Recommendation for a COUNCIL RECOMMENDATION on the 2017 National Reform Programme of Latvia and delivering a Council opinion on the 2017 Stability Programme of Latvia
Date: 2017-05-22
Institutions: European Commission, Secretariat-General
Subjects: Latvia, administrative formalities, budget deficit, economic policy, economic reform, educational reform, fiscal policy, organisation of health care, pension scheme, stability programme

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   EUROPEAN COMMISSION  Brussels, 22.5.2017  COM(2017) 513 final   Recommendation for a COUNCIL RECOMMENDATION on the 2017 National Reform Programme of Latvia  and delivering a Council opinion on the 2017 Stability Programme of Latvia  
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2017 National Reform Programme of Latvia 

and delivering a Council opinion on the 2017 Stability Programme of Latvia 

THE COUNCIL OF THE EUROPEAN UNION, 

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

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of 
the  surveillance  of  budgetary  positions  and  the  surveillance  and  coordination  of  economic 
policies,1 and in particular Article 5(2) thereof, 
Having regard to the recommendation of the European Commission,2 
Having regard to the resolutions of the European Parliament,3 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

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

Having regard to the opinion of the Social Protection Committee, 

Having regard to the opinion of the Economic Policy Committee, 

Whereas: 

(1) 

On  16 November  2016,  the  Commission  adopted  the  Annual  Growth  Survey,4 
marking  the  start  of  the  2017  European  Semester  of  economic  policy  coordination. 
The priorities of the Annual Growth Survey were endorsed by the European Council 
on  9-10 March  2017.  On  16 November  2016,  on  the  basis  of  Regulation  (EU) 
No 1176/2011,  the  Commission  adopted  the  Alert  Mechanism  Report,5  in  which  it 
did  not  identify  Latvia  as  one  of  the  Member  States  for  which  an  in-depth  review 
would  be  carried  out.  On  the  same  day,  the  Commission  also  adopted  a 
recommendation for a Council Recommendation on the economic policy of the euro 
area. That Recommendation was endorsed by the European Council on 9-10 March 
2017 and adopted by the Council on 21 March 2017.6  

(2) 

As a Member State whose currency is the euro and in view of the close interlinkages 
between  the  economies  in  the  economic  and  monetary  union,  Latvia  should  ensure 

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OJ L 209, 2.8.1997, p. 1. 
COM(2017) 513 final. 
P8_ TA(2017)0038, P8_ TA(2017)0039, and P8_ TA(2017)0040. 
COM(2016) 725 final. 
COM(2016) 728 final. 
OJ C92/01, 24.3.2017, p. 1. 

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the full and timely implementation of the Recommendation for the euro area which is 
reflected in recommendations 1 to 2 below. 
The 2017 country report for Latvia7 was published on 22 February 2017. It assessed 
Latvia’s progress in addressing the country-specific recommendations adopted by the 
Council  on  12 July  2016,  the  follow-up  given  to  the  recommendations  adopted  in 
previous years and Latvia’s progress towards its national Europe 2020 targets. 

On  20  April  2017,  Latvia  submitted  its  2017 National  Reform  Programme  and  its 
2017 Stability  Programme.  To  take  account  of  their  interlinkages,  the  two 
programmes have been assessed at the same time. 

The relevant country-specific recommendations have been taken into account in the 
Member States’ programmes for the European Structural and Investment Funds (ESI 
Funds) covering the 2014-2020 period. As foreseen in the legislation governing the 
ESI Funds,8 where it is necessary to support the implementation of relevant country-
specific  recommendations,  the  Commission  may  request  a  Member  State  to  review 
and  amend  its  relevant  ESI  Funds  programmes.  The  Commission  has  provided 
further guidelines on the application of those rules.9 

Latvia is subject to the preventive arm of the Stability and Growth Pact. In its 2017 
Stability  Programme,  the  government  plans  a  deterioration  of  the  headline  balance 
from a balanced position in 2016 to a deficit of 0.8% of GDP and of 1.6% of GDP in 
2017  and  2018  respectively,  as  a  result  of  a  significant  tax  reform,  followed  by  an 
improvement  to  a  deficit  of  0.5%  of  GDP  in  2020.  The  Stability  Programme 
estimates the structural balance to deteriorate from 0.2% of GDP in 2016 to -1.7% of 
GDP  in  2018  and  to  reach  -0.8%  of  GDP  in  2020.  This  path  is  consistent  with  the 
medium-term  objective  of  a  structural  deficit  of  1%  of  GDP  and  the  allowed 
deviations  based  on  the  pension  reform  and  the  structural  reform  clause  for  the 
healthcare sector. The recalculated10 structural balance is estimated to increase from    
-1.9% of GDP in 2017 to -2.3% of GDP in 2018, before declining to -0.2% of GDP 
in 2020. According to the Stability Programme, the general government debt-to-GDP 
ratio  is  expected  to  stay  around  40%  of  GDP.  The  programme's  GDP  growth 
projections  are  broadly  in  line  with  the  Commission  forecast  for  2017,  but  they 
appear markedly favourable for 2018.  

On 12 July 2016, the Council recommended Latvia to ensure that the deviation from 
the medium-term budgetary objective in 2017 is limited to the allowances linked to 
the systemic pension reform and the major structural reform in the healthcare sector. 
Taking  into  account  these  allowances,  the  structural  balance  would  be  allowed  to 
deteriorate  by  maximum  1.0%  of  GDP  in  2017.  Based  on  the  Commission  2017 
spring forecast, Latvia is projected to comply with that requirement in 2017. In 2018, 
Latvia should achieve its medium-term objective, taking into account the allowances 

SWD(2017) 79 final. 
Article  23  of  Regulation  (EU)  No  1303/2013  of  the  European  Parliament  and  of  the  Council  of  17 
December  2013  laying  down  common  provisions  on  the  European  Regional  Development  Fund,  the 
European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and 
the  European  Maritime  and  Fisheries  Fund  and  laying  down  general  provisions  on  the  European 
Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime 
and  Fisheries  Fund  and  repealing  Council  Regulation  (EC)  No  1083/2006,  OJ  L  347,  20.12.2013,  p. 
320. 
COM(2014) 494 final. 
Cyclically-adjusted  balance  net  of  one-off  and  temporary  measures,  recalculated  by  the  Commission 
using the commonly agreed methodology. 

(3) 

(4) 

(5) 

(6) 

(7) 

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related  to  the  implementation  of  the  systemic  pension  reform  granted  for  2016  and 
related to the structural reform granted for 2017, as temporary deviations are carried 
forward for a period of three years. Based on the Commission 2017 spring forecast, 
this  is  consistent  with  a  maximum  nominal  growth  rate  of  net  primary  government 
expenditure11  of  6.0%  in  2018,  corresponding  to  deterioration  in  the  structural 
balance  of  0.3%  of  GDP.  Under  unchanged  policies,  Latvia  would  be  at  risk  of  a 
significant  deviation  from  that  requirement.  Overall,  the  Council  is  of  the  opinion 
that  further  measures  will  be  needed  in  2018  to  comply  with  the  provisions  of  the 
Stability and Growth Pact.  

Income  inequality  in  Latvia  is  high.  The  ratio  of  incomes  of  the  richest  20 %  of 
households to that of the poorest 20 % stood at 6.5 in 2015, among the highest in the 
EU, although the figure decreased slightly in 2016. The difference between income 
inequality before and after taxes and social transfers is among the smallest in the EU. 
Latvia’s tax system is less progressive than in other EU Member States, contributing 
to  the  high  inequality  and  in-work  poverty.  The  tax  wedge  on  low-wage  earners 
remains among the highest in the EU, while the revenue potential of taxes which are 
less  detrimental  to  growth  is  underused.  The  low  tax  revenue  share  in  GDP  limits 
resources  for  sustainable  delivery  of  public  services.  Despite  some  progress  in 
fighting  tax  evasion,  tax  compliance  remains  a  serious  challenge.  The  Stability 
Programme announced the introduction of a tax reform. The key measures include a 
reduction of the standard rate of personal income tax from 23% to 20%, an increase 
in the income-differentiated basic allowance, an introduction of 0% corporate income 
tax  rate  for  reinvested  profits  and  aligning  of  capital  tax  rates  at  20%.  The  reform 
addresses  the  country  specific  recommendation  in  so  far  as  that  the  tax  wedge  on 
low-income  earners  is  reduced.  However,  the  tax  reform  is  limited  in  terms  of 
shifting taxation to sources less detrimental to growth and achieving the stated policy 
objective of increasing tax revenue share in GDP.  

Weaknesses  in  basic  social  safety  nets  contribute  to  high  poverty  and  inequalities, 
including  for  people  with  disabilities  and  the  elderly.  Poverty  rates  for people  with 
disabilities are among the highest in Europe. The low adequacy of social assistance 
benefits that has not improved since 2009, and of pensions does not provide effective 
protection  against  poverty  and  social  exclusion.  The  absence  of  minimum  income 
level  reform,  announced  in  2014,  but  never  implemented,  negatively  affects  the 
poorest households, although medium-term plans on minimum income support are in 
preparation.  

(8) 

(9) 

(10)  With  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, whereas unemployment is 
more prevalent among the low-skilled and those living in rural areas. In this context, 
upskilling  the  workforce  will  contribute  to  addressing  these  issues.  However,  even 
though  the  attractiveness  of  vocational  education  has  improved,  the  curriculum 
reform  aligning  education  with  contemporary  skills  requirements  has  made  limited 
progress.  The  regulatory  framework  for  work-based  learning  has  been  put  in  place 

11 

Net  government  expenditure  is  comprised  of  total  government  expenditure  excluding  interest 
expenditure,  expenditure  on  Union  programmes  fully  matched  by  Union  funds  revenue  and  non-
discretionary  changes  in  unemployment  benefit  expenditure.  Nationally  financed  gross  fixed  capital 
formation  is  smoothed  over  a  4-year  period.  Discretionary  revenue  measures  or  revenue  increases 
mandated by law are factored in. One-off measures on both the revenue and expenditure sides are netted 
out. 

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(11) 

and an active participation of social partners and companies in its implementation is 
warranted.  Moreover,  involvement  of  the  unemployed  in  active  labour  market 
measures  is  lower  than  in  most  other  EU  Member  States  but  measures  have  been 
taken  to  improve  this  situation  and  they  are  worth  pursuing.  The  participation  in 
lifelong learning remains low. 

Although  the  Latvian  authorities  have  successfully  initiated  relevant  reforms  of  the 
healthcare  system,  large  out-of-pocket  payments,  long  waiting  lines,  low  level  of 
public  spending  and  inefficient  allocation  of  services  limit  access  to  healthcare. 
Quota controlled public spending leads to delayed treatment and patients either have 
to  wait  a  long  time  or  pay  for  the  service  out-of-pocket,  which  leaves  part  of  the 
population with unmet healthcare needs. Initial steps have been taken to reform the 
quality  assurance  system  and  progress  should  continue  to  improve  patient  and 
population  outcomes.  There  is  some  progress  in  increasing  the  efficiency  of  the 
healthcare system but further rationalisation of the hospital sector,  improved access 
to  outpatient  and  primary  care  and  a  more  efficient  link  between  budget  allocation 
and service quality and costs are needed. 

(12) 

Latvian authorities tend to make regular recourse to public procurement procedures 
for the purchases made in the healthcare sector, but further efficiency gains could be 
achieved  through  regular  use  of  e-procurement  and  central  purchasing,  making 
public expenditure more transparent and efficient. 

(13)  Weaknesses  in  regulatory  quality  and  low  public  administration  efficiency  and 
effectiveness  have  a  negative  impact  on  the  business  environment.  In  2016  the 
government  presented an  ambitious  reform  plan  for  a leaner  and  more  professional 
public  sector,  aiming  at  improving  efficiency  through  reductions  in  staff  and 
centralisation  of  support  functions,  strengthening  performance  based  payment  and 
increasing  transparency.  This  plan  is  limited  to  the  central  administration,  while 
significant efficiency gains may also be realised at municipal level.  

(14) 

(15) 

(16) 

Corruption  continues  to  hamper  Latvia’s  business  environment,  and  the  system  for 
preventing  conflicts  of  interest  remains  rigid  and  formalistic,  with  insufficient 
verification.  Although  the  reform  of  the  insolvency  system  has  been  largely 
completed,  its  effective  implementation  needs  to  be  carefully  monitored  to  address 
the limited number of restructuring cases and low recovery rate of assets. 

Large-scale reforms of higher education and public research were introduced in the 
past  three  years  to  consolidate  research  institutions  and  to  increase  the  quality  and 
relevance of their output. However, the governance and the organisational structure 
of  Latvian  public  research  funding  remain  inefficient,  with  funding  functions 
scattered  between  many  institutions.  Inefficient  funding  for  public  research 
contributes to a very low scientific performance, a lack of skilled human resources in 
both public and private sectors and low levels of public-private cooperation. Latvia’s 
business R&D intensity remains one of the lowest in the EU. 

In  the  context  of  the  European  Semester  the  Commission  has  carried  out  a 
comprehensive  analysis  of  Latvia’s  economic  policy  and  published  it  in  the  2017 
country report. It has also assessed the Stability Programme and the National Reform 
Programme and the follow-up given to the recommendations addressed to Latvia in 
previous  years.  It  has  taken  into  account  not  only  their  relevance  for  sustainable 
fiscal and socioeconomic policy in Latvia, but also their compliance with  EU rules 
and guidance, given the need to strengthen the EU’s overall economic governance by 
providing EU-level input into future national decisions.  

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(17) 

In  the  light  of  this  assessment,  the  Council  has  examined  the  Stability  Programme 
and its opinion12 is reflected in particular in recommendation 1 below, 

HEREBY RECOMMENDS that Latvia take action in 2017 and 2018 to: 

1. 

2. 

3. 

Pursue  its  fiscal  policy  in  line  with  the  requirements  of  the  preventive  arm  of  the 
Stability  and  Growth  Pact,  which  implies  to  achieve  its  medium  term  budgetary 
objective in 2018, taking into account the allowances linked to the implementation of 
the  systemic  pension  reform  and  of  the  structural  reforms  for  which  a  temporary 
deviation is granted.  Reduce taxation for low-income earners by shifting it to other 
sources that are less detrimental to growth and by improving tax compliance.  

Improve  the  adequacy  of  the  social  safety  net  and  up-skill  the  labour  force  by 
speeding up the curricula reform in vocational education. Increase cost-effectiveness 
and  access  to  healthcare,  including  by  reducing  out  of  pocket  payments  and  long 
waiting times. 

Increase  efficiency  and  accountability  in  the  public  sector,  notably  by  simplifying 
administrative  procedures  and  strengthening  the  conflict  of  interest  prevention 
regime, including for insolvency administrators.  

Done at Brussels, 

For the Council 
The President 

12 

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

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