexed at 50 % of 
the growth of the national wage bill as opposed to 
25 %  previously.  The  amendments  also  envisage 
that  the  accrual  of  pension  capital  will  be  spread 
over  the  economic  cycle,  with  retroactive  effect, 
resulting  in  an  upward  revision  of  the  pensions 
granted  during  the  crisis  (European  Commission, 
2016a).  Pensions  granted  in  2010  have  been 
revised upwards and pensions granted in 2011 will 
be  subject  to  an  upward  revision  in  2017  (see 
Section 3.1.4  on  pension  adequacy  and  long-term 
sustainability).  Pensions  granted  from  2012–2015 
will be revised in 2018.  

Child  poverty  rates  are  above  the  EU  average, 
but have been on a strongly downward trend. In 
2017, additional support for foster families will be 
provided.  The  survivors’  benefit  for  children  will 
be  increased,  and  the  state  family  benefit  for  the 
fourth and subsequent children will be raised from 
EUR  34  to  EUR  50  per  month.  On  the  negative 
side,  a  relatively  high  number  of  children  were 
living in child care institutions (Opening Doors for 
Europe’s Children, 2016). 

The coverage of children under the age of four 
in  childcare  facilities  is  lower  than  the  EU 
average.  In  2014,  only  22 %  of  all  0-3  year  old 
children  were  enrolled  in  formal  childcare,  lower 
than  the  Barcelona  targets  of  33 %  and  below  the 
EU  average  of  28 %.  In  May  2016,  the  central 
government  stopped  financing  childcare  vouchers 
in  public 
for 
kindergartens,  transferring  the  responsibility  to 
ensure  equal  access  to  pre-school  education  back 
to 
the  municipalities.  Demand  for  childcare 
facilities exceeds supply in some locations and the 
provision  of  childcare  vouchers  is  expected  to 
continue.  However,  no  data  are  available  yet  to 
assess the latest developments. Policies supporting 

children  without 

a  place 

(30)  At-risk-of-poverty  and  social  exclusion  rate  for  women  is 

47.3% vs 31.2% for men (aged 65+, 2015). 

28 

 
                                                           
                                                           
3.4. INVESTMENT 

3.4.1.  INVESTMENT SITUATION 

Private  investment  has  not  yet  returned  to  its 
pre-crisis level. Non-financial corporations remain 
the main investors in Latvia, but their investments 
accounted for 15 % of GDP in 2015 against 24 % 
in  2000  (Graph  3.4.1).  On  the  other  hand,  public 
investment  has  increased  from  2 %  of  GDP  in 
2000  to  5 %  in  2015.  By  assets,  the  main 
investments  are  in  buildings  (other  than  housing) 
and machinery and equipment which each account 
for around 40 % of investment.  

Graph 3.4.1:  Investment by institutional sector as a share of 

GDP 

authorities  put  a  lot  of  emphasis  on  preparing 
national  implementing  provisions,  which  took 
more  time  than  initially  envisaged.  Moreover, 
measures  to  speed  up  the  implementation  as  well 
as  a  strict  monitoring  system  have  been  put  in 
the  beginning  of  2016  and 
place.  Between 
December, 
the  amount  of  selected  projects 
accelerated  from  8.8 %  to  around  32 %  of  total 
costs over the period 2014-2020 (including the EU 
and national share) (Box 2.1). 

Graph 3.4.2:  Implementation of EU funds 

Source: European Central Bank, Latvian Ministry of Finance 

There  are  specific  investment  needs  in  the 
healthcare  sector,  in  transport  and  energy 
infrastructures,  as  well  as  in  research  and 
innovation. These needs are discussed in Sections 
3.3 and 3.5. 

3.4.2.  BUSINESS ENVIRONMENT 

environment 

Latvia's  business 
is  quite 
favourable, but some weaknesses remain. Latvia 
is  ranked  14  out  of  190  in  the  latest  World  Bank 
Doing Business review (World Bank, 2017). Most 
Latvian  sub-indicators  are  high  in  the  ranking 
except for the rate of recovery of investment from 
insolvency cases (49 cents on a dollar compared to 
an OECD average of 73) and getting electricity.  

Source: Eurostat 

Latvia  relies  heavily  on  EU  funds  for  its 
investment.  EUR  5.2  billion  were  allocated  to 
Latvia  over  2007-2013  and  another  EUR  5.6 
billion  over  the  2014-2020  programme  period. 
This  amounts  to  approximately  70 %  of  the 
in  areas 
expected  national  public  investment 
supported  by  the  funds  (Box  2.1).  These  funds 
cover a wide range of policies, from infrastructure 
projects  and  business  environment  to  social  and 
environmental policies. 

impact  on 

investments 

A  slowdown  in  flow  of  EU  funds  has  had  a 
negative 
in  2016. 
The transition to the 2014-2020 programme period 
resulted  in  a  temporary  slowdown  in  investment 
activity  in  2016  (Graph 3.4.2).  Other  Members 
Sates have been also affected by this transition, but 
to a smaller extent. The new framework provision 
introduced new elements to make cohesion policy 
more  effective  (performance  framework,  ex-ante 
Latvian 
e-cohesion). 
conditionalities, 

The 

29 

051015202530354000010203040506070809101112131415% of GDPNon-financial corp.Financial corp.GovernmentHouseholds01234509101112131415161718% of GDPCapital transfersCurrent trasfersEU fund cash flow 
 
 
 
3.4. Investment 

30 

 Box 3.4.1: Investment challenges and reforms in LatviaSection 1. Macroeconomic perspective  The high share of investment in GDP contributed to the economy catching up prior to 2007. However, a housing bubble was fuelled by the credit expansion. Following the crisis, investment has adjusted to a lower level, but is still above the EU average. Investment in equipment, non-residential construction and civil engineering still dominates. Since the crisis both households and corporations have engaged in a marked deleveraging process. The signs of a turnaround in the credit cycle in 2016 are encouraging for private investment prospects. However, an interruption of public and private investment flows (both reliant on the EU funding) implied a temporary drop in investment in 2016.  Section 2. Assessment of barriers to investment and ongoing reforms   In addition to macroeconomic constraints and external developments, Latvia's investment attractiveness is hampered by a number of domestic policy bottlenecks (European Commission, 2015e; 2016a). Reforms progress slowly and those implemented still have to demonstrate their effectiveness, in particular in the areas of research and innovation, and access to finance (see Sections 3.2, 3.5 and 3.6). Main barriers to investment and priority actions underway 1. Despite efforts to introduce merit-based selection and transparency in decision-making, inefficiencies in public administration still persist and prevent needed far-reaching structural reforms. As a result, structural changes are gradual and interests of different groups are not adequately represented.  2. The insolvency proceedings are inefficient in sufficiently recovering assets and reviving businesses through restructuring. The system has been abused by the insolvency administrators in the past, but public oversight and ability to tackle insolvency related crimes have been strengthened recently (see Section 3.6). However, legal and implementation challenges still persist. Regulatory/ administrative burdenTaxationCSRPublic administrationCSRAccess to financePublic procurement /PPPsCooperation btw academia, research and businessCSRJudicial systemFinancing of R&D&IInsolvency frameworkCSRBusiness services / Regulated professionsCompetition and regulatory frameworkRetailEPL & framework for labour contracts ConstructionWages & wage settingDigital Economy / TelecomEducation CSREnergyTransportNo barrier to investment identifiedCSRInvestment barriers that are also subject to a CSRSome progressNo progressSubstantial progressLimited progressFully addressedPublic administration/ Business environmentFinancial Sector / TaxationR&D&ISector specific regulationLabour market/ Education 
 
 
 
 
 
3.4. Investment 

The  shadow economy  is a  structural  constraint 
on  the  development  of  the  Latvian  economy.  It 
is estimated to be as high as 21 % of GDP (Sauka 
& Putniņš, 2016). Underreported business income, 
unregistered  companies  and  envelope  wages  are 
widespread  practices.  These  directly  affect  the 
development  potential  and  borrowing  capacity  of 
such companies and households. 

the 

lowest 

The integration of digital technology by Latvian 
businesses  remains  a  challenge.  Despite  some 
progress  compared  to  2015,  Latvia  still  scores 
(European 
in 
among 
Commission,  2016b)  (32).  The  take-up  of  digital 
technologies  is  still  relatively  slow.  Only  a  minor 
fraction of Latvian SMEs are selling online (8.3 %, 
compared to 16 % in the EU) and an even smaller 
percentage  of  SMEs  are  engaged  in  cross  border 
online sales (3.9 %, compared to 7.5 % in the EU). 

the  EU 

Support  for  new  innovative  enterprises  has 
been  launched.  A  new  support  programme  for 
start-ups was passed in November 2016, providing 
an  option  of  fixed  tax  payments  for  employees  or 
grants for highly qualified employees, as well as a 
corporate  tax  exemption.  Support  for  individual 
start-ups is set to last for five years, which appears 
on  the  long  side.  The  implementation  details  are 
still  to  be  refined.  Other  support  schemes  for 
lifestyle businesses are expected.  

There are specific issues related to productivity, 
insolvency 
skill  shortages  and  mismatches, 
procedures,  corruption  and  inefficiencies  in 
public administration. These issues are discussed 
in  Sections  3.3  and  3.6.  Other  noteworthy  topics 
related  to  the  business  environment  are  the  need 
for  a  more  comprehensive  assessment  of  the 
impact  on  small  businesses  of  decisions  taken  by 
public  authorities,  missing  national  rules  and 
procedures 
their 
registered  offices  into  and  out  of  Latvia.  On  the 
positive  side,  there  are  improvements  in  the 
electronic tax declaration system. 

for  companies 

transfer 

to 

(32)  Across  indicators,  Latvia  ranks  19th  among  the  EU 
Member  States  in  the  2016  Digital  Economy  and  Society 
Index. 

31 

 
                                                           
3.5. SECTORAL POLICIES 

3.5.1.  ENERGY AND ENVIRONMENTAL ISSUES 

Energy 

Latvia  has  a  high  share  of  renewables  in  its 
energy mix, but remains dependent on imports 
of  fossil  fuels.  The  main  renewable  sources  of 
energy  are  biomass  and  hydropower.  Energy 
import  dependency  has  decreased  over  time,  but 
Latvia has been exclusively dependent on Russian 
natural  gas  supplies  so  far.  The  opening  of  the 
Klaipėda LNG terminal in Lithuania has provided 
a possible alternative for natural gas supplies from 
2015.  Electricity 
interconnections  are  being 
improved, but the weak points are the congestions 
on  the  Estonia-Latvia  border  and  Latvia's  internal 
power  grid.  Latvia  is  also  among  the  top  three 
Member  States  with  the  highest  electricity  market 
concentration (after Cyprus and Malta). 

and 

Security  of  supply  and  the  development  of  a 
competitive  regional  energy  market  rely  on 
interconnections 
electricity 
gas 
strengthening  domestic 
infrastructure  and 
efficient  use  of  resources.  The  Baltic  Energy 
Market  Integration  Plan  (BEMIP)  aims  at  ending 
isolation  of  the  Baltic  states  from  the  rest  of  the 
EU for the electricity and gas market. In 2015, the 
cooperation  under  the  BEMIP  was  extended  to 
renewable  energy  and  energy  efficiency.  In  2016, 
Latvia  hosted 
the  first  BEMIP  meetings  on 
renewable energy and energy efficiency financing.  
Modernisation  of  the  Inčukalns  underground  gas 
storage  facility,  reinforcement  of  electricity  and 
gas  transmission  systems (33),and  synchronisation 
of  the  Baltic  states'  electricity  grid  with  the 
European networks are among the priority actions. 
The related projects are included in the EU list of 
projects  of  common  interest,  and  some  of  them 
already benefit from EU co-financing. 

The  opening  of  the  gas  market  and  separation 
of  energy  supply  and  generation  is  foreseen  to 
be completed by end of 2017. Full opening of the 
gas  market  for  competition  is  foreseen  in  April 
2017. Regulated prices are to remain available for 
vulnerable consumers. The third party access to the 
Latvian gas infrastructure has already been ensured 

(33)  The  key  electricity  connection  projects 

the 
construction of the line between Riga Combined Heat and 
Power  Plant  (Riga  CHP  2)  and  Riga  Hydro  Power  Plant 
(Riga  HPP) by  2018  and  the  completion  of  the  Ventspils-
Tume-Imanta line by 2019. 

include 

for  natural  gas  transport  and  storage,  but  not  for 
sales  in  Latvia.  The  vertically  integrated  gas 
company  AS  Latvijas  Gaze  is  set  to  be  fully 
unbundled by end of 2017. 

the 

and 

choice, 

regulated 

deregulation 

electricity  prices 

The  electricity  market  deregulation  and  tariff 
changes  have  created  price  fluctuations.  Latvia 
for 
phased-out 
households  in  2015.  While  facilitating  investment 
and 
the 
discontinuation of subsidies led to a sharp increase 
in  household  electricity  prices  by  around  28 %  in 
2015  and  a  small  decrease during  the  first  half  of 
2016.  According 
the  Nordic 
to  data 
electricity  exchange  “Nord  Pool  Spot”,  wholesale 
electricity  prices 
in  Latvia  since  2013  have 
experienced a sharp decline (-30 %), attributable to 
the  introduction  of  new  electricity  transmission 
interconnections  in  Lithuania  with  Poland  and 
(“NordBalt”  and  “LitPolLink”).  For 
Sweden 
remained  stable. 
industries,  electricity  prices 
However,  in  summer  2016,  an  electricity  tariff 
reform  introduced  a  fixed  connection-capacity 
payment  component,  favouring  consumers  with 
constant use of their connection capacity.  

from 

the 

and 

final 

primary 

Energy  efficiency  and  support  for  renewable 
energy deserve attention. Latvia currently scores 
well  in  terms  of  its  2020  targets  for  energy 
consumption and renewable energy (see Annex A). 
However, 
energy 
consumption  levels  may  increase  until  2020,  in 
view  of  the  projected  economic  growth,  unless 
energy  efficiency  policies  are 
implemented. 
Continued  uncertainty  of  the  renewable  energy 
investment  framework  conditions  and  continued 
support to fossil fuel based co-generation increases 
the  complexity  and  overall  cost  of  such  support 
and  slows  down  renewable  energy  development, 
particularly in electricity sector. 

Electricity  feed-in  tariffs  carry  a  high  cost  for 
domestic  consumers.  Electricity  generation  from 
renewable  energy  sources  and  in  efficient  co-
generation is supported by feed-in tariffs based on 
quotas on generation capacity. In 2016, around two 
thirds (59 %) of  this support  was  given  to the  co-
generation  plants  which  use  mainly  imported 
natural gas. In 2015, the share of renewable energy 
and  co-generation  support  in  national  prices  in 
Latvia  was  the  fifth  highest  in  the  EU  for 
households  and  the  fourth  highest  for  industry. 

32 

 
 
                                                           
3.5. Sectoral policies 

environmental  fiscal  reforms  suggests  introducing 
a  tax  on  incineration  and  mechanical  biological 
treatment  of  up  to  EUR 15  per  tonne  (Eunomia 
Research & Consulting, 2016). This would provide 
economic 
for  waste  management 
focused  on  the  upper  tiers  of  the  waste  hierarchy, 
including recycling. 

incentives 

(GHG)  emissions 

Latvia  is  on  track  to  meet  its  2020  target  of 
greenhouse  gas 
reduction 
outside the EU emissions trading system (ETS) by 
a  10  percentage  points  margin.  Emissions  outside 
the  ETS  are  expected  to  increase by 7 % between 
2005 and 2020 whereas the forecast was 17 %. In 
2015,  such  emissions  accounted  for  80 %  of 
Latvia’s total GHG emissions. Half of this total is 
due to the transport and agriculture sectors whose 
emissions are increasing (36). In addition, land use, 
land  use  change  and  forestry  (LULUCF) 
is 
projected  to  become  the  most  important  GHG 
emitter in the coming years (Graph 3.5.1). 

Graph 3.5.1:  Greenhouse gas emissions 

(1) GHG inventory and proxy inventory data 
Source: EEA, European Commission 

CO2   emissions  from  new  cars  are  among  the 
highest  in  the  EU.  Transport  vehicle  registration 
tax  is linked  to  CO2   emissions, but has  a limited 
effect  on  consumers.  In  2015,  new  cars  in  Latvia 
(and  Estonia)  had  the  highest  CO2   emissions  per 
kilometre  in  the  EU  —  137g  CO2/km,  against  an 
EU  average  of  119.6  g  CO2/km  (European 
Environment Agency, 2016).  

(36)  GHG  in  agriculture  sector  increased  by  3.3 %  while  in 

transport sector – by 4.3 % (United Nations, 2016). 

Gradual cost reduction for this support is expected 
to be introduced as of 2019.  

the 

the 

from 

feed-in 

tariff  component 

the  state  budget. 

Balancing support for electricity generation and 
costs  for  consumers  has  been  difficult.  From 
2014,  over-subsidisation  of 
electricity 
generators  and  the  electricity  price  impact  for  the 
final  consumers  is  limited  through  a  tax  on 
subsidised  electricity  generators.  The  support 
scheme  is  closed  for  new  entrants  since  2011. 
Moreover, 
in 
electricity  bills  is  kept  stable  compensating  the 
In 
additional  costs 
November  2016,  a  fixed  connection-capacity 
payment  was  also 
tariff 
component.  It  will  enter  into  force  on  1  January 
2018.  The government  expects  that it  could  result 
in a reduction of this tariff component payment for 
households  and  companies  with  effective  use  of 
connected  electricity  capacity.  Part  of  the  support 
costs is covered by dividend payments of the state-
owned energy company Latvenergo which is also a 
major  beneficiary  of  the  scheme.  A  dialogue 
between 
the 
Latvian  authorities  on  past  and  existing  support 
framework  for  renewable  and  fossil  electricity 
generators is ongoing (34). 

the  European  Commission  and 

introduced  for 

this 

Environmental policy areas 

Recycling  is  low  and  most  of  the  waste  is 
landfilled, falling short of the EU requirements. 
Latvians  generate  less  municipal  waste  than  the 
average European, but most of it is still disposed of 
in  landfills.  With  the  municipal  waste  recycling 
rate  at  27 %  and  landfilling  rate  at  68 %  in 
2015 (35), Latvia is at risk of not meeting its 2020 
targets  of  50 %  for  recycling  and  75 %  for 
diversion of biodegradable waste from landfills. 

in  2017  and 

Incentives  for  a  better  waste  management  and 
investment  are  provided.  The  tax  on  municipal 
waste  landfill  is  set  to  increase  to  EUR  25  per 
tonne 
to  EUR  50  by  2020 
incentivising  a  better  waste  management  and 
timely investment in recycling capacity. However, 
in order to ensure that waste is not simply shifted 
the study  on 
from 

incineration, 

landfill 

to 

(34)  Part of the state aid case SA.43140 (2015/NN) - Subsidised 

Energy Tax and RES and CHP. 

(35)  http://ec.europa.eu/eurostat/web/waste/transboundary-
waste-shipments/key-waste-streams/municipal-waste 

33 

-100-5005010015020090's2000's2010's2020'sMtCO2 eqLULUCFTransportEnergy useWasteIndustrial processesEnergy supplyAgriculture 
                                                           
 
                                                           
3.5. Sectoral policies 

Nevertheless  funding  for  road  maintenance  and 
reconstruction from the state budget is insufficient 
to improve the currently low quality of the network 
(EUR 145 million available in 2016 from the state 
budget).  

The  Rail  Baltica  project  relies  on 
the 
commitment  of  the  three  countries.  By  2025,  a 
new  high-speed  railway  line  should  connect  the 
Baltic  states  to  the  trans-European  network  for 
both  freight  and  passenger  transport.  Central 
coordination  of  the  project  is  entrusted  to  a  joint 
venture — RB Rail AS — with equal participation 
of  each  Baltic  state.  Nevertheless,  balancing 
financial and organisational interests of the parties 
has  taken  time  and  increased  the  complexity  of 
project  management.  The  agreed  division  of 
responsibilities  and  the  key  deadlines  will  be  laid 
down  in  an  intergovernmental  agreement  between 
the  three  Baltic  countries.  Ratification  of  this 
agreement  would  ensure  a  long-term  commitment 
and the smooth implementation of the project. 

railway 

electrification  project 

The 
faces 
significant  delays.  The  estimated  cost  of  the 
railway  electrification  project  has  tripled  (from 
EUR 450 million according to the initial studies to 
EUR  1.5  billion  according  to  the  latest  Design 
study).  The  available  funding  is  insufficient  to 
electrify  all  TEN-T  railway  tracks  in  Latvia 
(998 km) as initially planned and the scope of the 
project  is  to  be  redefined (37).  EUR  347  million 
from  the  Cohesion  Fund  are  dedicated  to  this 
project over the 2014-2020 programming period. 

both 

contracting 

performance 

Opportunities for energy efficiency measures in 
the residential sector have been made available. 
Energy  efficiency  financing  instruments  measures 
for  multi-apartment  buildings  are  becoming  more 
available  for  inhabitants.  The  framework  for 
energy 
for 
residential  and  for  public  buildings  is  being 
developed,  which  is  expected  to  boost  the  energy 
services market in Latvia. Smart electricity meters 
were introduced in 2014. Their share is expected to 
increase  significantly  from  12 %  in  2015  to  80 % 
by  2020  and  100 %  by  2023.  Achieving  further 
energy  savings  in  the  residential  sector  is  an 
important  investment  priority  under  the  European 
Structural  and  Investment  Funds  financing  period 
for  2014-2020,  as  only  some  3 %  of  apartment 
buildings have been renovated in 2009-2013. 

The  legal  framework  for  energy  efficiency 
policies is about to be completed. In March 2016, 
the Parliament adopted the Energy Efficiency Law 
—  a  key  legislative  act  to  transpose  Directive 
2012/27/EU on energy efficiency. Even though the 
majority  of  the  provisions  have  been  transposed 
into  national  law,  some  provisions  of  the  Energy 
Efficiency  Directive  (e.g.  the  Energy  Efficiency 
Obligation  scheme)  remain 
transposed 
through government regulations so that it can start 
delivering savings. In addition, the implementation 
of the Energy Performance of Buildings Directive 
should  also  be  completed,  to  promote  more 
frequent use of energy performance certificates for 
existing  buildings,  including  raising  awareness 
about energy performance certificates. 

to  be 

3.5.2.  TRANSPORT INFRASTRUCTURE 

3.5.3.  RESEARCH AND INNOVATION 

Road safety remains poor. Although Latvia is no 
longer  the  worst  performing  EU  Member  State,  it 
remains among the three countries with one of the 
highest  fatality  rate  in  the  EU  (94  deaths  per 
million inhabitants in 2015, against the EU average 
of  51.5).  The  national  road  safety  plan  (EUR  25 
million over 2014-2016) aims at a 50 % reduction 
in road fatalities between 2010 and 2020. 

Latvia’s  innovation  performance  has  slightly 
improved. The country moved up from the group 
of  ‘modest  innovators’  (<50 %  of  EU  average)  to 
the  group  of  ‘moderate  innovators’  (50-90 %  of 
EU  average)  (European  Commission,  2016c). 
intensity 
However,  Latvia’s  business  R&D 
remains  one  of 
the  EU  and 
the 
cooperation between science and business remains 

lowest  in 

Road  investments  rely  almost  exclusively  on 
European  funds.  Significant  investments  have 
been  programmed  for  2014-2020  (EUR  454 
million)  aiming  at 
the  network, 
reducing  the  percentage  of  roads  in  a  bad  and  a 
very bad condition. Implementation is progressing. 

improving 

(37)  A  first  stage  of  electrification  (Daugavpils  –  Krustpils  – 
Rīga and Rēzekne – Krustpils – Rīga) is under preparation 
for 2019-2023 following the approval on 17 January 2017 
by the Cabinet of Ministers of the report on the cost-benefit 
analysis  and  project  implementation  alternatives  of  the 
major project “Electrification of the Latvian Railway TEN-
T Network”. 

34 

 
                                                           
3.5. Sectoral policies 

low.  Latvia’s  research  and  innovation  system 
strongly depends on support from EU funds.  

among the lowest in the EU. The take-up of R&D 
tax  incentives  is  increasing,  though  in  absolute 
terms the amounts are still limited. 

The  sectoral  distribution  of  SME’s  is  not 
conducive  to  innovation.  SMEs  are,  to  a  large 
extent,  concentrated  in  sectors  with  low  and 
medium-low  research  intensity,  such  as  metal 
processing  and  machinery,  wood  products  and 
food  processing  (82 %).  There  is  however  a 
growing eco-system of hi-tech start-ups, supported 
by  conferences,  accelerator  funds,  a  new  start-up 
association and cross-border experience sharing. 

The  implementation  of  Latvia’s  research  and 
innovation  strategy  for  smart  specialisation 
(RIS3)  is  progressing.  It  is  supported  by  a  re-
launched  entrepreneurial  discovery  process  (11 
thematic sectoral councils). The implementation of 
RIS3  is  monitored  by  the  strategic  innovation 
council.  The  first  monitoring  report  of  RIS3  in 
Latvia is expected in June 2017. 

investment 

in  research  and 
Most  public 
innovation  is  supported  by  EU  funds.  Research 
and  innovation  financed  by  the  EU  funds  has 
encountered 
the  new 
some  delays  under 
programming  period  2014-2020.  Authorities  are 
putting measures in place to increase the quality of 
investments,  such  as  ex  ante  assessments  and 
analysis  of  eco-systems  of  each  priority  of  smart 
specialisation  as  well  as  involvement  of  foreign 
experts 
the  assessment  of  some  project 
proposals. Latvia is also putting in place measures 
to increase its success rate in Horizon 2020 calls. 

in 

Public  research  suffers  from  underfunding, 
fragmentation  and 
internationalisation. 
low 
Reforms  to  consolidate  research  institutions  are 
ongoing (38). New rules for the allocations of both 
project  funding  (with  international  standards  of 
peer  review)  and 
institutional  funding  (with 
elements  of  performance-based  funding)  were 
introduced.  However,  public  research  funding 
remains  fragmented  and  regulations  for 
the 
assessment of projects are complex. At the request 
of the Latvian authorities, a specific support under 
the  European  Commission’s  Horizon  2020  policy 
support  facility (39)  has  been  launched  to  develop 
concrete  recommendations  in  this  area  including 
governance and organisational aspects. 

Business investment in research and innovation 
remains  low  in  international  comparison.  Over 
the last eight years Latvia had a positive growth of 
business R&D investment of about 4.8 % per year. 
However,  in  2015,  business  investment  in  R&D 
declined to 0.15 % of GDP (from 0.24 % in 2014). 
Overall,  business  investment  in  R&D  remains 

(38)  In  2016  the  Ministry  of  Education  and  Science  decreased 
the number of research institutions receiving basic funding 
from 44 to 21. 

(39)  https://rio.jrc.ec.europa.eu/en/policy-support-facility 

35 

 
                                                           
3.6. PUBLIC ADMINISTRATION 

3.6.1.  PUBLIC SECTOR EMPLOYMENT 

in 

in 

shows 

the  population),  notably 

Inefficiency in the public administration weighs 
on  the  business  environment.  The  size  of  the 
public  administration  has  decreased  since  2008  in 
absolute  terms  (from  211 000  in  2008  to  176 115 
in  2015)  and  relative  terms  (from  9.6 %  to  8.9 % 
the  central 
of 
administration (40).  Efficiency  gains 
the 
in 
municipal  sector  or  municipal  enterprises  have 
been  limited.  Ex  post  assessment  of  the  last 
regional reform, intended to increase economies of 
staff  and 
little  decrease 
scale, 
comparatively  large  administrative  expenditures, 
especially  in  smaller  municipalities  (Ministry  of 
Environment 
and  Regional  Affairs,  2013). 
Weaknesses  in  regulatory quality  and  government 
effectiveness  are  illustrated  by  business  survey 
results.  The  Global  Competitiveness  report  notes 
favouritism  in  decisions  of  government  officials, 
low  public  trust  in  politicians,  wastefulness  of 
government  spending,  low  efficiency  of  the  legal 
framework  in  settling  disputes  and  in  challenging 
regulations  (World  Economic  Forum,  2016). 
According to World Bank Worldwide Governance 
Indicators,  Latvia  lags  behind  its  peers  (such  as 
Estonia)  as  well  as  the  average  OECD  results  in 
terms  of  regulatory  quality,  control  of  corruption 
and the rule of law (41). 

The comparatively low pay in the public sector 
harms  recruitment.  Low  pay  and 
limited 
performance-rewarding  elements  (bonuses)  make 
attracting  and  retaining  talent,  especially  from  the 
private  sector  and 
international  organisations, 
challenging  in  Latvia’s  public  sector.  Managers 
and experts in public administration receive around 
50 %  lower  pay  than  their  private  sector  peers 
(Fontes, 2016), while the stated policy objective is 
80 % of private sector pay. There are notable skills 
shortages in ICT, audit and project management. 

Progress  in  public  administration  reform  has 
been  limited.  The  State  Chancellery  has  been 
preparing  reform  plans,  but  no  reform  tools  were 
introduced in 2016. The stated reform objective is 
to  achieve  an  effective,  accessible,  innovative, 
professional  and  result-oriented  administration. 

(40)  Numbers  include  a  large  share  of  those  employed  in 

education and health sectors. 

(41)  www.govindicators.org  

However, few decisions have been agreed to drive 
the reform forward.  

Accountability  of  the  public  administration  is 
low  due  to  weak  prevention  of  conflicts  of 
interest,  corruption  (section  3.6.4),  and  a 
fragmented  legal  basis  for  public  employment. 
The  draft  Civil  Service  Law  to  unify  public 
officials and other public sector employees under a 
common 
framework  has  been  under 
consideration  by  the  parliament  since  2015.  The 
draft law is expected to be reviewed in the light of 
the planned public sector reform. 

legal 

shared 

service 

Proposals  for  a  leaner  and  more  professional 
public sector were tabled in 2016. The intention 
is to simplify the structure of public administration 
by  evaluating  and  possibly  merging  smaller 
institutions, unifying related service functions, and 
creating 
centres. 
public 
Effectiveness  audits  and  process  reengineering  is 
considered for each and every institution to save at 
least  1 %  per  year.  The  reform  will  also  aim  to 
introduce  more  variable  performance  indicators 
and  linkages  between  results  and  remuneration. 
Top  managers  will  be  given  more  flexibility  on 
staff  and  reinvestment  of  savings  generated 
through  efficiency  gains.  Attracting  the  top  level 
Latvian-born experts from international institutions 
is also considered. Finally, there will be increased 
transparency — all salaries before tax of all public 
sector employees will be accessible online. 

Local  municipalities  are  looking  for  efficiency 
gains,  but  no  comprehensive  reform  of  their 
finances  or  staff  policies  is  planned.  Local 
authorities  employ  a  large  share  of  public  sector 
employees (almost 60 %, according to the Central 
Statistical  Office).  While  they  are  responsible  for 
an  increasing  share  of  public  functions  (social 
services,  social  assistance,  owner  of  schools  and 
hospitals,  transport  and  mobility  services)  and 
budgetary  resources,  in  practice  they  are  not 
subject  to  sufficient  scrutiny.  According  to  a 
forthcoming report commissioned by the Union of 
Local  and  Regional  Governments,  municipalities 
have  considerable 
the 
leeway 
expenditures  of  their  budgets  while  outcome  and 
programme-based  budgeting 
(Public 
Administration Consultancy, 2017). Municipalities 
could  achieve  significant  efficiency  gains  by 
increasing  transparency  and  modernising  their 
budgeting procedures. 

in  managing 

rare 

is 

36 

 
 
                                                           
3.6. Public administration 

Latvia  has  further  improved  its  e-government 
services. Recently, Latvia has further improved its 
digital public services. It increased the availability 
of  complete  services  online  and  improved  the 
sophistication  of  such  services.  It  now  ranks  14th 
among  EU  countries  in  the  Digital  Economy  and 
Society 
(European  Commission, 
2016b),  scoring  above  the  EU  average.  The 
number  of  active  e-government  users  also 
increased  further  to  36 %,  surpassing  the  EU 
average (32 %).  

Index  2016 

contracts. Contrary to its obligations under the EU 
Treaty, Latvia failed to transpose by 18 April 2016 
any  of  the  three  new  EU  public  procurement 
directives adopted in 2014, while further step have 
been  taken  since  then.  This  situation  creates  legal 
uncertainty  for  investments  in  the  public  sector, 
infrastructure  projects  co-
including  for  big 
the  European  Structural  and 
financed  by 
Investment  Funds.  The  absence  of  alignment  of 
Latvia's  procurement  legislation  would  further 
delay the investment rollout. 

3.6.2.  THE JUSTICE SYSTEM  

for 

financial 

training  of 
the 

Quality and independence of the justice system 
improvement.  Weaknesses 
show  room 
remain  on  the  quality  of  legal  aid  in  consumer 
judges  and  criteria  for 
disputes, 
determining 
the 
judiciary, which appear to be predominately based 
on  historic 
(European 
realised 
Commission,  2017).  On  the  independence  of  the 
judiciary,  the  amendment  to  the  law  of  judicial 
power  tabled  in  2015  which  aim  at  strengthening 
the powers of the Council for the Judiciary has not 
yet been adopted by the parliament. 

resources 

costs 

and 

for 

Using  e-procurement  platforms  is  still  not 
obligatory.  Although  companies  in  Latvia  are 
generally  satisfied  with  the  quality  of  the  existing 
e-procurement  services 
(37 %  of  companies 
complain about a low quality of services compared 
to the EU average of 40 %), the broader range of e-
procurement platforms has not yet been introduced 
in  a  mandatory  manner.  This  would have reduced 
the  administrative  burden  and  would  have  helped 
achieving  greater  transparency  and  savings  for 
both  the  administration  and  the  economic  players 
participating in tender procedures. In this context it 
should  be  taken  into  consideration  that  63 %  of 
companies  operating  on 
the  Latvian  market 
consider  possible  collusion  and  bid  rigging  as  an 
obstacle 
tender 
procedures.  

their  participation 

for 

in 

3.6.3.  PUBLIC PROCUREMENT 

of 

public 

efficiency 

The 
procurement 
procedures  is  low.  Most  public  contracts  (67 %) 
continue  to  be  awarded  based  on  the  lowest  price 
criterion (compared to an EEA average of 64 %). It 
is  noteworthy  that  fewer  operators  on  the  Latvian 
market (39 % compared to an EU average of 45 %) 
point out that the overall contract value is too large 
and  therefore  prevents  them  from  participating  in 
tenders.  Nevertheless,  64 %  of  those  companies 
consider  that  the  ‘lowest  price’  awards  are  an 
obstacle  for  public  contracts.  The  lowest  price 
criterion  in  practice  often  leads  to  price  dumping, 
tax  evasion,  sub-standard  goods  or  services 
rendered and renegotiations of contracts mid-term. 
The share of awarded contracts following only one 
bidder  participation  in  the  tender  procedure  was 
31 %  in 2016 (compared with  an  EEA  average  of 
15 %).  Together  with 
that  Latvian 
authorities  frequently  use  negotiated  procedures 
without  prior  publication  of  a  contract  notice 
(12 %, compared to an EEA average of 4 %), this 
results in a limited scope of competition for public 

the  fact 

for 

and 

local 
The  use  of  central  purchasing 
authorities 
innovation-oriented 
procurement  are  low.  The  amendments  to  the 
national public procurement rules in 2013 aimed to 
expand  central  purchasing  for  local  authorities  by 
making  it  compulsory,  but  results  so  far  are 
limited. Data from Tenders Electronic Daily show 
that  the  Latvian  contracting  authorities  make 
recourse  to  centralised  purchasing  only  rarely  (in 
4 % of the tender procedures, compared to an EU 
average of 8 %). However, aggregated purchasing 
at demand level not only leads to better prices but 
more  importantly  to  better  quality  thanks  to 
economies  of  scale,  expertise,  human  resources 
and know-how. Public procurement for innovation 
and other demand-led policy instruments is largely 
absent  in  Latvia.  Government  procurement  of 
advanced technology products in Latvia takes 98th 
place  in  the  total  evaluation  of  138  countries 
(World Economic Forum, 2016).  

Further  efficiency  gains  could  be  achieved  in 
the healthcare sector. One of the sectors where e-

37 

 
3.6. Public administration 

number  of  people  convicted (42).  However,  few 
high  level  cases  reach  the  courts.  Prominent 
investigations  have  focused  on  the  financing  of 
political  parties,  but  do  not  appear  to  have  a 
deterrent effect.  

Graph 3.6.1:  Corruption perception 

(1) Worldwide Governance Indicators 2015. Kaufmann et al. 
(2010) 
(2) Corruption perception index 2016. Transparency 
international (2017) 
Source: Worldwide Governance Indicators project and 
Transparency international 

independent  and  strengthen 

More  independence  and  powers  have  been 
granted  to  the  director  of  the  KNAB,  but  the 
post  remains  vacant.  In  March  2016, 
the 
parliament  adopted  amendments  to  make  the 
KNAB  more 
its 
director  whose  performance  will  no  longer  be 
assessed  and  who  can  now  dismiss  subordinates 
more  easily.  There  are  also  new  arrangements  for 
dismissing  the  director  and  revoking  unlawful 
decisions.  Following  expiry  of 
the  previous 
director’s  mandate  at  the  end  of  2016,  no  new 
director  has  been  selected.  The  first  selection 
procedure  ended  without  a  result  and  no  new 
competition is announced. 

Initiatives  improving  ethics  and  conduct  of 
public  officials  proceed  slowly.  Work  continues 
on  a  draft  whistleblower  law  that  was  due  by  the 

(42)  110  opened  investigations  in  2011,  132  in  2012,  158  in 
2013, and 263 in 2014. There were 39 convictions in 2011, 
51 in 2012, 82 in 2013, and 120 in 2014. 

is 

and 

room 

sector, 
in 

central  purchasing 

procurement 
could 
contribute  most  to  enhance  the  transparency  of 
public contracts and efficiency of public spending 
is  the  healthcare  sector.  Although  the  Latvian 
authorities tend to make regular recourse to public 
procurement procedures for purchases made in the 
healthcare 
for 
there 
still 
terms  of  competition  and 
improvement 
increasing professionalism. In 2012-2015, in 38 % 
of  all  contract  award  notices  in  the  healthcare 
sector published in Tenders Electronic Daily, only 
one  bid  had  been  received.  This  results  in  limited 
competition.  Furthermore,  the  Latvian  authorities 
rarely  make  use  of  award  criteria  other  than  the 
lowest  price.  Moreover,  smart  use  of  public 
procurement  is  known  to  be  an  important  trigger 
for innovation. Although not all types of purchases 
are  suitable  for  aggregation,  the  excessively  low 
aggregation  rates  in  the  healthcare  sector  imply 
lost  opportunities.  The  identified  challenges  of 
formalistic  compliance  and  rigidity  of  the  system 
already highlighted previously remain a concern. 

3.6.4.  CORRUPTION 

Economic 

Forum 
2016-2017 

Corruption  remains  a  challenge  for  Latvia. 
The World  Bank  governance  indicators  ranked 
Latvia 20th in the EU for control of corruption in 
2015, with a score of 68/100 (EU average 78/100). 
Global 
The  World 
Competitiveness  Report 
(World 
Economic Forum, 2016) ranked Latvia 99th out of 
138  countries  on  favouritism  in  decisions  of 
government  officials.  The  formalistic  compliance 
and  rigidity  of  the  conflict  of  interest  regime  for 
public  officials  remains  a  challenge.  Public 
procurement  remains  subject  to  corruption  risks, 
particularly  at  the  local  level.  The  State  Audit 
Office  confirmed  in  their  2015  report  (The  State 
Audit Office of the Republic of Latvia, 2015) and 
subsequently  discussed  the  persistence  of  these 
challenges,  and  called 
for  more  effective 
verification of declarations submitted by officials.  

The reputation and efficiency of the Corruption 
Prevention and Combating Bureau (KNAB) has 
deteriorated.  Longstanding 
the 
KNAB has continued to weaken the Bureau and to 
dent  public  trust.  Official  statistics  between  2011 
and 2013 indicate a steady increase in the number 
of  bribery  cases  being  handled  in  the  criminal 
justice  system,  which  is  also  reflected  in  the 

infighting  at 

38 

020406080100Control ofcorruption(1)Corruptionperceptionindex (2)Global percentile rankLatviaEstoniaLithuaniaEU average 
 
 
                                                           
3.6. Public administration 

end of 2015. The State Chancellery is also drafting 
a single ethics code for public servants. 

detection  of  abuse  of  the  insolvency  regime  and 
their capacity is being expanded.  

3.6.5.  INSOLVENCY  

3.6.6.  STATE-OWNED ENTERPRISES 

to 

it  comes 

the  effectiveness  of 

Insolvency  procedures  remain  inefficient,  there 
are  few  restructuring  cases  and  the  recovery 
rate  of  assets  is  below  that  of  peer  countries. 
Latvia  ranks  20th  among  the  EU  Member  States 
when 
its 
insolvency  proceedings.  Although  the  insolvency 
procedure  in  Latvia  on  average  takes  1.5  years  (2 
years  on  average  in  the  EU),  the  recovery  rate  is 
low (49.1 %) and the cost of procedure amounts to 
10 % of the insolvency estate (World Bank, 2017). 
In  2016  (until  end  of  September),  around  1 200 
cases  of  personal  insolvency  were  completed  and 
around  750  cases  for  legal  persons.  Moreover, 
there  were  4  successful  business  restructuring 
cases out of 90 initiated.  

to 

all 

legal 

framework 

interest  prevention 
increase 

requirements.  This 
their 

The 
for  supervision  of 
insolvency  administrators  has  been  completed. 
insolvency 
As  of  1 September  2016 
practitioners  became  public  officials,  subject  to 
declaring their income and complying with conflict 
of 
is 
transparency  and 
supposed 
accountability.  Moreover,  legislative  amendments 
were  adopted  in  December  2016  strengthening 
public oversight of insolvency administrators. This 
includes  moving  from  self-certification  to  state 
certification,  increasing  disciplinary  penalties  for 
negligence  and 
the 
fraud,  and 
responsibility  of  supervisors  of  legal  protection 
proceedings.  Further 
the 
insolvency regime were set out in the strategy for 
2016-2020  adopted  by 
in 
September 2016.  

improvements  of 

the  government 

increasing 

The  effective public  oversight of  the  insolvency 
proceedings  remains  to  be  seen.  The  new  legal 
powers  are  shared  among  the  several  public 
intuitions.  Prevention  of  conflict  of  interest  has  it 
weaknesses as discussed above. Random electronic 
distribution 
insolvency 
administrators  is  set  up  and  control  measures  are 
launched,  but  they  seem  to  concentrate  on  formal 
compliance.  Detecting  and  preventing  malpractice 
by  insolvent  companies,  individuals  and  creditors 
acting  in  bad  faith  is  still  a  challenge.  Institutions 
investigating economic crimes play a role in early 

among 

cases 

of 

in  assets,  EUR 3,4  billion 

State-owned  enterprises  (SOEs)  play  a  major 
role  in  Latvia’s  economy,  especially  in  the 
transport, energy, communications forestry and 
health  care  sectors.  SOEs    —  with  EUR 8,2 
billion 
in  annual 
turnover, EUR 164,4 million in profits and 52 200 
employees  in  2015  accounted  for  5.4 %  of  total 
employment  and  18 %  of  GDP. 
(Pārresoru 
koordinācijas centrs, 2016). An initial ambition to 
create a centralised, holding-style structure back in 
2011 has been watered down, and currently, a de-
centralised system where line ministries retain the 
final  say,  with  some  coordination  and  evaluation 
functions at the central government level, has been 
put into  practice.  Municipal  enterprises  as well  as 
port  authorities (43)  have  been  exempt  from  the 
new framework. The Cross-Sectorial Coordination 
Centre 
to 
municipalities on an ad hoc basis. 

is  providing  consultancy  functions 

Governance of SOEs in Latvia has a poor track 
record;  therefore,  restoration  of  public  trust 
goes  hand  in  hand  with  more  transparency, 
accountability  and  public  oversight.  Latvia’s 
longstanding problem has been the politicisation of 
Supervisory  Councils  (which  were  abolished  in 
2009), and the Management Boards of SOEs. The 
recent  political  appointments  of  new  board 
members  of  port  authorities,  exempt  from  the 
unified  governance  framework,  does  not  help  to 
restore public trust. 

Improvement  of  SOE  management  is  part  of 
Latvia’s  international  obligations.  It  was  one of 
the last stumbling blocks before Latvia’s accession 
to  the  OECD  in  June  2016.  The  Corporate 
Governance  Committee  at  the  OECD  issued  a 
positive report on Latvia’s compliance with OECD 
principles  in  April  2016.  However,  the  OECD  is 
closely  monitoring  how  the  new  nomination  and 
appointment  procedures  of  Supervisory  Councils 
work 
the  post-accession 
surveillance process.  

in  practice  under 

(43)  Port  authorities  are  part  of  public  administration  legally, 

but they operate as commercial enterprises.  

39 

 
                                                           
3.6. Public administration 

Re-establishment  of  Supervisory  Councils  has 
been  completed.  As  a  condition  of  accession, 
Latvia and the OECD agreed on a schedule during 
2016 for creating Supervisory Councils for the 12 
larger SOEs. By the end of December 2016, all 12 
Councils  were  established.  It  remains 
to  be 
the  new  arrangements  help 
monitored  how 
transparency  and 
improve 
strategic  planning, 
quality  of  management,  as  well  as  increase  return 
on equity. 

40 

 
ANNEX A 

Overview Table 

Commitments 

2016 Country-specific recommendations (CSRs) 

that 

from 

the  deviation 

CSR 1:  Ensure 
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 
towards 
environmental  and property taxes and improving tax 
compliance. 

tax  shift 

towards 

  Ensure  that  the  deviation  from  the  adjustment 
path 
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. 

Summary assessment (44) 

limited  progress 

Latvia  has  made 
in 
addressing  CSR 1  (this  overall  assessment  of 
CSR1  does  not  include  an  assessment  of 
compliance  with  the  Stability  and  Growth 
Pact): 

The  compliance  assessment  with  the  Stability 
and  Growth  Pact  will  be  included  in  spring 
when final data for 2016 will be available. 

  Limited  progress  has  been  made 

in 
shifting  the  tax  burden  away  from  low-
wage  earners.  Adopted  measures  have  a 
limited effect. The tax wedge on low-wage 
earners  remains  high,  while  there  is  a 
scope  to  shift  taxation  to  consumption, 
property and capital. 

  Some  progress  has  been  made 

in 
improving  tax  compliance.  A  number  of 
small measures have been introduced. The 
increased  tax  revenue  relative  to  the  tax 

(44)  The  following  categories  are  used  to  assess  progress  in  implementing  the  2016  country-specific  recommendations: 
No progress: The Member State has not credibly announced nor adopted any measures  to address the CSR. Below a number of 
non-exhaustive typical situations  that could be covered under this, to be interpreted on a case by case basis taking into account 
country-specific conditions: 

•  no  legal,  administrative,  or  budgetary  measures  have  been  announced  in  the  National  Reform  Programme  or  in  other  official 
communication  to  the  national  Parliament  /  relevant  parliamentary  committees,  the  European  Commission,  or  announced  in 
public (e.g. in a press statement, information on government's website);  
• no non-legislative acts have been presented by the governing or legislator body;   
•  the  Member  State  has  taken  initial  steps  in  addressing  the  CSR,  such  as  commissioning  a  study  or  setting  up  a  study  group  to 
analyse possible measures that would need to be taken (unless the CSR explicitly asks for orientations or exploratory actions), 
while clearly-specified measure(s) to address the CSR has not been proposed. 

Limited progress: The Member State has: 
• announced certain measures  but these only address the CSR to a limited extent;    
and/or 
• presented legislative acts in the governing or legislator body but these have not been adopted yet and substantial non-legislative 

further work is needed before the CSR will be implemented;  

• presented non-legislative acts, yet with no further follow-up in terms of implementation which is needed to address the CSR. 
Some progress: The Member State has adopted measures that partly address the CSR  
and/or  
the Member State has adopted measures that address the CSR, but a fair amount of work is still needed to fully address the CSR as 
only  a  few  of  the  adopted  measures  have  been  implemented.  For  instance:  adopted  by  national  parliament;  by  ministerial 
decision; but no implementing decisions are in place. 

Substantial progress: The Member State has adopted measures that go a long way in addressing the CSR and most of which have 

been implemented. 

Full implementation: The Member State has implemented all measures needed to address the CSR appropriately. 

41 

 
 
 
 
 
                                                           
 
 
 
A. Overview Table 

base demonstrates a better collection. 

Latvia  has  made 
addressing CSR 2: 

limited  progress 

in 

  Limited  progress  has  been  made 

in 
improving  adequacy  of  social  assistance 
benefits.  The  key  reform  of  the  minimum 
income  level  was  not  implemented  as 
planned  in  2017  and  future  plans  are 
uncertain.  The family  state  benefit  has 
been  excluded  from  the  means  test  to 
qualify for social assistance with a limited 
improvement in benefit adequacy. 

  Some  progress  has  been  made 

in 
supporting  social  assistance  recipients  in 
finding  and  retaining  work.  The  EU 
financed  programmes  have  picked  up  in 
2016  after  a  dip  in  2015.  Measures  for 
vulnerable  groups  are  expanded,  but 
regional  mobility  support  is  not  fully 
utilised.  To 
up 
encourage 
employment,  income  up  to  the  minimum 
wage  is  excluded  from  the  means  test  for 
the social assistance for three months from 
start of employment. 

taking 

  Some  progress  has  been  made 

framework 

in 
improving  vocational  education.  The 
regulatory 
for  work-based 
learning  and  on  development  of  VET 
programmes 
established.  Limited 
progress  has  been  made  on  curricula 
reform in 2016, which is to be finalised in 
2021. 

is 

  Limited  progress  has  been  made.  The 
current  structure  of  the  system,  with  high 
out-of-pocket  and  informal  payments,  still 
leaves much of the population with unmet 
healthcare needs. There is some increase in 
public  funding  in  2017,  but  no  medium-
term  financing  plans  have  been  adopted 
implementation  of  e-health 
yet.  The 

CSR 2:  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  work-based  learning  and 
increase their offer. Improve the accessibility, quality 
and cost-effectiveness of the healthcare system. 

 

Improve 
benefits…  

the  adequacy  of  social  assistance 

  …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 
work-based learning and increase their offer. 

 

Improve 
effectiveness of the healthcare system. 

the  accessibility,  quality  and  cost-

42 

 
incentives 

the  consolidation  of 

research 
CSR 3:  Pursue 
for  private 
institutions  and  provide 
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. 

  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.  

A. Overview Table 

services is delayed. 

Latvia has made some progress in addressing 
CSR 3: 

innovation 

  Some  progress  has  been  made  in  the 
consolidation  of  research  institutions  and 
in  private 
incentives.  The 
consolidation  of  research  institutions  is 
ongoing. Business investment in R&D has 
slightly  declined  and  remains 
in 
international comparison.  

low 

  Limited  progress  has  been  made 

the  conflict  of 

in 
strengthening 
interest 
legislative 
regime.  The 
prevention 
framework  has  been  further  developed  by 
granting more independence of the director 
of the corruption prevention office and by 
an  expert-based  selection  process  of  the 
director, but there is political reluctance to 
apply  this  framework.  The  draft  Public 
Service  Law  has  not  progressed  and  will 
be  reviewed  in  light  of  the  upcoming 
public service reform. 

 

Increase  the  accountability  and  public  oversight 
of insolvency administrators. 

Europe 2020 (national targets and progress) 

Employment rate: 73% 

R&D: 1.5 % of GDP 

43 

  Some  progress  has  been  made 

in 
increasing  the  accountability  and  public 
oversight  of 
insolvency  administrators. 
Legal framework and tools for supervision 
of insolvency administrators have been put 
in place. The capacity of the state police is 
gradually increased for preventing criminal 
offences related to insolvency. 

The employment rate (for the age group 20-64 
year  old)  has  reached  the  target  in  Q3-2016 
(73.1 %). The employment rate is expected to 
grow further partly offsetting the impact of the 
decline 
in  working  age  population  on 
employment. 

R&D  expenditure  was  0.71 %  of  GDP  in 
2015. Latvia is not on track to meet the target. 

 
 
A. Overview Table 

According  to  the  latest  national  projections 
and taking into account existing measures, the 
target is expected to be achieved: 7% in 2020 
compared to 2005. 

Furthermore, while the target for 2015 was an 
increase  of  no  more  than  11.6%  compared  to 
2005,  the  preliminary  figures  show  that  the 
non-ETS emissions actually decreased by 9%. 

In  2015,  Latvia's  share  of  renewable  energy 
reached  39.2%,  just  0.8%  short  of  the  2020 
target (45). 

The  share  of  renewables  in  transport  at  3.2% 
in  2014  is  below  the  target  and  with  no 
progress since 2010.  

In  2015,  Latvia  reduced  its  primary  energy 
consumption  by  –  1,8%  from  4.36  Mtoe  in 
2014  to  4.28  Mtoe  in  2015.  Final  energy 
consumption  also  decreased  by  2%  from  3.9 
Mtoe in 2014 to 3.8 Mtoe in 2015 showing a 
positive  trend.  Even  if  Latvia  has  already 
achieved  the  levels  of  primary  and  final 
energy  consumption  which  are  below  the 
indicative national 2020 targets, it would need 
to  make  an  effort  to  keep  these  levels  until 
2020. 

The early school leaving rate is at the target in 
2015,  but  has  increased  with  respect  to  2014 
from  8.5 %  to  9.9 %.  In  addition,  this  rate  is 
higher  for  boys  (13.4 %) 
than  for  girls 
(6.2 %). 

i.e.  exceeded 

The  tertiary  attainment  rate  was  41.3 %  in 
2015, 
target.  Gender 
disparities  are  however  strong:  26.8 %  for 
men and 56.5 % for women. 

the 

Greenhouse gas emissions: increase by 17% between 
2005 and 2020 (in non-ETS sectors) 

Renewable energy target: 40% 

Renewable energy in all modes of transport: 10% 

Energy  efficiency:  5.4  Mtoe  expressed  in  primary 
energy  consumption  (4.5  Mtoe  expressed  in  final 
energy consumption) 

Early school leaving: 10%  

Tertiary education: 34-36% 

Poverty/social exclusion: reduction of the number of 
people  at  risk  of  poverty  and/or  living  in  jobless 
households by 121 000 compared to 2008. 

The number of people living at risk of poverty 
and/or  living  in  jobless  households  has  been 
reduced by 108 000 compared to 2008. Latvia 
has not yet met its poverty target. 

(45)  Renewable energy shares for 2015 are approximations and not official data, reflecting the available data (04.10.2016). See the 
the  2016  Report  on  Renewable  Energy, 

in  Realisation  of 

Öko-Institut  Report:  Study  on  Technical  Assistance 
http://ec.europa.eu/energy/en/studies 

44 

 
 
 
                                                           
ANNEX B 

MIP Scoreboard 

Table B.1: 

The MIP Scoreboard for Latvia 

 (1) House price index: e = Eurostat estimates. 

Source: European Commission, Eurostat and Directorate General for Economic and Financial Affairs (for real effective 
exchange rate), and International Monetary Fund 

45 

Thresholds201020112012201320142015Current account balance, (% of GDP) 3 year average-4%/6%-0.82.2-1.6-3.2-2.8-1.8-35%-82.9-74.6-67.4-66.4-64.3-62.5Real effective exchange rate - 42 trading partners, HICP deflator3 years % change±5% & ±11% 6.7-2.5-8.6-1.70.23.1Export market share - % of world exports5 years % change-6%22.027.18.76.69.410.5Nominal unit labour cost index (2010=100)3 years % change9% & 12% -2.3-21.0-6.97.815.616.06%-8.74.0-0.46.64.2-2.714%2.5-2.0-2.10.9-11.80.7133%134.0115.598.192.796.388.860%47.442.841.339.040.736.3Unemployment rate3 year average10%14.917.716.914.412.610.916.5%-0.3-4.15.25.210.412.2-0.2%0.4-1.40.91.01.81.30.5%7.26.93.3-3.1-4.2-3.32%25.617.4-4.8-13.0-11.4-12.2Activity rate - % of total population aged 15-64 (3 years change in p.p)Long-term unemployment rate - % of active population aged 15-74 (3 years change in p.p)Youth unemployment rate - % of active population aged 15-24 (3 years change in p.p)External imbalances and competitivenessNew employment indicatorsNet international investment position (% of GDP)Deflated house prices (% y-o-y change)Total financial sector liabilities (% y-o-y change)Private sector credit flow as % of GDP, consolidatedPrivate sector debt as % of GDP, consolidatedGeneral government sector debt as % of GDPInternal imbalances 
 
 
 
 
 
 
ANNEX C 

Standard Tables 

Table C.1: 

(1) Latest data Q2 2016. 
(2) Quarterly values are not annualised 
* Measured in basis points. 

Source: European Commission (long-term interest rates); World Bank (gross external debt); Eurostat (private debt); ECB (all 
other indicators). 

46 

201120122013201420152016Total assets of the banking sector (% of GDP)145.4128.7128.2130.7131.1120.1Share of assets of the five largest banks (% of total assets)59.664.164.163.664.5-Foreign ownership of banking system (% of total assets)64.162.359.724.922.2-Financial soundness indicators:1)              - non-performing loans (% of total loans)10.17.95.67.75.14.4              - capital adequacy ratio (%)16.516.718.020.221.818.4              - return on equity (%)2)4.54.98.810.210.79.3Bank loans to the private sector (year-on-year % change)-6.3-0.4-2.0-4.5-0.16.2Lending for house purchase (year-on-year % change)-6.3-4.5-4.5-3.4-3.3-0.7Loan to deposit ratio193.3161.7132.3119.4109.3108.7Central Bank liquidity as % of liabilities1.31.31.30.31.01.0Private debt (% of GDP)115.598.192.796.388.8-Gross external debt (% of GDP)1) - public32.032.330.634.328.429.5    - private44.540.942.140.240.441.7Long-term interest rate spread versus Bund (basis points)*329.9307.0177.0134.546.842.5Credit default swap spreads for sovereign securities (5-year)*234.9213.2110.399.676.562.0 
 
 
 
 
 
 
 
 
C. Standard Tables 

Table C.2: 

Labour market and social indicators (A) 

1 Unemployed persons are all those who were not employed but had actively sought work and were ready to begin working 
immediately or within 2 weeks.       
2 Long-term unemployed are peoples who have been unemployed for at least 12 months.       
3 Not in education employment or training.       
4 Average of first three quarters of 2016. Data for total unemployment and youth unemployment rates are seasonally 
adjusted.       
Source: European Commission (EU Labour Force Survey). 

47 

201120122013201420152016 4Employment rate(% of population aged 20-64)66.368.169.770.772.573.1Employment growth (% change from previous year)1.51.42.3-1.31.30.2Employment rate of women(% of female population aged 20-64)65.366.467.768.570.571.6Employment rate of men (% of male population aged 20-64)67.570.071.973.174.674.8Employment rate of older workers (% of population aged 55-64)50.552.854.856.459.461.0Part-time employment (% of total employment, aged 15-64)8.88.97.56.87.28.1Fixed-term employment (% of employees with a fixed term contract, aged 15-64)6.74.74.33.33.83.8Transitions from temporary to permanent employment41.436.854.659.357.6:Unemployment rate1 (% active population, age group 15-74)16.215.011.910.89.99.7Long-term unemployment rate2 (% of labour force)8.87.85.74.64.54.2Youth unemployment rate (% active population aged 15-24)31.028.523.219.616.317.7Youth NEET3 rate (% of population aged 15-24)16.014.913.012.010.5:Early leavers from education and training (% of pop. aged 18-24 with at most lower sec. educ. and not in further education or training)11.610.69.88.59.9:Tertiary educational attainment (% of population aged 30-34 having successfully completed tertiary education)35.937.240.739.941.3:Formal childcare (30 hours or over; % of population aged less than 3 years)15.019.022.020.0:: 
 
 
 
 
 
C. Standard Tables 

Table C.3: 

 Labour market and social indicators (B) 

1 People at risk of poverty or social exclusion : individuals who are at risk of poverty and/or suffering from severe material 
deprivation and/or living in households with zero or very low work intensity.       
2 At-risk-of-poverty rate : proportion of people with an equivalised disposable income below 60 % of the national equivalised 
median income.        
3 Proportion of people who experience at least four of the following forms of deprivation: not being able to afford to i) pay 
their rent or utility bills, ii) keep their home adequately warm, iii) face unexpected expenses, iv) eat meat, fish or a protein 
equivalent every second day, v) enjoy a week of holiday away from home once a year, vi) have a car, vii) have a washing 
machine, viii) have a colour TV, or ix) have a telephone.       
4 People living in households with very low work intensity: proportion of people aged 0-59 living in households where the 
adults (excluding dependent children) worked less than 20 % of their total work-time potential in the previous 12 months.       
5 For EE, CY, MT, SI and SK, thresholds in nominal values in euros; harmonised index of consumer prices = 100 in 2006 (2007 
survey refers to 2006 incomes) 

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

48 

Expenditure on social protection benefits (% of GDP)201020112012201320142015Sickness/healthcare3.93.43.33.43.5:Disability1.41.31.21.21.3:Old age and survivors9.58.27.87.77.4:Family/children1.51.11.01.21.3:Unemployment1.30.70.50.60.6:Housing0.10.10.10.10.1:Social exclusion n.e.c.0.20.30.20.10.1:Total18.015.114.214.414.3:of which: means-tested benefits0.70.70.40.30.2:Social inclusion indicators201020112012201320142015People at risk of poverty or social exclusion1 (% of total population)38.240.136.235.132.730.9Children at risk of poverty or social exclusion  (% of people aged 0-17)42.244.140.038.435.331.3At-risk-of-poverty  rate2 (% of total population)20.919.019.219.421.222.5Severe material deprivation rate3  (% of total population)27.631.025.624.019.216.4Proportion of people living in low work intensity households4 (% of people aged 0-59)12.612.611.710.09.67.8In-work at-risk-of-poverty rate (% of persons employed)9.49.38.68.98.19.2Impact of social transfers (excluding pensions) on reducing poverty26.729.125.325.421.517.6Poverty thresholds, expressed in national currency at constant prices5205519451980202922632517Gross disposable income (households; growth %)-8.81.16.44.73.04.1Inequality of income distribution (S80/S20 income quintile share ratio)6.86.56.56.36.56.5GINI coefficient before taxes and transfers52.053.553.152.051.249.8GINI coefficient after taxes and transfers35.935.135.735.235.535.4 
 
 
 
 
 
 
C. Standard Tables 

Table C.4: 

Product market performance and policy indicators 

1 The methodologies, including the assumptions, for this indicator are shown in detail at: 
http://www.doingbusiness.org/methodology.        
2 Average of the answer to question Q7B_a. "[Bank loan]: If you applied and tried to negotiate for this type of financing over 
the past six months, what was the outcome?". Answers were codified as follows: zero if received everything, one if received 
most of it, two if only received a limited part of it, three if refused or rejected and treated as missing values if the application is 
still pending or if the outcome is not known.       
3 Percentage population aged 15-64 having completed tertiary education.       
4 Percentage population aged 20-24 having attained at least upper secondary education.       
5 Index: 0 = not regulated; 6 = most regulated. The methodologies of the OECD product market regulation indicators are 
shown in detail at: http://www.oecd.org/competition/reform/indicatorsofproductmarketregulationhomepage.htm       
6 Aggregate OECD indicators of regulation in energy, transport and communications. 
Source: European Commission; World Bank — Doing Business (for enforcing contracts and time to start a business); OECD (for 
the product market regulation indicators); SAFE (for outcome of SMEs' applications for bank loans).  

49 

Performance indicators201020112012201320142015Labour productivity (real, per person employed, year-on-year % change)Labour productivity in industry9.69-2.59-1.55-0.684.767.53Labour productivity in construction-20.6516.8511.46-1.38-1.39-0.97Labour productivity in market services2.017.652.91-0.830.443.12Unit labour costs (ULC) (whole economy, year-on-year % change)ULC in industry-11.412.559.416.202.372.38ULC in construction17.49-24.591.228.637.916.26ULC in market services-6.83-3.197.083.986.305.52Business environment201020112012201320142015Time needed to enforce contracts1 (days)309.0369.0469.0469.0469.0469.0Time needed to start a business1 (days)15.515.515.512.512.55.5Outcome of applications by SMEs for bank loans2na0.88na0.851.190.49Research and innovation201020112012201320142015R&D intensity0.610.700.670.610.690.63Total public expenditure on education as % of GDP, for all levels of education combined4.964.96na3.37nanaNumber of science & technology people employed as % of total employment424244444345Population having completed tertiary education3232425272728Young people with upper secondary education4808184868786Trade balance of high technology products as % of GDP-1.83-1.69-1.18-1.03-1.24-1.19Product and service markets and competition200320082013OECD product market regulation (PMR)5, overallnana1.61OECD PMR5, retailnana0.40OECD PMR5, professional servicesnananaOECD PMR5, network industries6nana2.66 
 
 
 
 
 
C. Standard Tables 

Table C.5:  Green growth 

All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2005 prices)  
          Energy intensity: gross inland energy consumption (in kgoe) divided by GDP (in EUR)  
          Carbon intensity: greenhouse gas emissions (in kg CO2  equivalents) divided by GDP (in EUR)  
          Resource intensity: domestic material consumption (in kg) divided by GDP (in EUR)  
          Waste intensity: waste (in kg) divided by GDP (in EUR)  
Energy balance of trade: the balance of energy exports and imports, expressed as % of GDP    
Weighting of energy in HICP: the proportion of ‘energy’ items in the consumption basket used for the construction of the HICP  
Difference between energy price change and inflation: energy component of HICP, and total HICP inflation (annual % 
change)  
Real unit energy cost: real energy costs as a percentage of total value added for the economy  
Environmental taxes over labour taxes and GDP: from European Commission’s database, ‘Taxation trends in the European 
Union’  
Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (in 2005 EUR)   
Real unit energy costs for manufacturing industry excluding refining: real costs as a percentage of value added for 
manufacturing sectors  
Share of energy-intensive industries in the economy: share of gross value added of the energy-intensive industries in GDP  
Electricity and gas prices for medium-sized industrial users: consumption band 500-20 00MWh and 10 000-100 000 GJ; figures 
excl. VAT.  
Recycling rate of municipal waste: ratio of recycled and composted municipal waste to total municipal waste  
Public R&D for energy or for the environment: government spending on R&D for these categories as % of GDP  
Proportion of greenhouse gas (GHG) emissions covered by EU Emissions Trading System (ETS) (excluding aviation): based on 
greenhouse gas emissions  
(excl land use, land use change and forestry) as reported by Member States to the European Environment Agency   
Transport energy intensity: final energy consumption of transport activity (kgoe) divided by transport industry gross value 
added (in 2005 EUR)  
Transport carbon intensity: greenhouse gas emissions in transport activity divided by gross value added of the transport sector  
Energy import dependency: net energy imports divided by gross inland energy consumption incl. consumption of 
international bunker fuels  
Aggregated supplier concentration index: covers oil, gas and coal. Smaller values indicate larger diversification and hence 
lower risk.  
Diversification of the energy mix: Herfindahl index over natural gas, total petrol products, nuclear heat, renewable energies 
and solid fuels  
* European Commission and European Environment Agency 

Source: European Commission (Eurostat) unless indicated otherwise 

50 

Green growth performance201020112012201320142015MacroeconomicEnergy intensity kgoe / €0.260.230.230.220.220.21Carbon intensity kg / €0.920.810.780.750.73-Resource intensity (reciprocal of resource productivity)kg / €2.762.872.662.742.622.64Waste intensity kg / €0.11-0.16-0.17-Energy balance of trade % GDP-4.9-5.4-6.1-5.3-4.2-Weighting of energy in HICP%14.0615.5115.7015.9315.4215.10Difference between energy price change and inflation %0.66.97.3-1.7-1.74.4Real unit of energy cost% of value added20.320.120.520.220.2-Ratio of environmental taxes to labour taxesratio0.370.360.340.320.30-Environmental taxes% GDP2.42.52.52.52.7-Sectoral Industry energy intensity kgoe / € 0.410.390.430.400.410.39Real unit energy cost for manufacturing industry excl. refining% of value added17.719.219.719.519.3-Share of energy-intensive industries in the economy% GDP9.249.018.848.398.63-Electricity prices for medium-sized industrial users€ / kWh0.090.100.110.110.120.12Gas prices for medium-sized industrial users€ / kWh0.030.030.040.040.040.03Public R&D for energy % GDP0.020.010.010.010.010.01Public R&D for environmental protection% GDP0.010.010.010.010.010.02Municipal waste recycling rate%9.49.715.825.927.026.7Share of GHG emissions covered by ETS*%26.325.324.023.220.720.0Transport energy intensitykgoe / €0.940.720.660.670.670.72Transport carbon intensitykg / €2.561.931.771.791.82-Security of energy supplyEnergy import dependency%45.559.956.455.940.651.1Aggregated supplier concentration indexHHI20.747.447.347.223.1-Diversification of energy mixHHI0.300.290.300.300.29- 
 
 
 
 
 
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