COMMISSION STAFF WORKING DOCUMENT Country Report Latvia 2018 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2018 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
Date: 2018-03-07
Institutions: European Commission, Secretariat-General
Subjects: Latvia, economic situation, education, investment, labour market, macroeconomics, public finance, social policy, structural adjustment, tax system

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 7.3.2018 SWD(2018) 212 final  COMMISSION STAFF WORKING DOCUMENT Country Report Latvia 2018 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2018 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(2018) 120 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 

Annex A Overview Table 

Annex B Macroeconomic Imbalance Procedure Scoreboard 

Annex C Standard Tables 

References 

LIST OF TABLES 

Table 1.1: 
Table 2.1: 
Table 3.2.1: 
Table B.1: 
Table C.1: 
Table C.2: 
Table C.3: 
Table C.4: 
Table C.5: 
Table C.6: 

Key economic, financial and social indicators 

Summary table on 2017 CSR assessment 

Financial soundness indicators 

Macroeconomic imbalances scoreboard 

Financial market indicators 

Headline Social Scoreboard indicators 

Labour market and education indicators 

Social inclusion and health indicators 

Product market performance and policy indicators 

Green growth 

LIST OF GRAPHS 

Graph 1.1:  GDP growth and components' contributions 

1 

5 

11 

15 

15 
22 
26 
35 
41 
46 

49 

53 

54 

60 

10 
12 
22 
53 
54 
55 
56 
57 
58 
59 

5 

 
 
 
 
 
Credit growth 

Poverty indicators 

Labour market trends in Latvia 

Real house price index, 2010=100 

Tax wedge on labour, single earners 

Distribution of income and net wealth 

Investment by type of asset, % of GDP 

12 month average HICP inflation, % change 

Net international investment position by sector 

Graph 1.2: 
Graph 1.3: 
Graph 1.4: 
Graph 1.5: 
Graph 1.6: 
Graph 1.7: 
Graph 1.8: 
Graph 1.9: 
Graph 2.1:  Multiannual implementation of 2012-2017 country-specific recommendations to date 
Graph 3.1.1:  Government expenditure growth plans 
Graph 3.1.2:  Cumulative fiscal effect of the tax measures 
Graph 3.1.3: 
Graph 3.2.1:  Private sector credit growth 
Graph 3.2.2:  Funding of non-financial corporations 
Graph 3.2.3:  House price benchmarks 
Graph 3.3.1:  Employment by sector, year-on-year changes 
Graph 3.3.2:  Job vacancies and labour shortage indicators 
Graph 3.3.3:  At-risk-of-poverty or social exclusion rate by age groups 
Graph 3.3.4:  Relationship between healthcare spending and health outcomes, 2014 
Graph 3.3.5:  Health risk factors in Latvia relative to other EU countries, 2013-2014 
Graph 3.4.1: 
Graph 3.4.2: 
Graph 3.4.3:  Annual average productivity growth, % 
Graph 3.4.4:  Value added per person employed, index 2000=100 
Graph 3.4.5:  Productivity and real wages, index=1995 
Graph 3.4.6:  Average unit labour cost and productivity growth, 2001- 2016 
Graph 3.4.7:  Changes in real effective exchange rate in Latvia and euro area 
Graph 3.4.8:  Employment, labour force and the unemployment rate 
Graph 3.5.1:  Electricity prices for industrial consumers, 2016 

Investment by type of asset, % of GDP vs EU average 

Investment as a share of GDP 

LIST OF BOXES 

Box 2.1:  

Tangible results delivered through EU support to structural change in Latvia 

Box 3.1.2:  

Distributional effect of the tax reform 

Box 3.2.3:  
Box 3.3.1: 

Policy highlights: Altum – single development financing institution 

Monitoring performance in light of the European Pillar of Social Rights 

Box 3.4.5:  

Investment challenges and reforms in Latvia 

5 
6 
6 
7 
8 
8 
9 
9 
11 
15 
16 
17 
22 
23 
24 
26 
26 
30 
31 
32 
35 
35 
36 
37 
37 
38 
38 
39 
42 

14 
18 
25 
28 
40 

 
 
 
 
EXECUTIVE SUMMARY 

in  other  key  areas 

Latvia currently enjoys strong economic growth 
and  it  has  undertaken  a  number  of  reforms  in 
key  areas.  Latvia's  economy  is  on  overall  strong 
footing  with  solid  productivity  growth,  but  rapid 
wage  growth  carries  some  risks.  Latvia  has 
implemented  a  major  tax  reform  and  is  pursuing 
reforms 
like  healthcare, 
education  and  public  administration.  While  these 
reforms aim to address some of the key challenges 
identified  in  this  report,  their  effectiveness  varies. 
At the same time, the rapidly shrinking population 
is  weighing  heavily  on  labour  supply  and  the 
efficiency  of  public  services.  Moreover,  the  high 
inequality  and  a  number  of  social  challenges 
reflect the weak social protection in Latvia (1).  

An  improving  external  outlook  coupled  with 
recovering investment has pushed Latvia’s real 
GDP  growth  above  4%  in  2017.  Real  GDP 
growth  is  forecast  to  have  reached  4.5 %,  double 
the 2016 figure and the highest GDP growth since 
2011  thanks  to  the  recovery  of  investments,  the 
more  favourable  external  outlook  and  continued 
strong  private  consumption  growth.  Growth  is 
expected to ease off to 3.5% in 2018 and 3.2% in 
2019  once  the  initial  boost  from  the  investment 
recovery  has  passed.  Exports  and  private 
consumption are expected to continue their strong 
performance,  although  these  will  be  increasingly 
held  back  by  accelerating  inflation  and  labour 
shortages. 

While  unemployment  is  steadily  decreasing, 
employment growth is becoming constrained by 
the falling labour supply. Driven by the shrinking 
labour  force  and,  to  some  extent,  economic 
growth,  the  unemployment  rate  continued  to 
decline to 8.7 % in 2017. A rapidly rising number 
of  vacancies,  reported  labour  shortages  and  a 
strong increase in wages signal a tightening of the 
labour  market.  Employment  remained  practically 
to 
unchanged  while  wage  growth  continued 
increase  further,  reaching  nearly  10%  in  the  first 
three  quarters  of  2017,  also  partly  due  to  an 

(1)  This  report  assesses  Latvia’s  economy  in  the  light  of  the 
European Commission’s Annual Growth Survey published 
on 22 November 2017. In the survey, the Commission calls 
on  EU  Member  States  to  implement  reforms  to  make  the 
European  economy  more  productive, 
resilient  and 
inclusive.  In  so  doing,  Member  States  should  focus  their 
efforts  on  the  three  elements  of  the  virtuous  triangle  of 
economic  policy  —  boosting 
investment,  pursuing 
structural reforms and ensuring responsible fiscal policies.  

1 

increase  in  the  minimum  wage.  Wage  growth  has 
been  more  or  less  uniform  across  skill  levels,  but 
large  regional  differences  and  skill-level  gaps  in 
large 
employment  opportunities 
difference  between  the  net  income  of  low-wage 
earners and the total cost for employers (‘the high 
tax wedge’) is dampening labour supply while the 
lack of affordable housing makes it hard for people 
to move to find work. 

exist.  The 

The  population  decline  increasingly  weighs  on 
the  efficiency  of  several  areas  of  the  economy 
and  social  policy.  Latvia’s  population  has  been 
falling since the early 1990s, caused by a negative 
natural  change  and  sizeable  emigration.  Over  the 
past  decade,  however,  the  pace  of  decline  has 
intensified due to a further increase in emigration. 
Besides  weighing  on  the  supply  of  labour,  the 
falling  population  is  putting  a  strain  on  public 
resources  for  social  and  health  services.  The 
negative  effect  of  this  dynamic  is  also  becoming 
apparent in education and public utilities as fewer 
users  of  the  existing  infrastructure  make  their  use 
more expensive.  

Productivity  growth  in  Latvia  has  been  solid 
since  the  crisis,  but  the  easy  gains  of  catching 
up  are  over.  Since  2010  annual  productivity 
growth in Latvia has been 2.4% on average, among 
the  highest  in  the  EU.  However,  it  has  more  than 
halved  compared  to  what  it  was  during  the  fast 
catching-up  process  before 
the  crisis.  The 
structurally  lower  investment  rate  suggests  that 
there  is  no  low  hanging  fruit  left  and  that  the 
country’s  growth  model  will  need  to  change  by 
shifting  the  focus  to  climbing  the  global  value 
chains.  However,  weak  innovation  performance, 
average  education  outcomes  and  a  diminishing 
talent pool due to emigration raise concerns about 
the  economy’s  ability  to  expand  its  share  of 
knowledge-intensive activities.  

the 

tax  and  benefit 

Despite some recent improvements, persistently 
high 
the 
inequality  and  poverty  reflect 
weakness of the social safety net and the design 
system.  While 
of 
progressivity  of  labour  taxation  has  been  recently 
improved,  its  impact  on  reducing  inequality  is 
expected 
remain  negligible.  Poverty  and 
inequality  remain  high,  notably  due  to  the  low 
spending  on  social  protection  which  is  directly 
linked  to  low  tax  revenue  as  a  share  of  GDP. 
Although  poverty  among  children  has  decreased 

to 

 
 
                                                           
 
Executive summary 

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

  Tax 

to 

are 

cuts 

retain 

expected 

the  profits  and 

to  provide 
employment  and  investment  incentives,  but 
restrict resources for public services. Labour 
taxation  is  being  made  more  progressive  by 
reducing the tax wedge on low wages, although 
a gap with the EU average remains. Changes to 
the  taxation  of  capital  give  entrepreneurs  an 
incentive 
the 
government expects this will boost investment. 
However, 
tax  cuts  are  only  partly 
compensated  by  increases  in  excise duties  and 
improving 
thereby 
reducing the tax revenue as a share of GDP. As 
a  result,  resources  for  public  services  remain 
restricted,  in  particular  for  pressing  needs  in 
healthcare  and  social  assistance.  At  the  same 
time, the revenue potential of property taxation 
remains underused. 

tax  administration, 

the 

the 

  The  education  system  faces  a  challenge  to 
improving 
resources  while 
consolidate 
quality  and  efficiency.  Access  to  quality 
education  remains  dependent  on  the  place  of 
residence  and  type  of  school.  The  decline  in 
student  numbers  calls  for  fewer  schools  and 
teachers, which would allow for higher teacher 
salaries and specialisation. At the same time, a 
competences-based 
education 
curriculum  is  set  to  be  rolled  out  from  2018. 
This  is  intended  to  align  skills  with  future 
labour  market needs.  The  target  for vocational 
education is to increase its share of students by 
offering  them  better  work  opportunities  and 
gradually  updating  the  curriculum.  At  the 
moment,  participation  in  vocational  education 
and adult learning is relatively low.  

general 

  Facilitating 

inclusion  of 
labour  market 
the long-term unemployed remains difficult, 
notably  in  rural  areas.  Active  labour  market 
policies rely on EU funding and are expected to 
increase,  but  their  coverage  is  still  lagging 
behind  other  EU  countries.  Regional  mobility, 
particularly  to  Riga,  is  impeded  by  limited 
availability  of  quality  rental  accommodations 
from 
and 
the mobility-benefit  scheme.  There  has  been  a 
greater  effort  to  reach  young people  neither  in 

because  Riga 

excluded 

is 

considerably over the past 5 years, poverty risk for 
the elderly has worsened, largely because pensions 
have not  kept pace  with economic  growth.  Future 
pension adequacy is also a concern due to a rapidly 
rising old-age dependency ratio. 

A  major  tax  reform  leaves  little  room  for 
discretionary  spending  in  other  areas.  While 
the cost of the tax reform is expected to weigh on 
the  fiscal  position  in  2018-2019,  the  government 
deficit  is  set  to  remain  at  around  1%  of  GDP.  At 
the same time, the intention to stick to the current 
tax policy for the coming three years will limit the 
available  public  resources  for  crucial  needs  in 
healthcare and social assistance.  

Latvia  has  made  some  progress  in  addressing 
the  2017  country-specific  recommendations. 
Some  progress  was  recorded  on  reducing  the  tax 
wedge  on  low-income  earners  and  on  improving 
tax compliance. Some progress was also made as a 
result  of  setting  efficiency  targets  for  central 
government, by increasing the provision of public 
healthcare  services  and  by  updating  vocational 
education curriculum. However, progress has been 
limited on preventing conflict of interest in public 
administration  and  on  improving  the  adequacy  of 
the social safety net. 

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

translated 

indicators  of 

Latvia faces challenges with regard to a number 
of 
the  Social  Scoreboard 
supporting the European Pillar of Social Rights. 
into 
High  economic  growth  has 
improved 
employment  outcomes.  However, 
income  inequality  and  poverty  remain  relatively 
high,  in  part  due  to  the  weaknesses  in  the  social 
protection system. Access to healthcare and decent 
housing  is  limited  and  social  housing  is  scarce. 
Participation  in  active  labour  market  policies 
remains  low.  On  the  positive  side,  the  gender 
employment gap is very low and gross disposable 
household income per capita is increasing.  

2 

 
 
Executive summary 

employment,  education or  training and  to  help 
the  long-term  unemployed  get  jobs,  but  this 
remains a complex task.  

containing  emigration.  While  the  risks  are 
limited so far, they highlight the importance of 
policy measures to increase labour supply. 

  Adequacy of social benefits remains low and 
results in a high proportion of people at risk 
of poverty and still high income inequalities. 
The  social  safety  net  is  insufficient  to  provide 
for  the  basic  subsistence  needs.  The  large 
number  of  low-wage  earners  and  widespread 
underreporting  of  wages  mean  that  a  sizable 
part of  the  population  has  only  minimal  social 
coverage. Ambitious government plans to raise 
the  minimum  income  level  have  not  been 
implemented due to a lack of funding. Instead, 
the  guaranteed  minimum  income  has  been 
increased  marginally.  Also,  despite  some 
increases in the lowest pensions, ensuring their 
adequacy  remains  a  challenge.  Moreover,  the 
social  protection  of  people  with  disabilities 
remains very weak. 

to  expand  access 

  The  increase  in  healthcare  financing  is 
expected to satisfy some of the critical needs 
but  newly  adopted  access  restrictions  risk 
worsening  health  outcomes.  The  country's 
poor  health  outcomes  are  linked  to  the  low 
public  financing  of  healthcare  and 
lower 
efficiency  than  in  other  countries.  Prioritising 
resources  for  health  in  2018  and  2019  is 
expected 
to  services. 
However,  public  spending  plans  for  2020 
remain well below the EU average and reforms 
to boost efficiency have only just started. State-
funded  health  services  are  set  to  be  linked  to 
the payment of social contributions from 2019. 
Population  groups  excluded  from  the  full 
access to public services can opt-in by making 
voluntary health contributions. As a result, part 
of  population  stand  to  lose  access  to  the  full 
basket of healthcare services.  

  Rapidly  rising 

about 

Latvia’s 

labour  costs  raise  some 
concerns 
price 
competitiveness.  Despite  rapid  wage  growth, 
Latvia  has  continued  to  gain  export  market 
shares.  Crucially,  unlike  during  the  period 
leading  up  to  the  2009  economic  crisis,  the 
current  account  has,  on  average,  remained 
close  to  balance.  The  falling  labour  supply 
appears to be the main driver of wage growth, 
which  in  turn  may  have  a  positive  effect  by 

the 

from 

  Latvia's productivity growth has been solid, 
but its innovation performance is average. A 
favourable  macroeconomic  environment  and 
falling  working-age 
pressures 
population  have  helped  productivity  growth  in 
Latvia. However, the low investments in R&D, 
the  overall  weak  innovation  performance  and 
average 
undermine 
Latvia’s pursuit of higher productivity through 
specialisation 
knowledge-intensive 
activities. 

education 

outcomes 

in 

  Latvia has taken steps to reduce the burden 
of energy subsidies on electricity consumers 
but challenges remain. In response to the high 
and  rising  costs  of  energy  subsidies,  Latvia 
phased-out the support paid to the state-owned 
energy  company  which  accounted  for  around 
half of the entire subsidy cost. Moreover, it has 
also  sought  to  increase  the  competitiveness  of 
large  industrial  consumers  by  lowering  their 
electricity price, which is among the highest in 
EU.  However,  challenges  remain  over  the 
efficiency of the electricity network (partly due 
to the population decline) and achieving better 
cost effectiveness in renewable energy support. 

for 

its  well-developed 

  Latvia's  business  environment  is  generally 
favourable, although the judicial system and 
public  procurement  continue 
to  pose 
challenges.  Overall,  Latvia  scores  high  on 
international  business  environment  rankings, 
standing  out 
IT 
infrastructure,  online  services  and  access  to 
credit.  It  does  less  well  in  insolvency  process 
and  public  procurement.  While  the  specific 
weaknesses  of  the  insolvency  framework  that 
allowed  for  major  abuses  of  the  process  have 
been  addressed,  trust  in  the  judiciary  remains 
relatively 
are 
low.  Furthermore, 
challenges with respect to competitiveness and 
the  public  procurement 
transparency  of 
process.   

there 

  The upcoming public administration reform 
aims at increasing the quality and efficiency 
of 
is 
the  central  administration.  This 
to  be  achieved  by  centralising 
expected 

3 

 
 
Executive summary 

administrative  support  functions  and  cutting 
back administrative procedures and regulations.  
However,  local  authorities  and  state  owned-
enterprises are outside the scope of the reform, 
limiting its overall effectiveness.  

  Corruption 

a 

remains 

challenge 

for 
the business environment, but strengthening 
functional 
the  anti-
independence  of 
corruption office is a positive step. Based on 
the surveys, corruption is still considered to be 
more  widespread  than  in  some  other  EU 
countries,  but  the  share  of  businesses  pointing 
to  it  being  an  obstacle  for  doing  business  is 
in-fighting 
decreasing.  The 
the anti-
corruption  office 
the previous  years 
in 
weakened  its  efficiency,  which  is  expected  to 
be  resolved  by  recent  organisational  changes. 
Nevertheless, 
legislating  on 
whistle-blower  protection  is  detrimental  to 
improving  the  accountability  and  efficiency  of 
public administration. 

the  delay 

in 

in 

4 

 
 
1.  ECONOMIC SITUATION AND OUTLOOK 

GDP growth 

GDP growth reached 4.5% in 2017 on the back 
of  strong  investment  recovery  and  improved 
external demand. Investment and exports led the 
way in an all-around acceleration of growth. While 
private  consumption  continued  its  steady  climb 
supported by increasing wage growth, the recovery 
of  investments  was  the  main  determinant  of  the 
pick-up  in  activity  in  Latvia.  Both  factors  are 
expected to extend their impact into 2018, but the 
growth is expected to return to about its post crisis 
average by 2019.  

Graph 1.1:  GDP growth and components' contributions 

than  4%  in  2017  up  from  3.3%  in  2016,  mainly 
due  to  rising  wages.  Above  average  consumer 
confidence  also  contributed  to  the  acceleration  in 
consumption  growth.  It  is,  however,  expected  to 
decelerate  in  line  with  the  developments  of  real 
disposable  income,  whose  growth  is  set  to  slow 
down  on  account  of  falling  employment  and 
increasing inflation.  

Investment 

EU-funded  projects  set  to  drive  the  investment 
cycle. Investments moved in line with the flow of 
EU  funds,  returning  to  their  2015  level  2017 
following  a  dip  in  2016.  Looking  ahead,  the 
stimulus provided by the EU funds are expected to 
last  until  early  2019  by  which 
the 
disbursements  should  have  reached  their  normal 
levels.  A  major  investment  in  equipment  by  the 
national  airline  and  credit  growth  turning  slightly 
positive gave an additional boost to investment in 
2017. 

time 

Graph 1.2: 

Investment by type of asset, % of GDP 

Source: European Commission 

According to the Commission's Winter forecast, 
growth  is  expected  to  slow  down  to  3.5%  in 
2018 and to 3.2% in 2019. Once the initial boost 
of  the  recovery  of  EU-fund  disbursements  wanes, 
growth  is  expected  to  slow  down  but  remain 
solidly  above  3%.  Robust  growth  of  the  EU's 
economy coupled with strong wage increases and a 
stimulus provided by the tax cuts should drive the 
economy  in  2018.  On  the  other  hand,  growing 
inflation and limited labour supply are projected to 
be constraining factors.  

Consumption 

Private  consumption  grew  at  a  high  pace  in 
2017  but  it  is  expected  to  decelerate.  Private 
consumption is believed to have increased by more 

5 

Source: European Commission 

Trade 

Increased  global  trade  provides  only  a  limited 
boost  to  Latvia's  exports.  Exports  of  goods  and 
services are forecast to have increased by some 4% 
in  2017,  largely  the  same  as  in  2016.  Export 
growth to the EU held steady and goods exports to 
Russia  resumed  growth  for  the  first  time  in  three 
years. At the same time, growth of services export 

-25-20-15-10-50510152025030405060708091011121314151617181920%, ppsInventories investmentInvestment (GFCF)ConsumptionNet exportsReal GDP growth-5051015202530354045030405060708091011121314151617*18*% GDPConstructionEquipmentOther investmentInventories and Valuables 
 
 
 
1. Economic situation and outlook 

slowed in 2017 as a result of a continued decline in 
rail transit services to Russia and financial services 
to  non-residents.  According  to  the  Commission's 
Autumn forecast, export growth is set to remain in 
the vicinity of 4% in both 2018 and  2019. Import 
growth, on the other hand, is set to loosely follow 
the investment cycle, gradually decreasing in both 
2018 and 2019 as investment growth slows down.  

Inflation 

Increasing  wage  pressures  are  set  to  keep 
inflation  elevated  in  the  foreseeable  future. 
Recovering  energy  prices  and  a  surge  in  food 
prices pushed HICP inflation in Latvia to 2.9% in 
2017.  While  the  impact  of  these  developments  is 
expected  to  be  short-lived,  wage  growth  and  a 
considerable  increase  in  excise  taxes  are  set  to 
keep inflation close to 3% in both 2018 and 2019.  

Graph 1.3: 

12 month average HICP inflation, % change 

Source: European Commission 

Labour market 

The  shrinking  of  the  labour  force  drives  the 
unemployment rate down and wage growth up. 
While  the  number  of  people  in  employment 
remained stable, the unemployment rate continued 
to  fall  on  the  account  of  shrinking  labour  force, 
whose  impact  has  been  mitigated  by  increasing 
activity 
the 
(Graph  1.4). 
unemployment rate in Latvia was 8.7% (seasonally 
adjusted), but there were large regional differences 
ranging from 4.8% in Riga to 15.8% in the eastern 

In  2017, 

rate 

share  of 

unemployment 

region,  Latgale2.  The 
long-term 
unemployed decreased, yet the average duration of 
the 
increased.  The 
unemployment rate is expected to decrease further 
on  the  back  of  the  continuing  decline  in  the 
working  age  population,  which  on  average  has 
decreased by around 1.5% annually since 2010. 

spell 

Graph 1.4: 

Labour market trends in Latvia 

Source: European Commission 

Wage growth nears 10% as competition for the 
falling  number  of  jobseekers  intensifies.  The 
nominal  wage  growth  picked-up  to  8.7%  in  the 
first  three  quarters  of  2017,  from  6.8%  in  2016. 
The  pick-up  in  GDP  growth,  in  particular  the 
upswing  in  investment  growth,  were  the  main 
drivers of the acceleration in wage increase. Wage 
growth is broadly similar across industries, regions 
and  skill  levels,  with  a  slightly  higher  increase  to 
the  pay  of  the low-skilled. Wages  are  expected  to 
continue rising at a high rate in 2018 and 2019 in 
line  with  the  solid  GDP  growth  and  partly  due  to 
an  approximately  13%  increase  in  the  minimum 
wage  (from  EUR  380  in  2017  to  EUR  430  in 
2018).  Notably,  real  wage  growth  has  exceeded 
productivity growth for a number of years now and 
therefore  raises  potential  concern  about 
the 
country's  price  competitiveness.  This  issue  is 
covered in more detail in section 3.4.4. 

(2) December 2017, State Employment agency data 

6 

-4.0-3.0-2.0-1.00.01.02.03.04.05.020102011201220132014201520162017All-items HICPOverall index excluding energy and unprocessed food707274767880828405101520253035402001200220032004200520062007200820092010201120122013201420152016%%Activity rate 20-64 (rhs)Unemployment rate 15-74 (lhs)Long-term unemployment rate 15-74 (lhs)Youth unemployment rate 15-24 (lhs)NEET rate 15-24 (lhs) 
 
 
                                                           
The challenges stemming from the demographic 
decline  are  becoming  more  pronounced.  The 
rate of decline of Latvia's working age population 
has increased from 0.8% annually over the 2003 to 
2007  period  to  almost  2%  over  the  2008-2016 
period,  primarily  on  the  account  of  increased 
emigration. Emigration is linked to higher pay and 
better  employment  opportunities  in  the  richer  EU 
countries. The  rapidly rising wages  can help  stem 
this 
therefore  present  a  positive 
development from this perspective. The population 
decline  carries  important  policy  challenges  in  a 
number of areas – fiscal sustainability (see Section 
3.1.4), labour supply (see Section 3.3.1), healthcare 
(see  Section  3.3.3),  education  (see  Section  3.3.4), 
productivity  (see  Section  3.4.3),  energy  (see 
Section  3.5.1)  and  public  administration  (see 
Section 3.6.1). 

trend  and 

Social developments 

Despite some improvements, the risk of poverty 
or  social  exclusion  remains  high.  The  share  of 
people  at  risk  of  poverty  or  social  exclusion 
continued  to  decrease  to  28.2%  in  2017,  but  it 
remains above the EU average of 23.5% (2016) (3). 
The  decrease  is  thanks  to  a  drop  in  the  severe 
material deprivation rate and, to a lesser extent, to 
a decrease in the proportion of people living in low 
work 
(Graph  1.5).  No 
significant  improvements  occurred  for  monetary 
poverty  in  2017  (see  section  3.3.2  for  more 
the  at-risk-of-poverty  rate 
details).  In  2017, 
remained at a high level for people with disabilities 
and for those living in (quasi-) jobless households, 
and the elderly.  

intensity  households 

(3)  Income  data  from  EU-SILC  refer  to  the  previous  year  for 

all Member States except from IE and UK. 

1. Economic situation and outlook 

Graph 1.5: 

Poverty indicators 

Source: European Commission 

Both wealth and income inequality are high. In 
2017,  the  share  of  income  of  the  richest  20%  of 
households  was  more  than  six  times  higher  than 
that  of  the  poorest  20%  of  households,  placing 
Latvia  among  the  EU  countries  with  the  highest 
inequality.  Despite  having  notably 
income 
declined  since  2006,  Latvia's  Gini  coefficient (4) 
for  household  income  after  taxes  and  benefits 
remain  among  the  highest  in  the  EU (5).  While 
market  incomes  were  only  slightly  more  unequal 
than in other EU countries, the impact of taxes and 
benefits on reducing the inequality is significantly 
lower  in  Latvia  than  in  other  EU  countries.  This 
reflects the low social spending (see Section 3.3.2) 
and  weak  tax  progressivity  (see  Section  3.1.3)  in 
Latvia. In addition, wealth inequality is among the 
highest in the euro area. Around half of the wealth 
reflects  ownership  of  the  main  residence  and  a 
quarter  reflects  ownership  of  other  real  estate, 
which is similar to the EA average (Graph 1.6). 

(4)  The  Gini  coefficient  is  an  indicator  with  value  between  0 
and  1.  Lower  values  indicate  higher  equality.  In  other 
words a value equal to 0 indicates everybody has the same 
income, a value equal to 1 indicates that one person has all 
the income. Note: The total disposable household income is 
'equivalised'  - adjusted for the size of a household 
(5)  The Gini coefficient was 38.9 in 2006 and 34.5 in 2017 

7 

05101520253035404550200520062007200820092010201120122013201420152016% of populationAt-risk-of-poverty-or-social-exclusion rateAt-risk-of-poverty rateSevere material deprivation 
                                                           
 
                                                           
1. Economic situation and outlook 

Graph 1.6:  Distribution of income and net wealth 

Graph 1.7:  Net international investment position by sector 

Source: EU SILC (Eurostat, 2017) and HFCN (2016) 

Source: European Commission 

Credit developments 

to 

lending 

recovering,  but 

Credit growth has remained low in spite of the 
economic  upswing. In  2017,  credit to households 
has  been 
firms 
decelerated  (Graph  1.8).  Only  25%  of  new  house 
purchases  were  financed  by  banks.  The  rest  was 
financed  by  buyers'  own  means  or  by  alternative 
consumer  credit  providers.  This  latter  market 
segment  has  been  expanding.  The  alternative 
lenders have about 300 thousand clients across the 
country and by volume grant more consumer loans 
than banks. Non-financial companies are reluctant 
to invest, despite the current economic prosperity. 
Firms  are  making  profits  but  do  not  intend  to 
expand  their  productive  capacities.  Part  of  this  is 
owed  to  a  subdued  economic  confidence,  but  the 
weak judiciary system and unresolved problems in 
insolvency  procedures  are  additional 
factors 
discouraging credit growth.  

Inequality  of  opportunities  and  unequal  access 
to  healthcare  are  also  a  cause  for  concern. 
While  the  link  between  educational  outcomes  and 
socio-economic  background  is  relatively  low,  the 
poverty  situation  of  the  children  of  low-skilled 
parents  (41.8%  at  risk  of  poverty)  is  considerably 
higher  than  that  of  the  children  of  high-skilled 
parents  (4.9%).  This  divide  is  also  reflected  in 
access  to  healthcare,  with  the  gap  between  the 
poorest  and  the  richest  as  regards  self-reported 
unmet  need  for  medical  care  being  among  the 
highest in the EU. 

External position 

The current account has reverted to a deficit on 
the back of recovering investment. The increase 
in  EU  funds  flow  and  the  corresponding  increase 
in imports of investment goods is forecast to have 
put the current account back in deficit of 1.4% of 
GDP in 2017. It is expected to remain moderately 
the  forecast  horizon.  The  net 
negative  over 
international investment position (NIIP) continued 
to improve mainly due to Latvian banks' declining 
need  for  external  financing.  At  the  end  of  2017, 
Latvia's  NIIP  was  above  -60%  of  GDP  compared 
to below -80% of GDP in 2009. Furthermore, it is 
mostly made up of foreign direct investment (FDI), 
limiting the risks of a sudden withdrawal. 

8 

0102030405012345% of totalincome quintileincomenet wealthEU/EA-140-120-100-80-60-40-20020406008Q4'09Q410Q411Q412Q413Q414Q415Q416Q4% of GDPGeneral GovernmentPrivate sectorMFI (excl central bank)Central Bank (incl reserves)Net int'l investment position (NIIP) 
 
 
1. Economic situation and outlook 

Graph 1.8:  Credit growth 

Graph 1.9: 

Real house price index, 2010=100 

Source: European Central bank 

Source: European Commission 

House prices 

Public finances 

House price growth has picked-up but the price 
level  remains  in  line  with  the  fundamentals. 
House price growth reached 9.3% in the first three 
quarters of 2017, however this follows a prolonged 
period of generally subdued price increase (Graph 
1.9). Overall, the average house price growth since 
2010  has  been  5.1%,  below  the  average  growth 
rate  of  nominal  GDP  (5.8%).  As  a  result,  the 
current house price levels are around the long term 
average (Section 3.2.5).  

With the general government deficit hovering at 
around  1%  Latvia's  public  finances  remain 
solid  but  the  current  expansion  is  pro-cyclical. 
The general government deficit was 0.9% of GDP 
in 2017 and it is expected to remain thereabout in 
both  2018  and  2019.  Defence  and  healthcare 
spending  are  the  main  beneficiaries  from  the 
expenditure growth foreseen for 2018. A major tax 
cut aimed at stimulating economic activity is set to 
limit  the  revenue  gains  from  the  strong  growth  in 
the  tax  base.  Given  the  above  potential  economic 
growth,  the  expansionary  fiscal  stance  is  pro-
cyclical.  The  pro-cyclicality  of  the  fiscal  policy 
raises  concern  about  the  resilience  of  the  public 
finances should the economic cycle turn.  

9 

-8-6-4-202468Nov-11May-12Nov-12May-13Nov-13May-14Nov-14May-15Nov-15May-16Nov-16May-17Nov-17Total private Non-financial corporationsHouseholdsMortgage credit% ch, y-o-y050100150200250Euro AreaEstoniaLatviaLithuania 
 
 
 
1. Economic situation and outlook 

Table 1.1: 

Key economic, financial and social indicators 

(1) Sum of portfolio debt instruments, other investment and reserve assets.         
(2) Domestic banking groups and stand-alone banks, EU and non-EU foreign-controlled subsidiaries and EU and non-EU 
foreign-controlled branches. 
Source: Eurostat and ECB as of 30 Jan 2018, where available; European Commission for forecast figures (Winter forecast 2018 
for real GDP and HICP, Autumn forecast 2017 otherwise) 

10 

2004-072008-122013-1420152016201720182019Real GDP (y-o-y)10,2-2,62,22,82,14,53,53,2Potential growth (y-o-y)7,9-0,21,12,11,73,23,73,9Private consumption (y-o-y)12,5-3,33,22,53,3...Public consumption (y-o-y)4,0-2,81,71,92,7...Gross fixed capital formation (y-o-y)21,6-7,2-3,0-0,5-15,0...Exports of goods and services (y-o-y)14,54,53,53,04,1...Imports of goods and services (y-o-y) 19,1-2,50,82,14,5...Contribution to GDP growth:Domestic demand (y-o-y)14,9-4,91,51,7-0,8...Inventories (y-o-y)0,1-1,1-0,90,63,2...Net exports (y-o-y)-4,92,91,60,5-0,3...Contribution to potential GDP growth:Total Labour (hours) (y-o-y)0,3-1,1-0,8-0,6-0,1-0,2-0,2-0,1Capital accumulation (y-o-y)3,60,2-0,4-0,4-1,40,00,40,6Total factor productivity (y-o-y)3,90,72,33,13,23,43,43,4Output gap6,3-5,80,01,01,32,32,11,4Unemployment rate8,715,211,49,99,68,47,97,3GDP deflator (y-o-y)12,52,01,70,00,32,23,43,2Harmonised index of consumer prices (HICP, y-o-y)7,44,60,40,20,12,93,12,9Nominal compensation per employee (y-o-y)24,41,57,07,76,89,58,88,1Labour productivity (real, person employed, y-o-y)7,41,41,81,42,4...Unit labour costs (ULC, whole economy, y-o-y)15,90,15,16,24,35,34,94,6Real unit labour costs (y-o-y)3,0-1,93,46,24,03,01,51,4Real effective exchange rate (ULC, y-o-y)11,2-2,14,73,73,44,84,12,5Real effective exchange rate (HICP, y-o-y)2,01,10,91,31,3-1,22,5.Savings rate of households (net saving as percentage of net disposable income)-9,1-4,8-14,0-8,1-6,5...Private credit flow, consolidated (% of GDP)27,3-0,2-5,50,70,3...Private sector debt, consolidated (% of GDP)86,3115,494,288,888,3...of which household debt, consolidated (% of GDP)32,543,328,024,523,7...of which non-financial corporate debt, consolidated (% of GDP)53,872,166,264,364,6...Gross non-performing debt (% of total debt instruments and total loans and advances) (2).9,96,65,15,2...Corporations, net lending (+) or net borrowing (-) (% of GDP)-9,56,36,46,13,80,7-0,5-0,3Corporations, gross operating surplus (% of GDP)30,830,131,028,426,625,524,323,0Households, net lending (+) or net borrowing (-) (% of GDP)-5,6-0,5-4,5-2,6-1,50,21,51,8Deflated house price index (y-o-y)16,9-11,35,4-2,47,4...Residential investment (% of GDP)4,52,82,42,52,0...Current account balance (% of GDP), balance of payments-16,4-1,9-2,2-0,51,4-1,2-1,4-1,0Trade balance (% of GDP), balance of payments-16,6-4,7-2,6-0,50,9...Terms of trade of goods and services (y-o-y)1,4-0,3-0,30,72,8-1,00,40,5Capital account balance (% of GDP)1,32,22,82,81,0...Net international investment position (% of GDP)-60,0-76,1-66,1-63,8-58,9...Net marketable external debt (% of GDP) (1)-30,2-37,8-19,4-12,7-9,9...Gross marketable external debt (% of GDP) (1)93,8132,4125,0130,2134,6...Export performance vs. advanced countries (% change over 5 years)105,150,616,514,56,2...Export market share, goods and services (y-o-y)14,11,62,6-3,73,5...Net FDI flows (% of GDP)-5,1-2,6-1,4-2,60,0...General government balance (% of GDP)-0,6-5,5-1,1-1,20,0-0,9-1,0-1,1Structural budget balance (% of GDP).-1,6-0,9-1,6-0,6-1,8-1,8-1,6General government gross debt (% of GDP)10,836,939,936,840,539,035,535,7Tax-to-GDP ratio (%)28,428,529,930,431,531,631,130,7Tax rate for a single person earning the average wage (%)29,029,730,028,929,1...Tax rate for a single person earning 50% of the average wage (%)26,327,327,826,827,0...forecast 
 
 
 
2.  PROGRESS WITH COUNTRY-SPECIFIC RECOMMENDATIONS 

the 

implementation 

implementation  of 

Progress  with 
of 
the recommendations  addressed  to  Latvia  in 
2017 has to be seen in a longer-term perspective 
since the introduction of the European Semester 
in 2011. Looking at the multi-annual assessment of 
the 
the  country  specific 
recommendations  since  these  were  first  adopted, 
85 %  of  all  the  recommendations  addressed  to 
Latvia  have  recorded  at  least  ‘some  progress’ 
full 
(Graph 2.1).  Substantial  progress 
by 
implementation 
adopting 
maintaining 
the domestic  fiscal  framework  and  by  improving 
the macro-prudential  supervision  of  the  banking 
sector. 

been 
discipline, 

and 
observed 

fiscal 

have 

its 

corrected 

low  wages 

taxation  away  from 

Latvia  is  fiscally  prudent  and  has  recently 
reduced  the  tax  wedge (6)  on 
low  wages 
somewhat.  Latvia 
excessive 
government deficit in 2012 and has complied with 
the  fiscal  requirements  since 
then.  A  fiscal 
framework  has  been  set  up  and  implemented. 
Shifting 
in 
a growth-friendly  manner  has  been  recommended 
to  Latvia  since  2012.  The 2017  tax  reform  partly 
addressed  this  recommendation,  as  the  tax  wedge 
on  low  wages  has  been  reduced,  but  it  remains 
above  the  EU  average  and  above  other  Baltic 
countries. Moreover, the fiscal costs of the tax cut 
are only partly compensated by increases in excise 
duties  and  stricter  VAT  administration.  Tax 
compliance  has  been  gradually  improving,  helped 
by  the  tax  administration's  preventive  measures 
and  efforts  to  eradicate  tax  evasion.  However, 
some  policy  measures  are  prone  to  abuse,  like 
the micro-enterprise tax regime.  

(6)  Tax  wedge  is  a  difference  between  the  amount  of  taxes 

paid and the total labour cost for the employer.  

Graph 2.1:  Multiannual implementation of 2012-2017 

country-specific recommendations to date 

Notes: The multiannual CSR assessment looks at 
the implementation since the CSRs were first adopted until 
the 2018 Country Report. 
The assessment excludes an assessment of compliance with 
the Stability and Growth Pact.  
Source: European Commission 

Social  policies  have  seen  little  progress  over 
lately  healthcare  has  gained 
time,  but 
the necessary  attention.  The  social  assistance 
system  has  not  improved  over  the  years.  A major 
reform  introducing  a universal  minimum  income 
level was presented in 2014 and was planned to be 
introduced  in  2017,  but  so  far  has  not  been 
advanced,  primarily  due  to  lack  of  funding. 
The adequacy  of 
social  benefits  has  been 
somewhat  improved  by  more  generous  pension 
indexation  rules  and  by  increasing  child  benefits, 
in  particular  for  large  families,  and  a  modest 
increase  in  the  guaranteed  minimum  income. 
Updating  vocational  education 
line  with 
the labour market needs has been slow. Framework 
conditions 
learning  were 
established  in  2016,  but  uptake  is  still  low. 
The healthcare  sector  has  been  prioritised 
in 
budget  decisions,  but  supply  of  state-funded 
services  still 
lags  behind  demand.  Strategic 
decisions  on  consolidation  and  specialisation  for 
greater 
to  be 
resource  efficiency  are  still 
implemented in practice.  

for  work-based 

in 

A  reform  proposal  for  increasing  efficiency  of 
the  central  public  administration  has  been 
adopted.  Public  administration  reforms  have 
advanced  little  over  the  previous  years,  with 
several proposals presented, but few adopted. Ideas 
for  increasing  efficiency  of  public  administration 
were  tabled  in  2016  and  the revised  proposal  was 
adopted  by  the  Government  in  2017.  The  reform 
hinges  on  high-level  targets  for  reducing  staff 
numbers in central government allowing for wage 

11 

14%59%15%12%No ProgressLimited ProgressSome ProgressSubstantial ProgressFull Implementation 
 
                                                           
 
2. Progress with country-specific recommendations 

Table 2.1: 

Summary table on 2017 CSR assessment 

(1) This assessment of CSR1 does not include an assessment of compliance with the Stability and Growth Pact. 
Source:  European Commission 

include 

these  plans  don’t 

increases, thus attracting talent to the public sector. 
However, 
local 
government. The legislative proposal for a unified 
legal  framework  for  all  public-sector  employees 
has  not  been  passed  by  Parliament,  despite  being 
ready  since  2014.  The  prevention  of  conflict  of 
interest  is  hampered  by  an  unclear  division  of 
competencies among  the  institutions  charged  with 
the verification  of  declarations  of  assets  and 
interests,  a  process 
is  not  carried  out 
that 
systematically. The delay in legislating on whistle-
blower 
to 
the accountability  and  the  efficiency  of  public 
administration. 

detrimental 

protection 

is 

the 

Overall,  Latvia  has  made  some  progress (7)  in 
country-specific 
2017 
addressing 
recommendations.  It  made  some  progress  on 
reducing the tax wedge on low-income earners and 
on  improving  tax  compliance,  as  well  as  on 
launching the reform of central government and on 
increasing provisions of public healthcare services. 
Only  limited  progress  was  made  on  improving 
adequacy of the social safety net and there is some 
progress 
education 
in  updating  vocational 
curricula,  although  fair  amount  of  work  is  still 
the  country-specific 
needed 

to  fully  address 

(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. 

recommendation.  Progress  on  preventing  conflict 
of interest is assessed to be limited. 

in 

the 

private 

European  Structural  and  Investment  Funds 
(ESI  Funds)  are  pivotal  in  addressing  key 
challenges to inclusive growth and convergence 
in Latvia (Box 2.1). ESI Funds are notably used in 
promoting  R&D 
sector, 
strengthening links between research and industry, 
supporting  national  reforms  directed  at  improving 
accessibility and quality of health care. ESI Funds 
the  quality  of  vocational 
also  help 
strengthen 
education 
the employability  and  social  inclusion  of  persons 
with  disabilities,  the  elderly  and  other  vulnerable 
groups. 

improve 
and 

training, 

States 

request 

Member 
from 
can 
the Commission  technical  support  to  prepare, 
design,  and 
implement  growth-enhancing 
structural  reforms.  The  Structural  Reform 
Support  Service  (SRSS)  provides,  in  cooperation 
with  the  relevant  Commission  services,  tailor-
made technical support, which does not require co-
financing  and  is  provided  at  a  Member  State's 
request. The support addresses priorities identified 
in  the  context  of  the  EU  economic  governance 
process  (i.e.,  implementation  of  country-specific 
recommendations),  but  the  scope  of  the  SRSS 
support is wider as it can also cover reforms linked 
to  other  Commission  priorities,  or 
reforms 
undertaken at the initiative of Member States.  

12 

Latvia Overall assessment of progress with 2016 CSRs: Some CSR 1: Pursue its fiscal policy in line with the requirements of the preventive arm of the Stability and Growth Pact, which entails achieving 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. Some progress (1)  Some progress in shifting the tax burden away from low wages.   Some progress in improving tax compliance.  CSR 2: Improve the adequacy of the social safety net and upskill the labour force by speeding up the curricula reform in vocational education. Increase the cost-effectiveness of and access to healthcare, including by reducing out-of-pocket payments and long waiting times. Some progress  Limited progress in improving adequacy of the social safety net.   Some progress in speeding up the curricula reform in vocational education.  Some progress in improving healthcare system. CSR 3: Increase efficiency and accountability in the public sector, in particular by simplifying administrative procedures and strengthening the conflict-of-interest prevention regime, including for insolvency administrators. Some progress  Some progress in increasing efficiency in the public sector.  Limited progress on increasing accountability of public administration.   
                                                           
 
 
 
2. Progress with country-specific recommendations 

improving  tax  administration,  increasing  the  cost-
effectiveness  and  access  to healthcare, developing 
Latvian capital markets, and providing anti-money 
laundering training.  

Latvia  has  requested  technical  support  from 
the SRSS to help implement reforms in various 
areas  such  as:  public  administration,  growth 
and  business  environment,  public  financial 
management, health and the financial sector. In 
for 
particular, 

the  SRSS  provides 

support 

13 

 
 
2. Progress with country-specific recommendations 

Box 2.1: Tangible results delivered through EU support to structural change in Latvia 

Latvia is a beneficiary of significant European Structural and Investment Funds (ESI Funds) support 
and can receive up to EUR 5.6 billion until 2020. This represents around 3 % of GDP annually over the 
period 2014-2018 and 65 % of public investment (1). By 31 December 2017, an estimated EUR 3.1 billion 
(55% of the total) was allocated to projects on the ground. This has paved the way for supporting around 
84 000 additional households with broadband access of at least 30 Mbps; 1 145 restructured or modernised 
farm  holdings;  57 000  people  received  European  Social  Fund  support  of  whom  16 000  of  long-term 
unemployed.  Latvia  has  also  received  support  from  the  Youth  Employment  Initiative  to  combat  youth 
unemployment and 23 000 young people have benefited from it. Out of the EU financing, EUR 126 million 
is to be delivered via financial instruments.  

implement  country-specific 
structural  policy  challenges  and 
ESI  Funds  help  address 
recommendations.  Examples  include  promoting  R&D  in  the  private  sector;  strengthening  links  between 
R&D,  innovation  and  industry;  in  healthcare  the  setting  up  of  a  national  strategic  policy  framework  and 
preparing  a  healthcare  infrastructure  mapping  to  increase  the  efficiency  of  healthcare  investments; 
improving the effectiveness of the justice system; in education 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, and strengthening the capacity of social work.  

Various  reforms  were  undertaken  already  as  precondition  for  ESI  Funds  support. (2)  Smart 
Specialisation Strategy for research and innovation was developed to focus efforts on product specialisation 
with  strong  market  potential.  This  has  also  helped  to  improve  cooperation  between  enterprises and  public 
research institutions. The consolidation of research institutions by linking financing to performance and in 
higher education by better focussing education to the needs of the economy was also done in line with the 
priorities set in the Smart Specialisation Strategy; improving access and quality of healthcare by developing 
healthcare  infrastructure  focusing  on  priority  healthcare  areas;  in  education  by  developing  evidence-based 
early school leaving 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.  

Latvia  is  advancing  the  take  up  of  the  European  Fund  for  Strategic  Investments  (EFSI).  As  of 
December  2017,  overall  financing  volume  of  operations  approved  under  the  EFSI  amounted  to  EUR 182 
million,  which  is  expected  to  trigger  total  private  and  public  investment  of  EUR 615  million.  More 
specifically, 6 projects involving Latvia have been approved so far under the Infrastructure and Innovation 
Window  (including  3  multi-country  projects),  amounting  to  EUR 164  million  in  EIB  financing  under 
the EFSI.  This  is  expected  to  trigger  about  EUR 370  million  in  investments.  Under  the  SME  Window, 
6 agreements with financial intermediaries have been approved so far. European Investment Fund financing 
enabled by the EFSI amounts to EUR 19 million, which is expected to mobilise approximatively EUR 245 
million  in  total  investment.  Over  4 200  smaller  companies  or  start-ups  will  benefit  from  this  support. 
Transport ranks first in terms of operations and volume approved, followed by SMEs. 

Funding under Horizon 2020, the Connecting Europe Facility and other directly managed EU funds is 
additional to the ESI Funds. By the end of 2017, Latvia has signed agreements for EUR 267 million for 
projects under the Connecting Europe Facility.  

(1)  Public investment is defined as gross fixed 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  so-called  ex-ante 

conditionalities, which aim at improving conditions for the majority of public investments areas. 

14 

 
 
3.  REFORM PRIORITIES 

3.1.  PUBLIC FINANCES AND TAXATION 

3.1.1.  BUDGETARY PLANS 

fiscal  position 

Latvia’s 
remains  benign. 
The government  deficit  is  estimated  at  0.9 %  of 
GDP  in  2017.  The government  deficit  target  for 
2018  has  been  adjusted  to  1.0 %  of  GDP,  as 
compared  to  1.6 %  of  GDP  under  the  Latvia’s 
stability  programme.  This  is  largely  achieved  by 
modifying the plans of a major tax reform between 
the announcement  in  the  stability  programme  in 
April  2017  and  the  adoption  in  July  2017,  in 
particular  spreading  out  the  costs  of  the  corporate 
tax changes over the coming years.  

The  medium-term  budgetary  plans  are  mainly 
determined  by  the  tax  reform.  The  labour  and 
corporate  tax  cutting  measures  are  only  partly 
balanced  by  revenue  increasing  measures,  thus 
overall restricting the fiscal space over the medium 
term.  The  tax  revenue  share  remains  well  below 
the  medium-term  national  target  of  one  third  of 
GDP,  limiting  the  room  for  financing  structural 
reforms  and  the  redistributive  function  of  the 
budget,  in  particular  towards  the  most  vulnerable 
groups.  The 2018  budget  expands  spending  on 
defence,  healthcare  and  family  support,  but  the 
discretionary  effort  is  not  sustained  in  2019-2020 
(Graph 3.1.1).  

As  a result of the tax reform, little room is left 
for  discretionary  expenditure  in  2019-2020. 
Latvia  has  few  automatic  expenditure  indexation 
rules.  In  general,  the expenditure  is  assumed  to 
remain unchanged in nominal terms, as a baseline 
for  the national budgetary  plans.  The policy areas 
with  well-anchored  funding  rules  or  which  are 
receiving EU financing have a certainty over their 
budgetary plans, while policy areas which rely on 
discretionary  budgetary  decisions  face  difficulties 
to secure financing. The budgetary plans for 2019-
2020  demonstrate 
the  contribution-based 
social  spending  and  financing  envelopes  for  local 
authorities  and  defence  account  for  a  stable  and 
large  share  of  the  total  expenditure  increase 
(Graph 3.1.1).  A pick-up  in  other  expenditure  in 
2020 is linked to a surge in the implementation of 
EU  financed  projects.  However,  the  discretionary 
increase  in  financing  for  healthcare  in  2018  and 

that 

2019  is  not  continued  in  2020  (Section 3.3.3). 
Other  costly  policy 
the 
minimum income level reform (Section 3.3.2) also 
get  side-lined  in  the  absence  of  the  space  for 
discretionary spending. 

initiatives  such  as 

Graph 3.1.1:  Government expenditure growth plans 

Source: The medium term budgetary plans for 2018-2020 

3.1.2.  FISCAL FRAMEWORK AND EXPENDITURE 

REVIEW 

used 

The fiscal framework is followed in broad terms 
when setting out fiscal policy, but adherence to 
the fiscal rules is not always rigorous. Budgetary 
targets  are  set  on  the  basis  of  the  fiscal  rules 
established in the Law on fiscal discipline and are 
monitored  by  the  independent  Fiscal  Discipline 
Council,  which  also  endorses  the  macroeconomic 
forecasts 
planning. 
The authorities’  adherence  to  the  national  fiscal 
rules  is  somewhat  weakened  by  the  planned 
suspension of the ‘fiscal security reserve’ in 2019. 
Moreover,  the  Fiscal  Discipline  Council (8)  has 
issued seven irregularity reports on specific issues 
in  2017,  indicating  occasions  when  decisions  by 
the  budgetary  authorities  (e.g.  on  re-allocation  of 
budgetary  resources)  appeared  to  be  in  conflict 
with the Law on fiscal discipline.  

budgetary 

for 

(8)  http://fiscalcouncil.lv/home  

15 

0100200300400500600700800201820192020EUR millionOtherHealthDefenceLocal authoritiesSocial protection 
 
 
                                                           
3.1. Public finances and taxation 

Most measures are effective from 2018, with some 
transitional provisions in place until 2020. 

Graph 3.1.2:  Cumulative fiscal effect of the tax measures 

in 

An  expenditure  review  across  the  central 
government  took  place  in  2017,  with  limited 
funds  re-allocated.  The  2017  expenditure  review 
identified expenditure in the magnitude of 0.3 % of 
GDP  available  for  re-allocation  in  2018.  The 
review  followed  up  on  the  implementation  of 
the recommendations  issued  in  2016,  including 
the  budget  preparation  and 
improvements 
reporting processes. The review also included pilot 
projects 
for 
reimbursable  pharmaceuticals  and 
for  public 
libraries.  Both  projects  had  to  be  completed  in 
the 
2017.  No 
reimbursable  pharmaceuticals  project,  due  to  data 
limitations. The public libraries project recognised 
advantages  of  reassessing  processes  and  costs,  as 
well  as  the  need  to  cooperate  across  institutions 
and use a uniform methodology. The project is set 
to be completed in 2018.  

‘zero-based’  budgeting (9) 

is  planned 

follow-up 

for 

for 

3.1.3.  TAXATION 

The  tax  revenue  share  in  GDP  remains  well 
below  the EU  average.  The  tax  revenue  ratio  to 
GDP  stood  at  31.2 %  in  2016 (10),  below  the  EU 
average  of  38.9 %.  The  tax  system  relies  on 
consumption  and  labour  taxes  in  terms  of  total 
revenue,  while  taxation  of  capital  is  limited. 
is  relatively  high 
labour 
The tax  burden  on 
especially 
earners  without 
low-income 
dependants  or  second  earners.  The  tax  revenue 
share  in  GDP  is  limited  by  tax  non-compliance, 
given  the  large  shadow  economy.  This  limits 
funding  available  for  government  services,  in 
particular social services. 

for 

The tax system is being overhauled by a reform 
adopted  in  the  summer  of  2017.  The  tax  reform 
aims  at  promoting 
the  competitiveness  of 
the Latvian  economy,  reducing  income  inequality 
and increasing the tax revenue to one third of GDP 
in  the  medium  term.  The  key  measures  focus  on 
the  reduction  of  personal  and  corporate  income 
taxes.  The  fiscal  costs  of  the  measures  are  partly 
compensated  by  higher  excise  duties  and 
improvements  in  VAT  collection  (Graph 3.1.2). 

(9)  This  means  allocating  budgetary  funding  based  on  needs 
and efficiency considerations rather than past practice. 
(10)  Statistical changes have increased the tax-to-GDP ratio by 
around 1 pp., relative to the pervious data. The  mandatory 
procurement public service obligation fee of 0.7 % of GDP 
is now recorded as general government revenue. 

(1) Mostly represents the 1 pp. increase in social 
contributions to finance health expenditure. 
Source: European Commission 

The objectives of the tax reform are expected to 
be  only  partially  achieved.  The  authorities 
assume  that  lower  labour  and  capital  taxation 
would  strengthen  investment  and  growth,  and 
ultimately  trickle  down  to  better  public  services 
and  work 
opportunities.  Macroeconomic 
simulations from the Commission, however, point 
to  a  very  limited  positive  effect  of  the  reform  on 
investment  and  GDP  (European  Commission, 
2017a).  Only  a  few  measures  are  well  targeted 
towards  reduction  of 
inequality,  such  as  an 
increase  in  the  basic  allowance,  and  they  account 
for  a  small  share  of  the  overall  reform  costs 
(Box 3.1.1). The target of the tax revenue share in 
GDP of one third is not expected to be reached.  

The  World  Bank's  review  of  the  Latvia's  tax 
system  and  its  recommendations  were  largely 
ignored.  Following  a  request  from  Latvia,  the 
World  Bank provided  a  review  of  the  Latvian  tax 
system (World Bank, 2016). Its recommendations, 
however, have not or only to a limited extent been 
incorporated  in  the  current  tax  reform.  Moreover, 
the  adoption  of  the  tax  reform  prior  to  the 
discussion  on 
the public  expenditure  needs 
illustrates  a  lack  of  a comprehensive  budgetary 
strategy,  including  an integral  assessment  of  the 
government revenue and expenditure priorities.  

16 

-2.5%-2.0%-1.5%-1.0%-0.5%0.0%0.5%1.0%1.5%201820192020% of GDPPersonal income taxCapital taxesSocial contributions (1)Indirect taxesProperty tax 
                                                           
 
3.1. Public finances and taxation 

The  high  tax  wedge  on  low  incomes  has  been 
reduced,  but  remains  elevated.  In  2016,  the  tax 
wedge  for  single  workers  earning  67 %  of 
the average wage was 41.8 % (compared to 43.2% 
in 2010), which was still one of the highest in the 
EU  (where  the  average  is  36.8 %).  Since  the  tax 
wedge  affects  labour  demand  and  supply  for  this 
it  can  help  boost 
income  group, 
employment. The tax reform is estimated to reduce 
the  tax  wedge  on  a single  person  earning  50%  of 
average  wage  to  36.0 %,  but  still  above  the EU 
average  of  32.5 %  (Graph 3.1.3).  The  increase  in 
is 
income-differentiated  basic  allowance 
the 
the most  effective  way  of  reducing  the  tax  wedge 
for  single  earners  among  the  adopted  measures. 
However, the increase in social contributions adds 
directly to the tax wedge for all income groups (11).  

lowering 

Graph 3.1.3:  Tax wedge on labour, single earners 

Note: This graph assumes an annual average wage growth 
of 5.5% by 2020. Assuming a higher wage growth rate would 
imply a higher tax wedge on low incomes in 2020. 
Source: European Commission 

(11)  Social contributions represent 28 % of labour costs for any 

employee under the general tax regime. 

The low tax progressivity contributes to income 
inequality.  The  small  difference  in  tax  wedge 
between  the  lower  and  higher  incomes  in  2016 
points  to  a  low  progressivity,  relative  to  the EU 
average (Graph 3.1.3). 

The  adopted  labour  tax  measures  will  reduce 
labour  taxation  and  increase  its  progressivity. 
All  income  groups  are  estimated  to  gain  from 
the reform  with  the largest  gains  in  the  second  to 
fifth  decile  of  the income  distribution.  A higher 
progressivity  of  the  tax  system  has  been  achieved 
by  increasing  the basic  (tax-free)  allowance  and 
the  allowances  for  pensioners  and  dependents. 
The measure  with  the largest  budgetary  impact — 
the reduction of the standard personal income tax, 
however, is a regressive measure, benefitting more 
to those with higher incomes (Box 3.1.1). Overall, 
the  labour  tax  measures  are  estimated  to  reduce 
the at-risk-of-poverty rate by 1.8 pps. and the Gini 
coefficient by 0.5 pp.  

The  unused  tax  allowances  and  the  low  work 
intensity for  low-income groups  limit  the  effect 
of  the  measures  on  poverty  and  inequality 
reduction.  Households  with  the  lowest  incomes 
include  many  unemployed,  inactive  individuals 
and pensioners with low pensions. They rely more 
on  social  benefits,  in  particular  pensions,  and 
contribute  less  to  tax  revenue.  The increase  in 
allowances  for  dependents  and  pensioners,  which 
are intended to support families with children  and 
the elderly, does not target the poorest groups well, 
as  their  personal  income  tax  bill  was  fully  or 
largely  reduced  by  the  tax  allowances  before 
the tax  reform.  For  these  groups  social  transfers 
are better suited. As a result, these measures are of 
a greater  benefit  for  middle  income  groups  and 
have a limited effect on inequality and the tax cuts 
have  a lower  effect  on  the  first  income  decile 
(Box 3.1.1)  

17 

30%32%34%36%38%40%42%44%46%50%67%100%167%% of average wageLatvia (2016)Latvia (2020)EU (2016) 
 
                                                           
3.1. Public finances and taxation 

Box 3.1.2: Distributional effect of the tax reform 

The  adopted  tax  reform  includes  notable  changes  to  labour  taxation,  reducing  the  overall  tax  burden  on 
labour  and  increasing  progressivity.  The  box  assesses  the  effect  of  the  selected  measures  across  different 
income groups using the EUROMOD simulations (1).  

1. 

A PERSONAL INCOME TAX CUT 

Personal income tax (PIT) rates are differentiated along three income brackets from 2018. The standard PIT 
rate is reduced from 23 % to 20 % for incomes up to 170 % of the average wage. A second tax rate of 23 % 
will be applied to incomes up to almost five times the average wage. For incomes exceeding this threshold, 
the rate is set at 31.4 %. The difference between the second and third bracket corresponds to the employee's 
share  of  the  existing  solidarity  tax,  implying  that  the  effective  marginal  tax  rate  as  of  the  second  bracket 
remains stable for all income groups. All tax payers will benefit from the decrease of the standard rate and 
only part of the incomes of the richest 10 % will remain unaffected (Graph 1a). The changes in the PIT rates 
cost 0.8 % of GDP. Given that 60 % of the benefits go to the 30 % highest incomes, the measure increases 
income inequality. The measure is estimated to lower the poverty rate by 0.4 pp. 

2. 

INCOME-DIFFERENTIATED BASIC ALLOWANCE 

The tax reform increases the maximum income-differentiated basic tax allowance to EUR 3 000 per year by 
2020. Currently the allowance ranges from EUR 1 380 for the lowest incomes to EUR 720 for the highest. 
The reform builds on the earlier plans by increasing generosity towards the lower incomes and by advancing 
implementation  (Graph 1b).  The  increase  in  the  basic  tax  allowance  further  increases  the  degree  of 
progressivity in the personal income tax system. As it represents a larger share of net income for low-income 
earners, it also has a stronger impact on the tax wedge of low incomes than of high incomes.  

The measure comes at a small fiscal cost (0.1 % of GDP) and largely benefits the bottom half of the income 
distribution. The mean annual equivalised disposable income of households is positively impacted (+0.3 %). 
By  contrast,  disposable  income  for  the  top  deciles  is  expected  to  be  negatively  impacted  (Graph 1b),  as 
the current minimum allowance is set to be withdrawn. This measure lowers income inequality (as measured 
by the Gini coefficient) and the relative poverty rate by 0.5 pp. and 0.8 pp., respectively.  

3. 

ALLOWANCE FOR PENSIONERS AND DEPENDANTS 

The tax reform also raises the allowance for pensioners (from EUR 2820 to 3 600 annually) and dependents 
unable to work (from EUR 2 100 to 3 000 annually). The aim is to address child poverty and poverty among 
the elderly. 

The  increase  in  the  allowance  for  dependants  benefits  the  middle-income  groups  relatively  more. 
Households in the first decile of the income distribution are little impacted by the reform. This is linked to 
the fact that a large share of their taxable income is already covered by the allowances before the reform and 
by  the  fact  that  only  11 %  of  households  in  the  first  decile  with  dependent  children  stand  to  benefit  from 
the reform (Pluta and Zasova, 2017). The reach of the measure increases towards the middle income groups, 
which gain the most relative to their disposable incomes. As a result, the measure only has a limited positive 
effect on income inequality, reducing the Gini coefficient by 0.1 pp. 

The  reform  of  the  pensioners'  allowance  has  a  marked  impact  on  income  in  the  second  to  fourth  deciles 
(Graph 1a),  as  those  are  deciles  with  a  large  share  of  pension  incomes.  The  impact  of  the  measure  on 
incomes in the first decile is limited, as already one third of pensions were below the allowance in 2016 and 
this share is set to increase. Nevertheless, the reform has a positive redistributive effect and should markedly 
bring down the risk of poverty rate for single elderly people, albeit to a level that remains more than three 
times as high as for the overall population. 

4. 

HEALTHCARE-RELATED SOCIAL CONTRIBUTION 

18 

 
 
 
 
3.1. Public finances and taxation 

The social contribution and the solidarity tax rates are raised by 1 pp. (shared equally among employers' and 
employees'  contributions),  with  the  ensuing  additional  revenues  earmarked  for  healthcare  financing. 
The additional social contribution rate to finance health should bring in 0.3 % of GDP in fiscal revenues. It 
directly adds to the tax wedge for all employees, but it will weigh on higher incomes slightly more than on 
lower  ones  (Graph 1a),  given  a  lower  share  of  employees  in  the  bottom  half  of  the  income  distribution. 
The impact on poverty and inequality is negligible. 

(1)  Simulations  conducted  by  the  European  Commission’  Joint  Research  Centre  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. 

Taxes on capital are aligned at a 20% rate and 
the  taxation  of  corporate  income  is  deferred 
until the distribution of profits. The nominal tax 
rate  on  corporate  profits  and  dividends  of  23.5 % 
has  been  lowered,  while  the  rates  on  interest  and 
capital  gains  have  been  increased  from  10 %  and 
15 % to 20% from 2018. At the same time, no tax 
is  payable  on  undistributed  profits.  This 
is 
expected  to  carry  a  large  fiscal  cost  in  the  first 
years following implementation (0.6 % of GDP in 
2020,  with  tax-increasing  measures  covering  less 
than  0.1 %  of  GDP,  Graph 3.1.2).  Revenue  is 
expected to start increasing from 2020, but there is 
a risk of a large share of profits being retained due 
to  the  advantages  provided  by  deferred  taxation, 

thus affecting tax revenue over a longer period (12). 
Macroeconomic  and  distributional  effects  of  the 
reform will depend on the business decisions taken 
by  companies,  but  are  expected  to  stimulate 
reducing 
investment.  On 
the effective  tax  rate  for  corporations  benefits 

face  of 

the 

it, 

(12)  The  example  of  Estonia,  which  introduced  a  corporate 
income  tax  payable  only  on  distributed  profits  in  2000, 
shows  that  corporate  income  tax  revenue  dropped  by 
around a half in the first 3 years of the reform, but after that 
revenue-to-GDP  ratio  recovered  to  a level  similar  to  that 
before  the  reform  (Staehr,  2014).  Moreover,  after  the 
reform Estonian companies accumulated more liquid assets 
and relied less on debt financing, while smaller companies 
invested  more.  At  macroeconomic  level  no  immediate 
effects  were  observed  on  labour  productivity  and  GDP 
growth. 

19 

-2%-1%0%1%2%3%4%5%6%7%12345678910% change in eq. disp. income decile of equivalised disposable incomeGraph 1a: Effect of the labour tax measures by decile (2020)Solidarity taxBasic allowanceAllowance for dependentsAllowance for pensionersSocial contributionPersonal income tax reformCombined effect-1.5%-1.0%-0.5%0.0%0.5%1.0%1.5%2.0%2.5%12345678910All% change in eq. disp. income decile of equivalised disposable incomeGraph 1b: Effect of the basic allowance reforms on income distribution (2020)Basic allowance (as adopted in 2015)Basic allowance (as adopted in 2017)Table 1:Old plansCombined effect of the measuresSolidarity tax+1 pp of social contributionBasic allowance adopted in 2017Allowance for pensioners Allowance for dependentsProgressive PIT schemeBasic allowance adopted in 2015Income inequalities (Gini)-0.50.00.0-0.5-0.2-0.10.2-0.3Poverty (AROP)-1.80.00.1-0.8-0.8-0.2-0.4-0.3Government budget-1.1%-0.1%0.3%-0.1%-0.3%-0.2%-0.8%0.0%Households eq. disposable income3.2%0.1%-0.4%0.3%0.8%0.4%2.2%0.0%Tax reform 
 
 
 
 
                                                           
3.1. Public finances and taxation 

the richest most, as the richest 20 % of households 
own around 80 % of financial wealth (Graph 1.6).  

Indirect tax revenue is set to expand due to rate 
increases  and  stricter  administration.  Excise 
duties  on  fuel,  alcohol,  tobacco  and  gambling  are 
planned  to  be  increased  and  stricter  requirements 
under the VAT system are expected to improve tax 
compliance. These include a reduction of the VAT 
registration  threshold  for  companies  from  EUR 
50 000 to EUR 40 000 and a requirement to report 
VAT transactions in greater detail.  

the  same 

level.  This  is  beneficial  for  local  authorities  as 
the equalisation  fund  adjusts  only  for  divergences 
in property taxation, while the role of income tax is 
not  considered (13).  At 
time,  such 
practices  erode  the  overall  revenue  of  local 
authorities.  While  socially-motivated  tax  rebates 
exist,  those  are  linked  to  property  values  and 
benefit  more  to  valuable  property  owners.  The 
option to use tax deferrals for vulnerable groups is 
not used by the local authorities. This option suits 
the needs of asset-rich but income-poor households 
better and ensures uniform treatment of properties. 

Recurrent  property  taxation  remains 
low. 
Recurrent  tax  on  property  accounts  for  0.9 %  of 
GDP  in  Latvia,  as  compared  to  1.6 %  of  GDP  in 
the EU on average. Increasing taxation of property 
is  one  of  the  suggested  revenue  sources  for 
reducing  the  high  tax  wedge  on  low  wages  for 
Latvia,  given  its  limited  impact  on  economic 
growth  (European  Commission,  2015).  Moreover, 
much of the property wealth is concentrated in the 
higher  income  groups  which  would  lead  to  a 
progressive  distribution  of 
tax  burden 
(Household  Finance  and  Consumption  Survey, 
2017).  

the 

taxation 

two  year 

Property 
is  becoming  gradually 
detached  from  market  values.  By  design, 
the property  values  used  for  property  tax  should 
follow  market  values  with  a 
lag. 
The successive  postponement  of 
reassessing 
cadastral values amounts to a freeze at 2012/2013 
property  prices.  The  most  recent  update  planned 
for  2018  has  been  postponed  for  2 years.  This 
sends  undesirable  signals  to  the  property  market, 
encouraging  speculative  behaviour  and  price 
increases. It also accounts for some 0.1 % of GDP 
in 
to 
the lower  valuations  used  for  taxes.  Moreover, 
inconsistencies  in  the  value  of  similar  properties 
persist  due  to  underreporting  of  the  value  upon 
registration and misidentifying the type of property 
usage  (different  property 
taxed  at 
different rates). These issues serve as a pretext for 
postponing  the  update  of  cadastral  values  until 
a new methodology is devised by 2020. 

(Graph 3.1.2),  due 

types  are 

revenues 

foregone 

Uniform application of property tax is distorted 
by  practices  at  local  government  level.  Some 
local  authorities  provide  property  tax  rebates 
which  are  more  than  compensated  by  income  tax 
revenue,  leading  to  tax  competition  at  the  local 

(pp.) 

lower 

Although the shadow economy is shrinking, it is 
estimated  to  be  larger  than  in  the  other  Baltic 
countries.  The  shadow  economy  in  Latvia  was 
estimated  at  20%  of  GDP  in  2016,  1 percentage 
point 
in  2015,  but  still 
than 
approximately  5 pps.  higher  than  in  Estonia  and 
Lithuania.  The  level  of  envelope  wages  is  similar 
in  all  three  Baltic  countries,  while  unreported 
business  income  in  Latvia  (42%  of  the  shadow 
economy)  explains  the  difference  with  the  peers. 
The  shadow  economy 
to  be 
the highest  in  the  construction  industry  (40 %), 
followed  by 
industry  (25 %),  and 
the share  of  envelope  wages  in  total  wages  are 
estimated  at  18 %  in  2016  (Sauka  &  Putnins, 
2017).  The  high  share  for  the  shadow  economy 
poses  a challenge  for  tax  collection  and  business 
environment. However, improving tax compliance 
takes  time,  as  it  involves  a  change  in  culture 
together with an attuned policy design. 

is  estimated 

the  retail 

A  variety  of  measures  are  being  taken  to 
improve  tax  compliance.  The  tax  administration 
aims  to  improve  the  culture  of  tax  compliance, 
through  a more  co-operative  approach  at  sectoral 
level  and  with  individual  tax  payers.  Moreover, 
public  pressure  for  tax  compliance  is  expected  to 
be generated by the public disclosure of employers 
paying  salaries  lower  than  the  minimal  wage  and 
of  those  being  late  with  tax  returns  from  2018 
onwards.  At  the  same  time,  an  increasingly 
detailed  electronic  tax  record  will  enable  the  tax 
administration to perform its task more efficiently. 
Despite a strengthening of the capacity of the State 
Revenue Service and the state police, lengthy court 

(13)  The  equalisation  fund  adjusts  for  some  disparities  in 
income level among the local authorities through transfers 
from more affluent to poorer areas. 

20 

 
                                                           
3.1. Public finances and taxation 

2020-2060  period.  Despite  these  reforms,  the 
adequacy  of  current  social  policy  and  healthcare 
expenditure 
further 
in  Sections 3.3.2 
strengthened,  as  discussed 
and 3.3.3.  

potentially 

could 

be 

procedures and mild sentences continue to impede 
the fight against tax crime. 

limits 

It  also 

The  micro-enterprise  tax  regime  poorly  serves 
its  purpose,  being  used  as  a  tax  optimisation 
tool  for  a  wider  set  of  business  than  intended. 
The  micro-enterprise  tax  regime  is  intended  to 
support  start-ups  and  sectors  with  low  wages.  In 
recent  years,  however,  it  has  been  used  as  a  tax 
optimisation  tool  by  companies  operating  under 
the general tax regime (Ministry of Welfare, 2016; 
World  Bank,  2016). 
social 
contributions  and  social  protection  for  a  large 
share of the workforce. The tax administration has 
been  unable  to  eradicate  abuse  due  to  issues  over 
the burden of proof and administrative costs. From 
2018, the maximum annual turnover for the micro-
enterprise  tax  regime  has  been  decreased  from 
EUR 100 000  to  EUR 40 000,  with  the  aim  of 
shifting  companies  to  the  general  tax  regime. 
Nevertheless, the micro-enterprise tax regime with 
an effective tax wedge of 15 % to 27 % (depending 
on  turnover  and  deductible  expenditure),  will 
continue to be more attractive than the general tax 
regime.  

3.1.4.  LONG-TERM FISCAL SUSTAINABILITY 

Due  to  low  spending  levels,  health  care,  long-
term care and pension expenditure do not pose 
a threat to long-term fiscal sustainability, based 
on  the  current  policies.  Despite  an  ageing 
population  and  rising  dependency  ratios,  Latvia 
scores  well  for  the  long-term  sustainability  of 
public  finances  according  to  the  Ageing  Report 
2018  projections.  Public  pension 
spending 
is projected to decline from 7.4 % of GDP in 2016 
to [4.7% of GDP] in 2070 — among the lowest in 
the  EU.  Almost  all  this  decline  will  be  offset  by 
rising  mandatory  private 
individual  pensions, 
leading  to  total  pension  expenditure  remaining 
broadly  unchanged  as  a  share  of  GDP  by  2070. 
Moreover,  a  number  of  recent  changes  to  the 
public pension and welfare system have somewhat 
increased  in  generosity,  including  changes  in 
pension 
in 
minimum survivor pensions and broader eligibility 
criteria for the non-contributory minimum pension. 
These  reforms  are  reflected  in  the  fact that public 
pension  expenditure  in  the  latest  Ageing  Report 
2018 projections are consistently higher than in the 
previous  Ageing  Report  2015  projections  for  the 

indexation  mechanism, 

increases 

21 

 
3.2.  FINANCIAL SECTOR 

3.2.1.  CREDIT DEVELOPMENTS 

is 

to 

Despite recently turning positive, credit growth 
in  Latvia  remains  subdued  as  both  businesses 
and households continued to decrease their debt 
levels.  Credit growth  returned  at  the  end  of  2016. 
However, its growth rate remains below that of the 
other  Baltic  countries  and  remains  only  barely 
positive  (see  Graph  3.2.1).  This 
largely 
attributed 
the  banks'  higher  cautiousness 
towards  Latvia  as  the  financial  losses  during  the 
crisis were much higher in Latvia than in the other 
Baltics.  The  abuse  of  the  insolvency  process  (see 
section  3.6.3)  which  also  caused  considerable 
losses  to  the  banks,  has  also  been  cited  as  one  of 
the reasons for banks perception of higher country-
specific risk in the case of Latvia.  The prolonged 
weak  credit  growth  has  resulted  in  a  substantial 
decrease  in  total  private  sector  debt,  which  has 
decreased  from  above  130%  of  GDP  in  2010  to 
below 90% of GDP in 2016. On the one hand, this 
has led to a decrease in financial risks, on the other 
hand  it  has  been  among  the  main  reasons  for  the 
low investment. 

housing  market  and  the  housing  construction, 
which  in  Latvia  has  been  significantly  lower  than 
in  the  other  Baltic  countries.  So  far,  the  house 
price  developments  have  been  in  line  with  the 
domestic  growth  drivers,  in  particular  income 
growth. The house required 8% and well above the 
EU  average  of  18.5%.  The  loan-to-deposit  ratio 
remains  stable  at  109%.  Some  foreign-owned 
banks still hold substantial liabilities to their parent 
banks. In this respect, a potential downturn on the 
Swedish  housing  market  is  recognised  as  an 
external risk. The country is still suffering from the 
loss of confidence due to the financial crisis. As a 
result,  both  the  demand  and  supply  for  loans  are 
still  negatively  affected.  Another  legacy  from  the 
crisis is the relatively high level of non-performing 
loans:  10.9%  for  firms  and  7.1%  for  households. 
This  is  above  the  EU  averages  of  9%  and  4.4%, 
respectively.  In  this  regard,  a  well-functioning 
insolvency  process  is  particularly  important  (see 
section  3.6.3).  The  total  share  of  NPLs,  however, 
has decreased considerably since peaking at above 
13% in 2010. At the same time, the coverage ratio 
is 34.8%, below the EU average of 44.4%. 

Graph 3.2.1:  Private sector credit growth 

Table 3.2.1: 

Financial soundness indicators 

Source: European Central bank 

3.2.3.  ACCESS TO FINANCE 

Access to finance for SMEs is improving. Latvia 
has  been  very  active  in  improving  the  access  to 
finance  for  SMEs  over  the  last  years.  A  range  of 
financial  instruments  for  SMEs  have  been  made 
available,  including  mainly  public  loans,  public 
guarantees  and  microfinance  measures.  The 
measures are provided either directly by the Single 
Financial  Development 
Institution  Altum,  or 
indirectly through intermediary commercial banks. 
Starting  in  2017,  Altum's  development  of  full 
operational  capacity  should  further  contribute  to 
enhancing  access  to  finance  for  SMEs.  Local 
stakeholders  suggested  that  Altum  could  expand 
the  scope  of  its  support.  Moreover,  the  Latvian 

Source: European central bank 

3.2.2.  FINANCIAL STABILITY 

The  financial  sector  is performing  well overall, 
with  no  immediate  concerns  about  financial 
stability.  The  average  capital  adequacy  ratio  is 
20.5%  (Table  3.2.1),  which  is  well  above  the 
recovery (Graph 1.7) suppressed the activity in the 

22 

-12-8-404812Nov-14Jan-15Mar-15May-15Jul-15Sep-15Nov-15Jan-16Mar-16May-16Jul-16Sep-16Nov-16Jan-17Mar-17May-17Jul-17Sep-17Nov-17LTLVEEy-o-y %y-o-y %(%)20132014201520162017Q2Non-performing debt5.67.75.15.25.0Non-performing loans-9.76.56.35.9Non-performing loans NFC-12.011.111.110.9Non-performing loans HH-12.310.47.97.1Coverage ratio79.339.937.735.334.8Loan to deposit ratio*132.3119.4109.3107.8109.0Tier 1 ratio16.517.519.017.317.6Capital adequacy ratio18.020.221.820.420.5Return on equity**8.810.210.714.3-Return on assets**0.91.01.21.5-*ECB aggregated balance sheet: loans excl to gov and MFI / deposits excl from gov and MFI**For comparability only annual values are presented 
 
 
 
 
 
3.2. Financial sector 

amendment on investment-saving accounts, aiming 
to attract retail investors to the capital market and 
prepared a draft law on crowdfunding platforms, to 
provide a legal framework for development of this 
market segment. A review of specific obstacles to 
capital market development in the commercial law 
is  planned.  In  November  2017,  the  Ministers  of 
Finance from Latvia, Estonia and Lithuania signed 
a  Memorandum  of  Understanding  on  cooperation 
for  regional  capital  market  in  the  Baltics.  The 
objective is to create common asset classes, market 
infrastructures  and  index  labels.  Some  relevant 
support  projects  are  already  ongoing  with  support 
from the Commission and the EBRD, including the 
development  of  a  legal  and  regulatory  framework 
for  covered  bonds,  securitisation  and  derivatives, 
as well as projects to raise the profile of the equity 
market and promote SME listing.  

3.2.4.  ANTI-MONEY LAUNDERING 

Anti-money  laundering  reforms  are  broadly 
implemented;  continued  efforts  would  be 
needed  to  achieve  sustainable  improvement. 
Following  the  financial  fraud  cases  revealed  in 
2015  and  the  ensuing  efforts  to  tighten  the 
regulation and supervision, the key amendments to 
the  financial  fraud prevention framework  are  now 
in  place.  Strengthening  of  the  FCMC Compliance 
Department  in  terms  of  staff,  data  processing  and 
operating 
progressing.  The 
Association  of  Latvian  Commercial  Banks  issued 
summaries  of 
anti-money 
enhancement 
laundering compliance for all its member banks. It 
urged 
the  Compliance 
Departments  of  banks  to  obtain  international 
(Association  of 
from  ACAMS 
certification 
Certified Anti-Money Laundering Specialists). 

employees  of 

procedures 

the 

in 

is 

Banks  whose  primary  business  is  serving  non-
residents  are  subject  to  higher  solvency  and 
liquidity  requirements.  Due  to  tightening  anti-
money  laundering  supervision,  in  last  two  years 
they  have  lost  about  20  000  depositors,  including 
the  most  risky  clients.  Some  of  the  banks  have 
been strongly hit by high sanctions (increased from 
the maximum 10% of the company's profit to 10% 
of the turnover). In general, the non-resident banks 
see their assets and profit margins shrinking. Many 
look  out  for  a  new  business  model,  however,  this 

authorities  are  also  actively  promoting  other 
alternative  sources  of  financing,  such  as  crowd 
investing. 

Graph 3.2.2:  Funding of non-financial corporations 

(1) Data on venture capital not available 
Source: European Central bank 

to  help  young  and 

Latvia  has  seen  a  steady  increase  in  venture 
capital  investment.  The  development  of  Latvia’s 
venture capital market is actively promoted by the 
government  and  a  number  of  venture  capital,  pre-
seed and seed capital funds have been established 
innovative 
since  2010, 
businesses  throughout  the  different  stages  of 
growth. In 2017, additional financial products have 
been launched, including three acceleration funds; 
in  2018,  additional  risk  capital  funds, 
and 
including  three  acceleration  funds,  will  start  their 
operations.  Compared  with  2010,  Latvia  has  the 
third  highest  increase  in  venture  capital  in  the 
European  Innovation  Scoreboard.  In  absolute 
terms,  however,  such  investments  still  remain 
relatively  small  and  largely  dependent  on  support 
from EU funds. 

this 

address 

challenge, 

Both  equity  and  debt  markets  in  Latvia  lag 
behind  the  EU  levels  in  terms  of  depth  and 
liquidity.  To 
the 
government  is  implementing  the  Financial  Sector 
Development  Plan  for  2017-2019  (adopted  in 
March 2017). In 2017, the government revised the 
legal  framework  for  public  pension  funds  to 
provide  them  with  incentives  for  investment  in 
local venture capital funds. Adjusted tax incentives 
were  introduced  for  saving  in  private  pension 
an 
funds.  The  government 

adopted 

also 

23 

0.0000.0050.0100.0150.0200.0250.0300102030405060Listed shares;2016Debt securities;2016MFI loans; 2016Gross operatingsurplus:corporations;2016Venture capital(rhs); 2015LVEU% of GDP 
 
3.2. Financial sector 

will also help improve the reputation of the whole 
financial sector14. 

3.2.5.  HOUSE PRICES 

Recent  house  price 
inflation  has  been 
accompanied  by  stagnant  mortgage  credit 
growth. House prices in Latvia increased by above 
9% in the first three quarters of 2017, showing an 
upturn  following  a  prolonged  period  of  moderate 
growth  after  the  burst  of  the  housing  bubble  in 
2008  (Graph  1.8).  Initial  household  deleveraging 
and  slow  credit  prices  to  income  ratio  (Graph 
3.2.1)  is  still  below  the  historical  average (15), 
suggesting no sign of overheating, at the moment. 
issues 
There  are,  however,  some  structural 
affecting  the  housing  supply.  Firstly,  the planning 
and  building  permit  approval  process  in  Riga  is 
particularly long (16) which increases the lead time 
for  market  reactions  to  prices.  Secondly,  current 
rental  regulations  discourage  investment  in  rental 
housing.  

resolution, 

(OECD  survey  of  Latvia,  2017).  Only  20%  of 
households  rent  their  home,  which  is  low  relative 
to  other  Member  States,  moreover  more  than  half 
of the tenants pay rents that are considerably below 
the  market  price  for  their  dwellings,  a  legacy  of 
Soviet-era  rental  agreements (17).  Moreover,  the 
current regulation does not foresee an out-of-court 
rental  dispute 
thus 
dispute 
resolution  is  time  consuming  and  costly.  This 
impedes  an  effective  functioning  of  the  rental 
market and has resulted in underinvestment in both 
existing and new housing. The government is now 
drafting  a  new  rental  law  with  the  aim  to  shorten 
the dispute resolution times, to boost investment in 
rental housing and to improve tax collection from 
rental  income.  It  is  important,  however,  that  a 
balanced  view  of  the  interests  of  landlords  and 
tenants is maintained. 

the 

Graph 3.2.3:  House price benchmarks 

for 

Demand 

housing. 

The  government  is  drafting  a  new  rental  law 
with  a  view  to  stimulate  more  investment  in 
rental 
quality 
accommodation  in  urban  areas  with  better  job 
opportunities,  notably  in  Riga,  is  reflected  by  the 
overcrowded housing and a shortage of adequately 
priced  rental  accommodation.  This 
to 
problems of access to quality housing and housing 
exclusion  (see  Section  3.3.2.).  The  small  rental 
market has contributed to reduced labour mobility 

leads 

(14)  See  more  on  specific  risks  of  the  non-resident  banking 

model in Country Report Latvia 2017. 

(15)  Given  the  huge  housing  bubble  that  Latvia  had,  historical 
average  may  not  be  a  good  benchmark.  Nevertheless, 
current  price-to-income  ratio  is  even  below  the  levels 
following the bursting of the bubble. 

(16)  The  average  time  it  takes  to  approve  a  building  permit  in 
Riga  is  2  years  compared  to  3  months  in  the  surrounding 
municipalities. 

(1) Overall valuation gap takes the average of a model 
based and historical averages-based gap assessments. 
Source: European Commission 

(17)  Typically  these  are  low-prices  agreements  without  a  fixed 
term, which can be 'inherited' by the tenants' relatives.  

24 

-60-40-20020406080200020022004200620082010201220142016Overall valuation gapPrice to income vs. hist. avg.Price to rent vs. hist. avg. 
                                                           
 
                                                           
3.2. Financial sector 

Box 3.2.3: Policy highlights: Altum – single development financing institution 

Latvia 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  2010,  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. In September 2017 
Altum has signed COSME agreement with EIF to improve access to finance in form of guarantees. 

25 

 
3.3.  LABOUR MARKET, EDUCATION AND SOCIAL POLICIES 

The  emigration  of  skilled 
labour  remains 
a challenge. Between 2009 and 2016, the outflow 
of people with higher education accounted for 40% 
of  net  outward  migration.  This  is  equivalent  to 
the  high-educated  working-age 
17.4 %  of 
population 
(European  Centre  of 
Expertise, 2018). A shortage of qualified labour to 
some extent caused by emigration is perceived as a 
serious challenge for Latvia’s competitiveness and 
economic growth in the long run. 

in  Latvia 

Graph 3.3.2:  Job vacancies and labour shortage indicators 

3.3.1.  LABOUR MARKET 

to 

led 

growth 

Labour  market  conditions  have  improved  on 
the  back  of  economic  growth,  but  the  social 
protection  system  remains  weak.  Stronger 
economic 
increasing 
has 
employment  opportunities  for  both  men  and 
women,  decreasing  unemployment  and  increasing 
wages  and  disposable  household  income.  Latvia 
has  a  low  gender  employment  gap  and  increasing 
gross  household  disposable  income  per  capita. 
However,  despite  recent  improvements,  social 
safety  nets  in  Latvia  are  still  not  effective  at 
reducing  high 
inequality,  poverty  and  social 
exclusion.  Moreover,  low  participation  in  active 
labour market policies, also by the young, may be 
hindering  access  to  the  labour  market  and  equal 
opportunities for all.  

Graph 3.3.1:  Employment by sector, year-on-year changes 

Note: Vacancies/full-time equivalents (FTEs) and 
vacancies/unemployed refer to the ratio of vacancies 
registered at the State Employment Agency to registered 
employment (in full-time units) and unemployment, 
respectively.  
Vacancies/jobs refer to the standard enterprise survey-
based job vacancy rate.  
Labour shortage is measured as a percentage of firms 
reporting labour shortage as a factor limiting production 
(annual average of seasonally adjusted quarterly data). 
Source: European Commission (Eurostat, Economic 
Sentiment Indicator) 

limiting  production 

Recent data point to labour shortages, albeit to 
a  lower  extent  than  before  the  crisis.  Labour 
shortages  as  a  factor 
in 
industry  and  construction  increased  to  16 %  and 
13 % respectively in 2017, but remain well below 
the  2007  peak  (Graph 3.3.2).  The  number  of 
registered  vacancies  also  increased  in  2017,  but 
stayed well below the pre-crisis levels. The survey-
based  ratio  of  vacancies  to  jobs  in  2017  reached 
the level of 2008, but remained lower than the EU 
average and well below that observed in the main 
destination  countries  of  Latvian  emigrants.  More 
than 80 % of vacancies were registered in the Riga 

Source: European Commission (Eurostat) 

The labour  force is set to decrease on the back 
of  a  shrinking  working-age  population.  While 
the employment rate (75.2 % in Q3-2017) is 3 pps. 
above  the  EU  average  and  continues  to  grow, 
the working-age population is declining quickly, as 
a  result  of  negative  natural  growth  and  net 
emigration.  This  in  combination  of  a  temporary 
lower  economic  growth  led  to  the  decreasing 
number  of  people  employed  in  2016  (Section 1). 
As  a  stronger  economic  growth  resumed  in  2017, 
employment picked up in Q3-2017, in particular in 
construction and public sector (Graph 3.3.1).  

26 

-30-20-10010203040502013Q12013Q22013Q32013Q42014Q12014Q22014Q32014Q42015Q12015Q22015Q32015Q42016Q12016Q22016Q32016Q42017Q12017Q22017Q3thousand peoplePublic sectorNon-tradable servicesTradable servicesConstructionIndustryAgricultureTotal0%10%20%30%40%50%60%0.0%0.5%1.0%1.5%2.0%2.5%vacancies / FTE (lhs)vacancies / jobs (lhs)vacancies / unemployedlabour shortage in industrylabour shortage in construction 
 
 
 
3.3. Labour market, education and social policies 

sectors. Around 36 000 adults are expected to take 
part  in  training  financed  through  this  project,  of 
which  13 000  are  expected  to  be  low-qualified 
adults.  The  training  will  be  provided  mostly  at 
VET schools. 

Youth  unemployment  has  declined  as  labour 
demand picked up. The youth unemployment rate 
and  the  rate  of  young  people  not  in  employment, 
education  or  training  (NEET)  increased  in  2016. 
Limited  outreach  has  resulted  in  a relatively  low 
number  of  young  people  registered  in  the  Youth 
Guarantee  scheme (19),  despite  some  progress 
since  the  launch  of  the  scheme  in  2014.  The 
economic upturn of 2017 led to a decrease in youth 
unemployment rate (by 1 pp.) to 16.2%.  

Employment  opportunities  vary  significant 
from  region  to  region.  The  dispersion  of 
employment  rates  among  ethnic  groups  and 
regions are larger than before the crisis (European 
Centre  of  Expertise,  2018),  suggesting 
that 
a substantial  amount  of  labour  is  not  utilised. 
According  to  national  data,  the  lowest  registered 
unemployment rate (4.3 % in the Riga region) was 
less  than  one  third  of  the  highest  regional  rate 
(15.8 %  in  the Latgale  region)  in December  2017. 
Moreover, 54 % of the unemployed in Latgale had 
been  without  a  job for  more than  a  year, while in 
Riga  this  figure  was  only  10 %.  This  reflects  on 
bringing 
the 
long-term 
unemployed  back 
labour  market  and 
the 
regional labour mobility problems, exacerbated by 
the 
rental 
supply 
accommodation in the cities (Section 4). 

affordable 

difficulty 

limited 

the 

of 

to 

in 

(19)  OJ C 120, 26.4.2013 

region  where  also  70  %  of  existing  jobs  are 
located. 

Unemployment is strongly linked to the level of 
skills. The variation in labour market outcomes by 
education  level  is  somewhat  wider  in  Latvia  than 
in  many 
(European 
Commission,  2017b).  In  2016,  unemployment 
among the low-educated was 20.6 % (EU average: 
16.1 %), while it remained limited to 4.3 % among 
the highly educated (EU average: 5.1 %). 

other  EU 

countries 

Older  workers  have  a  lower  employment  rate, 
but  few  seek  to  change  careers  or  update  their 
skills. The employment rate of older workers (55-
64)  is  growing.  However,  they  earn  less  than 
younger  workers  and  face  depreciation  of  their 
skills.  Adult  participation  in  learning,  although 
increasing (7.3 % in 2016), remains below the EU 
average  of  10.8 %  and  significantly  below 
the national  target  of  15 %  for  2020.  Moreover, 
only  4 %  of  older  workers  participated  in  adult 
learning  in  2016  (the  EU  average  is  6.1 %). 
Latvia’s  2016-2020  adult  education  governance 
model  implementation  plan  aims  to  be  more 
to  reduce 
targeted 
fragmentation  of 
In 
the context  of  the  Upskilling  Pathways  Council 
Recommendation (18),  an  EU-funded  programme 
for  employed  adults  was  started  in  2017  with 
special focus on workers in high-risk groups, such 
as  those  over  45  or  the  low-skilled.  In  2017, 
sectors 
training 
(construction,  ICT,  metalwork  and  woodwork), 
which  were  identified  together  with  the  social 
partners  through  the  sectoral  expert  councils  and 
are  set  to  expand  in  2018  to  eight  additional 

towards  skill  needs  and 

training  programmes. 

priority 

started 

four 

in 

(18)  OJ C 484/01, 24.12.2016. 

27 

 
                                                           
                                                           
3.3. Labour market, education and social policies 

Box 3.3.1: 

Monitoring performance in light of the European Pillar of Social Rights 

The  European  Pillar  of  Social  Rights,  proclaimed  on  17  November  2017  by the European  Parliament,  the 
Council  and  the  European  Commission,  sets  out  20  principles  and  rights  to  benefit  citizens  in  the  EU.  In 
light of the legacy of the crisis and changes in our societies driven by population ageing, digitalisation and 
new ways of working, the Pillar serves as a compass for a renewed process of convergence towards better 
working and living conditions.  

Latvia  faces  challenges  with  regard  to  a 
number of indicators of the Social Scoreboard1 
supporting  the  European  Pillar  of  Social 
Rights.  Income  inequality  is  high.  Although 
the risk  of  poverty  or  social  exclusion  has  been 
decreasing,  it  still  remains  high,  especially  for 
people  with  disabilities  and  the  elderly.  Self-
reported  unmet  needs  for  medical  care  are  also 
elevated. On the positive side, gender employment 
gap is low and gross disposable household income 
per capita is increasing. 

the 

Pensions  do  not  effectively  protect  against 
poverty  in  Latvia.  In  2017,  43.9%  of  people 
above the age of 65 faced risks of poverty or social 
exclusion.  Moreover, 
trend  has  been 
continuously  deteriorating  for  the  past  6 years, 
resulting 
increase.  Poverty 
particularly  affects  women,  which  can  partly  be 
explained  by 
life  expectancy. 
The absence  of  survivor  pension  for  spouses  also 
contributes to this situation. 

in  nearly  11 pps. 

longer 

their 

The  gender  employment  gap  is  relatively  low. 
The  overall  difference  between  the  cumulated 
earnings of all men and all women is 28.8 %. This 
is not only due to the low gender employment gap, 
but  mainly  because  of  a  relatively  low  share  of 
women employed part-time in Latvia. Very high tertiary educational attainment of women and relatively low 
fiscal disincentives for second earners also contribute to low employment and earnings gaps.  

1   The  Social  Scoreboard  includes  14  headline  indicators,  of  which  12  are  currently  used  to  compare  Member  States 
performance.  The  indicators  "participants  in  active  labour  market  policies  per  100  persons  wanting  to  work"  and 
"compensation  of  employees  per  hour  worked  (in  EUR)"  are  not  used  due  to  technical  concerns  by  Member  States. 
Possible alternatives will be discussed in the relevant Committees. GDHI: gross disposable household income. 

Active 
labour  market  policies  are  being 
upgraded  with  EU  funds  but  participation 
remains  low.  In  2016,  involvement  in  active 
labour  market  policies  (ALMPs)  stood  at  5.8 
participants  per  100  people  wanting  to  work  (on 
average,  at  any  given  moment).  Nevertheless,  all 
registered  unemployed  people  undergo  profiling 
and  have  job  integration  agreements.  In  2017, 
ALMPs 
funding  and 
increase 
an expansion  of  support  measures  for  the  long-

saw  an 

in 

unemployed 

disadvantaged 

long-term  unemployed  with 

term 
as 
implementation  of  EU-funded  projects  picked-up 
pace.  Almost  one  third  (29.3 %  in  2016)  of  the 
registered 
job 
integration  agreements 
regained  employment, 
more  than  double  the  EU  average.  Mobility 
support  (transport  and  rent  costs  subsidy)  for 
moving  to  work  in  Riga  is  expected  to  be  made 
available,  facilitating  the  regional  mobility  of  the 
unemployed.  So  far,  local  authorities  in  the  rural 

28 

Early leavers from education and training (% of population aged 18-24)On averageGender employment gapBest performersIncome quintile ratio (S80/S20)To watchAt risk of poverty or social exclusion (in %)Weak but improvingYouth NEET (% of total population aged 15-24)To watchEmployment rate (% population aged 20-64)On averageUnemployment rate (% population aged 15-74)On averageGDHI per capita growth Better than averageImpact of social transfers (other than pensions) on poverty reductionWeak but improvingChildren aged less than 3 years in formal childcareOn averageSelf-reported unmet need for medical care Weak but improvingIndividuals' level of digital skillsTo watchSocial protection and inclusionDynamic labour markets and fair working conditionsEqual opportunities and access to the labour marketLATVIAMembersStatesareclassifiedaccordingtoastatisticalmethodologyagreedwiththe EMCO and SPC Committees. The methodology looks jointly at levels and changes oftheindicatorsincomparisonwiththerespectiveEUaveragesandclassifiesMemberStatesinsevencategories(from"bestperformers"to"criticalsituations").Forinstance,acountrycanbeflaggedas"betterthanaverage"iftheleveloftheindicatorisclosetoEUaverage,butitisimprovingfast.Formethodologicaldetails,please consult the draft Joint Employment Report 2018, COM (2017) 674 final.NEET:neitherinemploymentnorineducationortraining;GDHI:grossdisposablehousehold income. 
 
3.3. Labour market, education and social policies 

it  remains  above 

poverty  or  social  exclusion  has  been  steadily 
reducing, 
the  EU  average 
(Section 1).  Looking  ahead,  the tax  reform  is 
expected  to  only  have  a  limited  effect  on  the 
reduction of inequality and poverty (Box 3.1.1). 

social 

transfers, 

Low  adequacy  of  benefits  contributes  to  high 
poverty  and  inequality.  Latvia  spends  little  on 
social protection as a percentage of GDP compared 
to  other  EU  Member  States.  In  spite  of  a  recent 
improvement, 
including 
the minimum income scheme, are among the least 
effective in reducing poverty in the EU (20). From 
2018,  the  guaranteed  minimum  income  tops  up 
income to EUR 53 (some municipalities voluntary 
provide  higher  benefits),  while  the  at-risk-of-
poverty  threshold  reached  EUR  330  per  month  in 
2016.  The  coverage  of  guaranteed  minimum 
income  decreased  by  more  than  50  %  between 
2013  and  2016,  from  64 408  to  27 769  persons. 
According  to  the  Ministry of Welfare,  the modest 
increase 
the  adequacy  of  benefits  would 
increase the coverage to 29 553 recipients in 2018. 
The  concept  paper  adopted  in  2014  envisaging  a 
significant  increase  in  benefit  adequacy  has  not 
been  implemented,  and  the  most  recent  plan  to 
improve  the  minimum  income  support  system  for 
2018-2020  has  not  been  adopted  by 
the 
in  March  2017).  As 
Government  (submitted 
concerns  unemployment  benefits,  Latvia  ranks 
close  to  EU  average  for  indicators  related  to 
adequacy  and  coverage,  while  maximum  duration 
(for  a  1-year  work  record)  is  comparatively 
high (21). 

in 

The  social  protection  system  provides  partial 
coverage  for  the  self-employed.  Some  8 %  of 
self-employed  without 
Latvian  workers  are 
employees,  which  is  below  the  EU  average  of 
10 %.  However,  these  workers  cannot  opt-in  to 
the statutory  unemployment  assistance  regime.  As 
a  result,  the  proportion  of  Latvian  self-employed 
with  social  protection  coverage  is  lower  than  the 
EU  average.  Moreover,  following  the  healthcare 
reform,  seasonal  agricultural  workers,  people 
employed  under  the  micro-enterprise  tax  regime, 

(20)  In  2017,  social  transfers  (excluding  pensions)  reduced 
the risk of poverty rate by 21.9 % in Latvia vs. 33.7 % on 
average in the EU (2016). 

(21)  According  to  the  benchmarking  exercise  in  the  area  of 
unemployment  benefits  and  active  labour  market  policies 
conducted  within  the  EMCO  Committee.  See  the  draft 
Joint Employment Report 2018 for details. 

areas  have  blocked  this  option,  given  the  greater 
job opportunities in Riga and declining population 
in the rural areas. 

An  increase  in  the  minimum  wage  affects 
a large  share  of  population,  in  particular  in 
rural areas. In 2017, the national minimum wage 
of  around  42 %  of  the  average  wage  was  in  line 
with the EU average ratio. One fifth of employees 
received  the  minimum  wage  or  lower;  this  share 
stood at one-third in the region of Latgale. In 2018, 
the minimum wage has been increased by 13 % to 
EUR 430, somewhat exceeding the projected wage 
growth of around 9 % in the economy as a whole. 
While  this  increase  broadly  corresponds  to  wage 
developments  in  general,  it  may  affect  access  to 
employment in less developed regions. 

the  Government, 

The  institutional  set-up  for  tripartite  social 
dialogue  is  adequate,  but  there  is  scope  to 
improve  its  quality.  The  National  Tripartite 
Cooperation  Council 
(NTSP),  which  brings 
together  employers'  organisations,  trade  unions 
and 
taxation, 
education  and  healthcare  reforms  in  2017,  and 
social  partners 
involvement 
satisfactory.  However,  social  partners  note  that 
social  dialogue  can  be  further  enhanced  by 
ensuring  their  timely  involvement  in  the  dialogue 
and by further expanding their capacity. 

focused  on 

consider 

their 

Limitations in social partners’ capacity hamper 
social  dialogue.  The  capacity  of  social  partners 
and  bipartite  social  dialogue  is  currently  being 
strengthened  under 
the  EU-funded  project, 
although  low  membership  remains  an  issue.  In 
2014,  just  10.9 %  of  workers  were  organised  in 
trade union, which is among the lowest in the EU. 
Trade  union  membership  is  concentrated  in  the 
public  sector,  but  it  is  low  in  the  private  sector. 
Members  of  the employers'  organisation  employ 
30 %  of  all  workers  (Eurofound,  2015),  with 
smaller companies being weakly represented.  

3.3.2.  SOCIAL POLICIES 

Despite  recent  improvement,  high  levels  of 
poverty and income inequality remain a serious 
challenge. In 2017, the income of the richest 20 % 
of  the  population  was  6.3 times  higher  than 
the poorest 20 %. It is still one of the highest in the 
EU.  While  the  proportion  of  people  at  risk  of 

29 

 
                                                           
3.3. Labour market, education and social policies 

Graph 3.3.3:  At-risk-of-poverty or social exclusion rate by 

age groups 

Source: European Commission (Eurostat) 

Social protection for persons with disabilities is 
very  weak.  While  the  employment  and  activity 
rates  for  persons  with  disabilities  in  Latvia  are 
higher than the EU average, their poverty or social 
exclusion  rate  is  among  the  highest  in  the  EU  at 
38.9 %  (EU  SILC  2016).  Also,  the  difference  in 
poverty  rates  between  people  with  and  without 
disabilities is higher than the EU (20.1 pps. vs. the 
EU  average  of  10.1 pps.).  In  addition,  Latvia  has 
one of the largest tertiary education attainment gap 
between people with and without disabilities in the 
EU  (20 pps.  vs.  the  EU  average  of  13.7 pps.  in 
2015  -  EU  SILC  2016),  indicating  inequalities  of 
opportunity. 

The  coverage  for  children  under  the  age  of 
three in childcare facilities is lower than the EU 
average. This is linked to the long parental leave, 
which  is  paid  until  the  child  is  18  months  old.  In 
2016, 28.3 % of all 0-3 year olds were enrolled in 
formal  childcare  (EU  SILC),  which  is  below 
the Barcelona  targets  of  33 %  and  below  the  EU 
average  of  32.9 %.  Due  to  the  limited  number  of 
places  in  municipality  kindergartens,  children  can 
receive 
private 
establishments  with  municipalities  covering  costs 
up 
the  municipality's 
kindergarten.  The  municipality  contributions  vary 
and are lower than private tuitions fees leading to 
unequal  access  to  the  service  which  can  hamper 
employment at low wages. 

the  average  cost 

pre-school 

education 

to 

in 

patent-fee  payers  and  certain 
types  of  self-
employed  will  have  access  only  to  the minimum 
basket of healthcare services. To obtain access the 
full basket they may voluntary join the new social 
contribution's  based 
as  of  2018 
(Section 3.3.3.). 

scheme 

the  elderly  continues 

Pensions  are  not  keeping  pace  with  economic 
growth,  which  leads  to  increasing  poverty  in 
old-age. The at-risk-of-poverty or social exclusion 
rate  for 
to  deteriorate 
(Graph 3.3.3)  and  is  above  the  EU  average  of 
18.2 % in 2016. Moreover, the poverty gap, which 
measures  the  intensity  of  poverty  (i.e.  how  poor 
the poor are), is among the highest in Europe. This 
is  mainly  because  pension  indexation  lags  behind 
the  growth  in  labour  incomes  while  there  are  no 
adequate safety nets for the elderly. The minimum 
pension varies from EUR 70.43 to EUR 108.85 per 
month  depending  on  the  length  of  the  pension 
contribution  period.  These  amounts  are  below 
the income threshold of a person in need, which is 
defined  as  having  a  monthly  income  below 
EUR 128 — amount not revised since 2009.  

to 

this 

long 

in  the  short  term,  although 
run 

Latvia has taken some steps to address pension 
in 
adequacy 
the medium 
remains 
a challenge. To address the conversion of the pre-
reform  service  record  into  post-reform  pension 
benefits,  in  2018,  pensions  will  be  increased  for 
people with careers spanning 30 years or more and 
the  process  of  compensating  the  pensioners  who 
retired in 2010-2015 for the losses in their pension 
capital  in  crisis  years  is  on-going  (European 
Commission, 2017b).  Moreover,  as of 2018,  most 
recipients  of  medium  and  higher  pensions  will 
benefit from the tax reform due to an increased tax 
allowance  and  progressive  taxation  (Box 3.1.1). 
However, according to analysis carried out for the 
upcoming Pension Adequacy Report, the aggregate 
replacement  ratio  in  Latvia  is  among  the  lowest 
and  theoretical  replacement  rates  40  years  from 
remain  among 
today  are  also  projected 
the lowest 
third  of 
in 
employees  make  social  insurance  contributions 
from 
to 
the minimum wage, which gives cause for concern 
about  the  adequacy  of  future  pensions.  This  also 
the  micro-
falling  under 
affects  employees 
enterprise tax regime (Section 3.1.1).  

that  are  below  or  equal 

the  EU.  About  one 

incomes 

to 

30 

0102030405060% of populationChildren (<18y)Working age (18-64)Elderly (65+) 
 
 
 
3.3. Labour market, education and social policies 

expectancy  among  all  EU  countries.  Despite 
a nearly  five-years  increase  in  2000-2015,  life 
expectancy  is  still  nearly  6  years  lower  than  the 
EU  average  (74.8 years  vs.  80.6 years).  Heart 
disease  and  strokes  are  the  biggest  causes  of 
deaths,  which  remains  among  the  highest  in  the 
EU.  The  poor  health  outcomes  are  linked  to  the 
low  public  expenditure,  while  other  EU  countries 
with  similarly  modest  spending  per  capita  have 
better 
(Graph 3.3.4).  This  underlines 
the need to both expand public health services and 
increase their efficiency. 

results 

Prevalence  of  lifestyle  choices  bad  for  health 
questions  effectiveness  of  prevention  policies. 
Latvia  has  been  investing  in  the  promotion  of 
health  and  disease  prevention  activities  by 
implementing  a number  of  legislative  measures, 
such as smoking restrictions and food regulations. 
The  share  of  adult  smokers  has  decreased  over 
the past  years,  although  lung  cancer  continues  to 
be  the main  cause  of  cancer  deaths.  Obesity,  low 
physical  activity  and  rising  alcohol  consumption 
are major public health risks (Graph 3.3.5). 

Graph 3.3.4:  Relationship between healthcare spending 
and health outcomes, 2014 

Child  poverty  has  decreased  substantially  in 
recent  years.  In  2017,  the  at-risk-of-poverty  or 
social  exclusion  rate for  children  stood  at  23.9 %, 
below  the  EU  average  of  26.9 %  and  20 pps.  less 
than  6 years  ago.  To  reduce  the  share  of  children 
living  in  child  care  institutions22,  measures  to 
support  foster  families  will  be  implemented  in 
2018, including improving their social protection.  

lived  housing 

Large  proportion  of  Latvian  population  is 
facing  severe  housing  deprivation.  In  2016, 
15.5 %  of  Latvians 
that  was 
overcrowded  and  showed  at  least  one  measure  of 
deprivation (23).  This  contrasts  with 
the  EU 
average of 4.9 %. One  in  five  children  (under  18) 
faced  severe  housing  deprivation.  Among  the 
population  at  risk  of  poverty  or  social  exclusion, 
23.4 % 
in  overcrowded,  poor  quality 
housing (24),  with  children  living  in  poverty  being 
particularly  vulnerable.  In  2017  overcrowding 
rates  were  high,  both  for  those  at  risk  of  poverty 
(47 %)  and  for  the  general  population  (41.9 %  in 
2017).  

lived 

Social  housing  is  scarce  and  hard  to  access. 
Social  housing  represents  only  0.4%  of  total 
housing stock, compared to the EU average of 8% 
(Housing Europe, 2017). As a result there are long 
waiting  lists,  especially  in  Riga.  Housing  benefits 
for  low-income  households  cover  in  part  the  rent 
and  utility  bills  (5 %  of  population  in  2016). 
However,  the  cover  is  limited  and  the  amounts 
vary  considerably  between  municipalities (25).In 
the  Latvian 
2016  an  estimated  0.33 %  of 
population 
account  of 
shelter  on 
sought 
homelessness (26). 

3.3.3.  HEALTHCARE 

outcomes 

Health 
the substantial 
decade.  Latvia  has  one  of 

despite 
improvement  over  the  past 
life 
the 

remain 

lowest 

poor 

(22)  According  to  the  Ministry  of  Welfare  data    6957  children 
were in out-of-family care, among them 1216 were in child 
care institutions (January 2017) 

(23)  Deprivation  measures  include  a  leaking  roof,  damp  walls, 
lack of light, window rot, no private indoor flushing toilet, 
no bath or shower. 

(24)  No bath or shower in their housing. 
(25)  According  to  the  Ministry  of  Welfare  data  (2016),  the 
average  housing  benefit  was  EUR 58  per  household  or 
EUR 13.77 per person. 

(26)  6 660 people, Ministry of Welfare data, 2016. 

Note: 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. 
Source: European Commission (Eurostat), OECD health 
statistics 

31 

ATBEBGHRCYCZDKEEFIFRDEELHUIEITLVLTLUMTNLPLPTROSKSIESSEUK010002000300040005000600050100150200250300350Health expenditure per capita, EUR PPPAmenable mortality per 100 000 population 
                                                           
 
 
3.3. Labour market, education and social policies 

Graph 3.3.5:  Health risk factors in Latvia relative to other EU 

countries, 2013-2014 

social  contribution  constitute  less  than  10 %  of 
total  healthcare  expenditure  in  2018,  the  rest 
remains  financed  from  the  general  tax  revenue. 
The Law on health insurance will follow. 

for  an  access 

The  publicly-funded  basket  of  health  care 
services  has  been  restricted  for  a  certain 
population  group.  The  legislation  provides  for 
dividing healthcare services into a 'full basket' and 
a  'minimum  basket'.  The  full  basket  will  be 
available  to  all  children  and  pensioners;  however, 
for other groups the access to services will depend 
on them paying social security contributions, with 
an  opt-in  possibility  for  those  not  obliged  to  pay 
them. The minimum basket of services available to 
all  provides 
the  general 
practitioners,  emergency  services,  childbirth  care 
and curing diseases endangering public health. The 
access to hospital care in non-emergency situations 
will not be provided for the minimum basket. This 
financing  model  is  a  departure  from  an  earlier 
Government decision to maintain universal access 
to  full  basket  of  healthcare  services28.  While  the 
intention is to motivate people to pay taxes, a share 
of  the  population29  risks  losing  their  current  level 
of access to healthcare. This is likely to lead to an 
even lower health status of the affected population, 
delayed  treatment  and  an  increase  in  the  use  of 
emergency services.  

to 

system 

suffers 

healthcare 

The 
from 
inefficiencies  and  underfunding,  however 
a substantial  increase  in  financing  is  expected 
from 2018 onwards. Spending on health in Latvia 
is among the  lowest  in  the EU  (less  than  40 % of 
the  EU  average).  However,  under  the  health 
reform  goals,  additional 
funding  was  made 
available  in  2017  and  a  further  increase  in 
healthcare  budget  has  been  envisaged  through 
budget  reallocation  and  increased  compulsory 
social  contributions.  Public  spending  on  health  is 
set  to  increase  from  3.0 %  of  GDP  in  2017  to 
around  3.5 %  in  2018  and  2019,  according  to  the 
medium-term  budgetary  plans.  The 
target  of 
government  expenditure  on  healthcare  of  4%  of 

28)  Government  decision  of  1  November  2016  on  the  health 

system financing model. 

(29) The  measures  will  affect  around 100 000  people or 5%  of 
total  population,  based  on  the  latest  estimates  by  the 
Ministry  of  Health.  The  affected  population  includes 
seasonal  agricultural  workers,  people  employed  under  the 
micro-enterprise  tax  regime  and  certain  types  of  self-
employed. 

Note: The closer the dot is to the centre the better the 
country performs compared to other EU countries.  
Source: OECD/European Observatory on Health Systems 
and Policies (2017) 

Access  to  healthcare  is  a  concern.  The  main 
barrier to access to healthcare is the annual ‘quota’ 
system  and  high  out  of  the  pocket  payments, (27) 
which  constituted  42 %  of  health  spending  in 
2015,  among  the  highest  in  the  EU  and  nearly 
three times the EU average of 15 %. Over 8 % of 
Latvians report unmet medical care needs, which is 
less  than  in  previous  years,  but  still  one  of 
the highest  shares  among  all  EU  countries 
(Box 3.3.1). There is significant disparity in unmet 
needs between the highest income quintile (2.5 %) 
and  the  lowest  one  (17.1 %)  highlighting  unequal 
access  to  services  for  vulnerable  groups.  As 
a result,  less  than  half  of  Latvians  report  being  in 
there  are 
good  health  (46 % 
significant  disparities  between  the  income  groups 
for  people  reporting  that  they  are  in  good  health 
(31.5 %  of  the  low-income  group  vs.  68 %  of 
the high-income group).  

in  2015)  and 

Healthcare  reforms  to  improve  the  system’s 
efficiency  and  effectiveness  are  progressing.  In 
July  2017,  the  Government  approved  a  healthcare 
reform  package,  including  the  Law  on  healthcare 
financing  adopted  in  December  2017.  The  law 
makes healthcare part of the state social insurance 
system,  with  1 %  of  social  contributions  directed 
to  healthcare  financing.  Revenues  from  increased 

(27)  Official  expenses  for  medical  care  not  reimbursed  by 

insurance 

32 

Smoking,15-year-oldsSmoking,adultsDrunkenness, 15-year-oldsBinge-drinking,adultsOverweight/obesity,15-year-oldsObesity,adultsPhysicalactivity, 15-year-oldsPhysicalactivity,adults 
 
                                                           
                                                           
3.3. Labour market, education and social policies 

functional electronic medical health records, which 
could  contribute  to  improving  efficiency  and 
quality of the healthcare. 

3.3.4.  EDUCATION 

of 

in 

the 

education 

student  numbers  poses 
The  decline 
a challenge  to  reduce  capacity  and  improve 
quality 
system. 
The remuneration of teachers is linked to a number 
of  students  and  as 
this  number  decreases, 
especially  in  rural  areas,  schools  become  under-
resourced  and  over-staffed.  The 
teacher 
salaries contribute to making teaching unattractive, 
which is one of the factors affecting the quality of 
education  in  the small  schools  and  results  in 
relatively 
entering 
young 
the profession  (Krasnopjorovs,  2017).  Improving 
the  quality  of  education  is  crucial  for  enhancing 
human capital and its productivity.  

people 

few 

low 

Access  to  quality  education  remains  dependent 
on the place of residence and type of school. In 
terms of basic skills, 15-year-olds’ performance as 
measured  by  the  2015  OECD  Programme  for 
International  Student  Assessment  (PISA)  appears 
to have levelled off although it remains well above 
the EU average (OECD, 2016). The proportion of 
low  achievers  in  mathematics  (21  %)  and  in 
science (17 %) worsened compared to PISA 2012, 
but  continues  to  be  better  than  the  EU  average. 
However,  the  disparity  between  rural  and  urban 
schools  is  large  and  growing.  In  terms  of  basic 
skills, students in upper general education perform 
better  than  those  in  vocational  education  and 
training  and  special  needs  education  (European 
is  also 
Commission,  2016).  Moreover, 
a significant gender gap in education with women 
outperforming  men  significantly  both  in  terms  of 
qualifications and basic skill proficiency (30). 

there 

Consolidation of schools based on the minimum 
number  of  students  has  been  delayed.  While 
the Government’s  requirements  for  the  minimum 
number  of  students  per  class  in  the  secondary 
education  from  2018  were  overruled  in  the  court, 
legislative changes now allow for the Government 
to define qualitative and quantitative criteria in the 

(30)  This  concerns  also  tertiary  education  attainment  with 
37.5 %  of  women  and  only  21.1 %  men  having  higher 
education in Latvia (in the age group 15-64). 

GDP  in  2020  is  adopted,  but  it  includes  private 
payments for services in public health institutions. 
The  net  public  spending  for  the  healthcare  is 
estimated  at  3.2%  of  GDP  in  2020  or  10.5%  of 
total  government  expenditure —  still  well  below 
the EU average. 

Streamlining  the  hospital  sector  will  allow  for 
improvements  to  be  made  on  efficiency  and 
quality.  The  overall  number  of  hospital  beds  per 
head in Latvia has declined by more than one third 
since 2000 (from 8.8 per 1 000 inhabitants in 2000 
to  5.7  in  2015).  However,  the  number  of  people 
who  use  hospital  care  remains  slightly  above 
the EU  average.  Plans  for  regional  consolidation 
and  specialisation  of 
in-patient  health  care 
providers have been announced, in order to further 
the  use  of  human  resources  and 
rationalise 
infrastructure 
Moreover, 
the concentration of resources and flow of patients 
to 
specialised  hospitals  will  contribute 
in 
the quality of the service.  

resources. 

Shortage  of  healthcare  workforce  hampers 
delivery of public healthcare. Latvia faces labour 
shortages in the healthcare sector. This is reflected 
in  a  low  number  of  doctors  (3.2 per  1 000 
population,  compared  to  3.6  for  the  EU  average) 
and one of the lowest number of nurses among EU 
countries  (4.7 per  1 000  population).  It  is  difficult 
to recruit and retain a sufficient number of skilled 
health  workers,  mainly  due  to  low  salaries.  The 
budget for 2018 provides financing for an increase 
for 
in 
remuneration  of  medical  staff  and 
compensation 
time  of 
medical  personnel.  The  implementation  of  the 
workforce plans is still contingent on planning and 
operational decisions at all levels of the healthcare 
system,  as  well  as  provision  of  the  necessary 
financing  both  at  central  and  local  government 
level. The medium-term budgetary plans for 2018-
2020 have not provided the healthcare financing to 
the  level  envisaged  in  the  most  recent  healthcare 
reform plans presented in 2017. 

the extended  working 

Following 

drawbacks. 

Introduction of e-health services has proceeded 
despite 
several 
postponement  since  2016,  the  use  of  the  first  e-
health  services  is  mandatory  from  2018.  Medical 
and  IT  professionals  have  criticised  the  services 
currently  provided  for  cumbersome  use,  system 
errors  and  over  concerns  of  patient  data  security. 
is  still  far  from  fully 
The  e-health  system 

33 

 
                                                           
3.3. Labour market, education and social policies 

programmes  remains  below  the  EU  average (31). 
Latvia is still one of the few EU countries that do 
not  have  a  centralised  approach  to  graduate 
tracking in secondary VET32, which hinders efforts 
to improve quality and labour the market relevance 
of the training offer. VET curricula reform started 
in 2010 is advancing with the close involvement of 
social partners and is supported with EU funds. In 
2017,  the  Law  on  vocational  education  was 
amended to provide a legal basis for modular VET 
programmes.  Progress,  however,  is  moderate  and 
by January 2018, modular programmes in only 39 
out  of  56  already  developed  professional 
qualifications are taught in 24 VET schools, while 
10  of 
the remaining  174  planned  modular 
programmes are in the process of being developed. 
Similarly, out of the 240 occupational standards to 
be updated, more than one half (129) were updated 
by  February  2018.  It  is  expected  that  the  reform 
will be finalised by the end of 2021.  

introduction  of 

the  new  work-based 
The 
learning  approach  has  started. 
In  2017, 
guidelines  were  approved  for  the  implementation 
of  work-based  learning,  including basic principles 
and  methodological  support.  The  EU-funded 
project 
learning  and 
practical training began to be implemented in 2017 
and is led by the employers association. However, 
there is still a long way until work-based learning 
becomes  a  significant  part  of  VET  as  currently 
only  a  small  fraction  of  students  participate  in 
work-based learning and practical training. 

to  support  work-based 

(31)  In 2015, 39.8 % in Latvia compared to 47 % in the EU for 

upper secondary VET. 

(32) European Commission. (2018, forthcoming). Mapping of 
VET graduate tracking measures in EU Member States. 

secondary  education  by  September  2018.  The 
independent  study  on  an  optimal  network  of 
general education institutions will from a basis for 
the discussion on the criteria on minimum number 
of  students  per  school  and  on  the  distribution  of 
general  education  institutions.  Streamlining  the 
secondary  school  network  would  concentrate 
resources from state and municipalities budgets in 
fewer schools with better infrastructure and higher 
salaries  for  teachers,  thus  improving  the  quality 
and efficiency of the general education. 

A  new  competence-based  curriculum  is  being 
gradually  rolled  out  with  the  support  of 
the European  Social  Fund.  The  new  curriculum 
covers all levels of education from pre-primary to 
upper  secondary,  and  is  based  on  a  framework  of 
seven  key  competences  and  four 
transversal 
competences.  It  aims  to  introduce  a  student-
centred  approach  to  learning  and  to  promote  the 
competences  and  skills  needed  for  individual 
development  and  participation  in  society  and  the 
labour  market  in  the  future.  It  also  aims  to  raise 
students'  levels  of  knowledge  and  interest  in 
science-related  subjects.  Teaching  aids  and  other 
support  materials  reflecting  the  new  curricular 
approach are being developed and training is being 
provided 
the  new 
to 
curriculum. The pilot phase was launched in 2017 
in  100 schools  throughout  the  country.  The  new 
curriculum should be fully implemented by 2023. 

implement 

teachers 

to 

Latvia  is  also  looking  at  ways  of  consolidating 
its  highly  fragmented  higher  education  system. 
So far, attempts to reduce fragmentation in higher 
education  show 
that  small  higher  education 
institutions are reluctant to be merged with bigger 
ones, even if they do not have a sufficient base for 
research  and  innovation.  The  Government  has 
commissioned  a  World  Bank  study  to  evaluate 
higher  education  institutions’  internal  governance, 
funding  systems  and  human  resources  policies. 
The  study  will  provide  recommendations  for  all 
areas under review.  

Vocational  education  and  training  (VET)  is 
undergoing  significant  reform,  although  a  fair 
amount  of  work  is  still  ahead.  The  employment 
rate  of  recent  upper  secondary  VET  graduates 
(74.8 %)  was  similar  to  the  EU  average  (75 %), 
while,  the  proportion  of  students  enrolled  in  VET 

34 

 
                                                           
3.4. INVESTMENT 

3.4.1.  INVESTMENT SITUATION 

Latvia's  investment  rate  is  higher  than  the  EU 
average,  but  relatively  low  for  a  catching-up 
economy. Bar the dip in 2016, Latvia’s investment 
rate  has  held  safely  above  20 %  (Graph 3.4.1). 
This  is  somewhat  above  the  EU  average,  but 
considerably lower than before the crisis, when the 
investment rate was close to 30 %. The investment 
dynamic in other Member States, who are also net 
beneficiaries  of  EU  funds,  has  been  similar  to 
Latvia’s,  albeit  less  volatile.  Although  Latvia's 
investment  rate  does  not  stand  out  as  particularly 
low among the other catching-up economies in the 
EU, it is low given the still significant productivity 
gap to the old Member States of around 35 %.  

Graph 3.4.1:  Investment as a share of GDP 

(1) EU15 - EU Member States that joined before 2004, 
weighted average 
EU13 - EU Members States that joined after 2004, weighted 
average 
Source: Eurostat 

the opposite  trend  –  in  2016  they  lagged  the  EU 
average by a higher margin than they did a decade 
ago.   

Graph 3.4.2:  Investment by type of asset, % of GDP vs EU 

average 

Source: Eurostat 

large 

influence  on 
Public  entities  bear  a 
Latvia’s  investment  decisions.  The  public  sector 
and  state-owned  enterprises  (SOEs)  combined 
account  for  more  than  1/3  of  all  investment (33). 
Furthermore,  a significant  part  of  private  sector 
investment  is  funded  through  EU  programmes. 
This  underlines  the  importance  of  state  policy  to 
make  sure  investments  address  the  country’s  key 
economic  challenge,  however  biggest  SOEs 
strategies  are primarily focused on  financial  goals 
and 
towards 
is  geared 
providing maximum revenue to the state..  

the  dividend  policy 

3.4.2.  COMPETITIVE ENVIRONMENT 

Investment in intellectual property increasingly 
lags  behind  the  EU  average.  Machinery  and 
commercial  buildings  account  for  the  bulk  of  all 
investment  and  they  have  also  historically  been 
significantly  higher  as  a  share  of  GDP  than  in 
the EU on average (Graph 3.4.2). This positive gap 
has been decreasing post-crisis, however, given the 
convergence  of  Latvian  productivity  to  the  EU 
average.  On  the  other  hand,  as  the  economy 
becomes more knowledge intensive, an increasing 
share  of  investments  would  be  expected  to  go  to 
intellectual  property.  Unfortunately,  Latvia’s 
show 
intellectual 
investments 

property 

in 

concentration 

In  general,  Latvia's  product  markets  are 
competitive, but there are worries of increasing 
market 
sectors. 
The business  surveys  reveal  that  the  domestic 
competition  has  been  increasing  in  recent  years. 
However,  they  also  show  an  increasing  trend  of 
market  concentration  in  certain  sectors  (World 
Economic Forum, 2017). A number of areas have 

some 

in 

(33)  In 2015, investments by the general government amounted 
to 4.8 % of GDP, while the SOEs made investments worth 
3.3 % of GDP, totalling to 36 % of all investment made in 
Latvia. 

35 

15%20%25%30%35%40%20002001200220032004200520062007200820092010201120122013201420152016EU15EU13EstoniaLatviaLithuania-10.0-5.00.05.010.015.020.020002001200220032004200520062007200820092010201120122013201420152016HousingOther buildingsMachineryIntellectual property 
 
 
 
                                                           
this  respect.  In  particular, 

drawn the attention of Latvia's competition council 
the  retail (34), 
in 
banking (35),  pharmaceuticals  wholesale  and  retail 
sectors  have  been  identified as  having  the  highest 
risk  of  diminished  competition  due  to  market 
concentration.  The  two  most  frequent  types  of 
infringements encountered  by  the  council are  bid-
rigging in public procurement and anti-competitive 
activities by the state or, more often, municipalities 
(Competition council, 2017).  

in 

limited 

competitive 

environment 

The 
in 
the medical  and  pharmaceutical  sectors  is  not 
conducive  to  the  ongoing  effort  to  improve 
the healthcare 
Latvia. 
quality 
The pharmaceutical  retail  market  is  dominated  by 
four  large  companies36,  each  of  which  owns  both 
the  retail  and  wholesale  parts  of  the  business. 
Moreover,  the  biggest  player  also  owns  medical 
centres,  and  medical  laboratories.  This  kind  of 
market power creates clear risks for consumers in 
terms  of  pricing  and  quality.  The  competition 
council  has  proposed  a number  of  potential 
remedies  to  foster  competition  in  the  sale  of 
pharmaceuticals  and  healthcare  services  markets, 
for  example  by  allowing 
the  sale  of  non-
prescription  drugs  in  general  retail  shops.  So  far, 
however, these proposals have not been considered 
at the government level. 

The  competition  council  finds  itself  under-
resourced  amid  growing  risks  stemming  from 
market concentration. Unlike similar government 
institutions  that  have  been  tasked  with  market 
supervision,  the  competition  council  is  subject  to 
remuneration  rules  of  the  civil  service  and  is 
financially dependent on the budget of the ministry 
its 
of 
institutional  independence  and  the  capacity  to 
employ  adequately  skilled  people.  However,  in 
November  2017  the  Parliament  approved  changes 
to  the  remuneration  system  of  the  Competition 
Council,  allowing  for  more  flexible  wage  setting 
within the limits of existing funding. 

affairs.  This  diminishes 

economic 

(34)  The two largest retailers' market share is estimated at 60  - 
80%.  A  special  law  aimed  at  preventing  the  abuse  of 
market  power  by  retailers  against  their  suppliers  was 
adopted in 2015 

(35)  The  market  share  of  three  largest  banks  ranges  from  60  -

85% (European Commission, 2017c) 

(36)  The  largest  of  them  holds  about  one  third  of  the  retail 

market and four together hold 58%)  

3.4. Investment 

3.4.3.  PRODUCTIVITY 

Despite  a  considerable  slowdown,  Latvia’s 
productivity  growth  rates  are  still  among 
the highest  in  the  EU.  Over  the  past  16  years, 
the average productivity growth was only higher in 
Romania  and  Lithuania  (Graph  3.4.3).  While 
the average  productivity  growth  rate  more  than 
halved  after  the  crisis,  as  it  did  in  most  other 
converging  EU  economies,  it  remains  among 
the highest  in  the  EU.  Despite  this  Latvia’s 
productivity level still stands among the lowest in 
EU (37).  Productivity  growth,  however,  is  crucial 
for future economic growth, particularly in view of 
the declining working age population. 

Graph 3.4.3:  Annual average productivity growth, % 

Source: Eurostat 

States, 

Productivity  growth 
in  manufacturing  has 
lagged  behind  peers  and  may  partially  explain 
why Latvia’s overall productivity is lower than 
in  the  other  Baltic  countries.  In  most  new 
Member 
in 
manufacturing  has  been  the  main  contributor  to 
the aggregate  productivity  growth.  In  Latvia, 
however,  productivity  growth  in  manufacturing 
has been both notably lower and has lagged behind 
the  aggregate  productivity  growth  until  2010 
(Graph  3.4.3) (38).  This  may  partially  be  due  to 

productivity 

growth 

(37)  In  2016  it  was  65.1%  of  the  EU  average  measured  in 
purchasing power standard (PPS), the 3rd lowest among EU 
countries 

(38)  Baltic  countries  and  4  other  EU  Member  States  with  the 
highest  productivity  growth  during  2010  to  2016  period, 
except Ireland. 

36 

0%1%2%3%4%5%6%7%8%9%10%2000-20052005-20102010-20162000-2016 
                                                           
 
                                                           
3.4. Investment 

challenge  is  to  invest  efficiently  as  Latvia  faces 
the dual  challenge  to  both  upgrade  and,  given  its 
population  decline,  downscale  its  infrastructure. 
Poor  (public)  investment  decisions  can  ultimately 
harm productivity through high maintenance costs 
paid for little economic benefit. 

3.4.4.  PRICE COMPETITIVENESS 

Real  wage  growth  has  exceeded  productivity 
growth  for  some  time  now,  raising  concerns 
about  the  country's  price  competitiveness. 
Nominal  unit  labour  cost  (ULC)  growth (40)  has 
hovered  around  5%  annually  since  2012.  While 
the initial  appreciation  of  the  ULC  could  be 
the  wages  catching  up  with 
attributed 
the economic  growth  following  their  downward 
adjustment  during  2008-  2011,  the  difference 
and 
between 
levels  of 
is  approaching 
the productivity 
the boom  in  2008  (Graph  3.4.5).  This  raises 
concern about Latvia's price competitiveness.  

real  wage 
the 

the  growth  of 

to 

Graph 3.4.5:  Productivity and real wages, index=1995 

(1) The productivity surplus  or deficit is calculated as (index 
value of productivity / index value of real wages) - 1 
Source: European Commission 

Rapid  growth  of  unit  labour  costs  is  a  by-
product  of 
convergence  and  not 
necessarily  as  sign  of  a  loss  of  competitiveness. 
Due  to  the  Balassa-Samuelsson  effect (41),  the 

rapid 

(40)  Unit 

labour  cost  growth  equals  wage  growth 

less 

productivity growth 

(41)  The  observation  that  the  price  level  in  rich  countries  is 
systematically  higher  than  in  poor  countries.  As  countries 

in 

that 

than 

the  Latvian  economy 
initially 
the fact 
specialised 
transit  and  financial  services, 
directing investment and labour to these activities, 
in  manufacturing.  Furthermore, 
rather 
the credit-fuelled housing bubble that developed in 
the  mid-2000s  and  burst 
in  2008  caused 
the appreciation of the real effective exchange rate 
(REER)  and  hurt  the  relative  profitability  of 
the manufacturing  sector (39),  which  could  be 
another  reason  why  its  productivity  growth  was 
lagging  behind  peers.  A 
internal 
devaluation  restored  price  competitiveness  and 
therefore  improved  the  relative  profitability  of 
the tradables  sector.  Since  the crisis,  however, 
the productivity  growth 
in  manufacturing  has 
picked up and has been the main contributor to the 
aggregate productivity growth.  

sizable 

Graph 3.4.4:  Value added per person employed, index 

2000=100 

Source: Eurostat 

The decline in population presents both a threat 
and  an  opportunity  to  Latvia’s  productivity 
growth. On the one hand, the declining population 
makes  a  number  of  activities  less  productive  – 
fewer  users  of  schools,  hospitals,  roads  and  other 
infrastructure  make  their  use  more  expensive  for 
the remaining users and therefore hurt productivity 
and  external  competitiveness.  On  the  other  hand, 
the tight labour supply and rapid wage growth may 
stimulate 
labour-saving 
technology  and  rethink  their  business  models  in 
view  of  the  higher  labour  costs.  A  particular 

invest 

firms 

to 

in 

(39)  In  theory  appreciation  of  REER  would  hurt  the  tradable 

sectors at the expense of non-tradable sectors 

37 

10012014016018020022024026028030020002001200220032004200520062007200820092010201120122013201420152016EE-TotalEE-ManufacturingLV-TotalLV-ManufacturingLT-TotalLT-Manufacturing-15%-10%-5%0%5%10%15%050100150200250300Productivity surplus/deficit (rhs)ProductivityReal wages 
 
                                                           
 
                                                           
3.4. Investment 

faster growth of the catching up economies comes 
with  higher  (wage)  inflation  than  in  the  advanced 
economies. The EU countries that grew on average 
the  fastest  from  2000  to  2016  also  had  a  higher 
NULC  growth  rate  (Graph 3.4.6).  Therefore,  one 
must be careful to interpret ULC growth as either 
an effect of rapid growth or a sign of deteriorating 
cost  competitiveness.  A  more  detailed  analysis  is 
required  to  see  whether  the  wage  development  is 
benign or malignant.  

Graph 3.4.6:  Average unit labour cost and productivity 

growth, 2001- 2016 

years (42). While Latvia's trade figures are distorted 
by  the  impact  of  the  Russia  crisis,  the  slower 
export market share growth might suggest that the 
hurt  Latvia's 
indeed 
ULC 
competitiveness to some extent. 

growth 

has 

Graph 3.4.7:  Changes in real effective exchange rate in 

Latvia and euro area 

Source: European Commission 

The  wage  growth  impact  on  prices  has  so  far 
been  subdued  and  signs  of  competitiveness 
losses  are  scant.  Since  2010,  Latvia's  inflation-
based real effective exchange appreciated by 0.7%, 
only slightly above the euro area (EA) average (see 
Graph 3.4.7). This is due to the fact that the rapid 
wage  growth  has 
largely  been  absorbed  by 
companies'  profits  rather  than  passed  on  through 
higher  prices.  Latvia's  export  market  shares  have 
continued 
throughout  the  post-crisis 
period,  with  the  exception  of  2015,  albeit  net 
market  share  growth  since  2013  has  been  small. 
However, other catching-up economies whose real 
exchange  rate  has  depreciated  contrary  to  Latvia 
(and  other  Baltics),  have  had  somewhat  higher 
growth  in  export  market  shares  (EMS),  in  recent 

to  grow 

'catch-up'  their  price  level  is  expected  to  converge  and 
hence their inflation is higher. 

Source: European Commission 

The  shrinking  supply  of  the  labour  force  is 
the main  driver  of  wage  growth.  Although  over 
the past four years employment has barely grown, 
the  dwindling  size  of  the  labour  force  has  put 
the unemployment  rate  significantly  below  its 
historical  average,  thus  pointing  to  an  increasing 
tightness  of  the  labour  market  (Graph  3.4.8).  The 
competition 
fewer  employees  has 
intensified  and  has  put  an  increasing  pressure  on 
wages.  However,  the  current  pattern  of  wage 
to 
growth  underlines  an important  difference 
the macroeconomic  environment  of  the  2004  to 
2008 when an unsustainable credit-fuelled demand 
shock  drove  a  substantial  increase  in  labour 
demand.  

for  ever 

Latvia could become bogged down in a possible 
protracted  period  of  low  growth.  The  slight 
current  account  deficit  and  the  meagre  credit 
growth  suggest  there  is  little  risk  of  repeating  of 
the  boom-bust  cycle  that  Latvia  went  through 

(42)  For example,  since  2013  REER  has  depreciated  in  Poland 
and Romania by 6% and 3%, respectively and their average 
EMS growth for the same period has been 14% and 15%, 
respectively  –  among  the  highest  in  the  EU.  Latvia,  by 
comparison,  has  gained  very  little  export  market  share 
since 2013 

38 

-1.0%0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%-2.0%0.0%2.0%4.0%6.0%NULC growthProductivity growthEU15EU13LV-15.0%-10.0%-5.0%0.0%5.0%10.0%15.0%20.0%25.0%30.0%2001200220032004200520062007200820092010201120122013201420152016LV REER (ULC)LV REER (HICP)EA REER (ULC)EA REER (HICP) 
 
                                                                                   
 
                                                           
3.4. Investment 

3.4.5.  BUSINESS ENVIRONMENT 

The  shadow  economy  and  the  judicial  system  are 
the weakest areas in what generally is a favourable 
business  environment  in  Latvia.  Latvia  is  ranked 
19  out  of  190  in  the  2018  World  Bank  Doing 
Business Review. Latvia scores lowest on dealing 
with construction permits, court process length and 
recovery  rates  in  insolvency  cases  (section  3.6.1 
Public  administration).  Also,  the  sizable  shadow 
economy 
the 
economy. 
competitiveness 
The Latvian authorities aim to further improve the 
business  environment  by  simplifying  business-
related legislation and applying an SME-test to all 
new regulations (European Commission, 2017d). 

(section 
of 

the  Latvian 

impairs 

3.1.3) 

during the 2004 – 2010 period. However, as wages 
eat  into  profits,  investment  spending  may  suffer 
and  therefore  constrain  the  economy's  growth 
labour  market  and 
the 
potential.  Addressing 
healthcare  issues  (Sections  3.3.1  and  3.3.3)  is 
essential  to  raise  labour  supply  and  mitigate  the 
negative  effects  of  the  declining  labour  force.  On 
the other hand, the rapid wage growth also has an 
upside  in  that  it  may  increase  the  living  standard 
sufficiently to stem emigration, which is one of the 
root causes of the declining labour force.  

Graph 3.4.8:  Employment, labour force and the 
unemployment rate 

Source: Eurostat 

39 

0%5%10%15%20%25%-20.0%-15.0%-10.0%-5.0%0.0%5.0%10.0%2001200220032004200520062007200820092010201120122013201420152016Employment, % changeLabour force, % changeUnemployment rate (rhs) 
 
3.4. Investment 

Box 3.4.5: Investment challenges and reforms in Latvia 

Section 1. Macroeconomic perspective  

From  2000  to  2007,  the  average  investment  rate  of  close  to  30 %  of  GDP  reflected  Latvia’s  rapid 
convergence  process.  The  latter  part  of  this  period,  however,  was  dominated  by  rapid  credit  growth  and 
the emergence of a real estate bubble, which burst in 2009. Since the crisis, the average investment rate has 
fallen  to  22 %  of  GDP.  The  significant  decrease  can  largely  be  attributed  the  changed  credit  dynamics 
(Section 3.2.1). When looking at the different investment types, investment in equipment and non-housing 
construction are above the EU average, reflecting the still ongoing catching-up process and the sizable role 
of  financing  from  the  EU  funds  (Section 3.4.1).  Investment  in  housing  has  been  suppressed  by  weak 
mortgage lending and subdued purchasing power of households. The long deleveraging process came to an 
end in 2016, but the credit growth is expected to remain subdued, in the foreseeable future. 

Section 2. Assessment of barriers to investment and ongoing reforms  

Main barriers to investment and priority actions underway 

1. Low recovery rates and a low share of restructuring cases, and cases of abuse of the process have weighed 
on the quality of Latvia's insolvency process. As a result, the insolvency process is perceived as a country-
specific risk by the investors and the banking sector and therefore part of the reason why credit growth has 
been  slower  in  Latvia  than  in  the  neighbouring  countries.  A  comprehensive  overhaul  of  the  insolvency 
administrators’  profession  has  improved  the  oversight,  the  qualification  process,  and  the  prevention  of 
conflict  of  interest  process,  but  challenges  related  to  the  reputation  of  the  judicial  system  remain. 
(see Section 3.6.3) 

2. Private R&D investment in Latvia is among the lowest in the EU and it has not changed significantly over 
the past decade. Moreover, a large part of this investment  depends on EU funds, making the unsubsidised 
private  R&D  investment  even  smaller.  The  dominant  position  of  SMEs  in  the  corporate  sector  is  part  of 
the reason  for  this.  Given  that  some  of  the  largest,  best  funded  companies  in  Latvia  are  state-owned, 
directing them to engage in R&D activities more actively is one of the few policy levers to promote more 
active private R&D investment at Latvia’s disposal. (see Section 3.5.3) 

3.  Latvia  has  taken  notable  steps  to  reduce  the  burden  of  energy  subsidies  on  large  industrial  consumers, 
who have been paying among the highest electricity prices in the EU, facing a competitive disadvantage in 
the region. However challenges related to high network tariffs and cost-effectiveness of renewable energy 
support remain. (Section 3.5.1)  

40 

Regulatory/ administrative burdenTaxationPublic administrationCSRAccess to financePublic procurement /PPPsCooperation btw academia, research and businessCSRJudicial systemFinancing of R&D&IInsolvency frameworkBusiness services / Regulated professionsCompetition and regulatory frameworkRetailEPL & framework for labour contracts ConstructionWages & wage settingDigital Economy / TelecomEducation EnergyTransportNo barrier to investment identifiedCSRInvestment barriers that are also subject to a CSRSome progressNo progressSubstantial progressLimited progressFully addressedPublic administration/Business environmentLabour market/ EducationSector specific regulationFinancial Sector / TaxationR&D&I 
 
3.5. SECTORAL POLICIES 

3.5.1.   ENERGY AND CLIMATE 

Energy markets 

The completion of key electricity infrastructure 
projects 
in  the  Baltic  States  has  brought 
the region  lower  energy  wholesale  prices  and 
better  security  of  supply.  As  a  part  of  the 
implementation  of 
the  Baltic  energy  market 
interconnection plan (BEMIP), a number of cross-
border  and  domestic  infrastructure  projects  have 
been  realised  across 
the  Baltics,  essentially 
integrating them with the Nordic electricity market 
(European  Commission,  2017b).  As  a  result,  the 
Baltics now enjoy among the lowest energy prices 
(the  lower  part  of  the  bars  in  Graph  3.5.1)  in 
the  Baltic 
the EU.  The 
countries’ grids with continental Europe is the key 
priority  for  years  to  come (43);  the  project  would 
significantly increase the security of supply. 

synchronisation  of 

The  development  of  the  regional  natural  gas 
market  has  been  steady,  but  some  key 
infrastructure projects remain to be completed. 
In  2015,  wholesale  gas  prices  in  Latvia  were 
somewhat  higher  than  the  EU  average  prices, 
partly  due  to  a  lack  of  competition  in  the  region, 
which  is  still  dominated  by  Russian-supplied  gas. 
(LNG) 
The  Klaipeda  Liquefied  natural  gas 
terminal  provides  an  alternative  source  of  gas 
supply,  albeit  on  a  limited  scale.  Looking  ahead, 
the  Finland-Estonia  and 
the  construction  of 
to 
Lithuania-Poland 
making  the  regional  gas  market  fully  operational. 
While  the  Finland-Estonia  connector  project  has 
been  progressing  solidly,  the  Lithuania-Poland 
connector is behind schedule.  

interconnectors 

is  crucial 

The opening of the domestic gas market in 2017 
was implemented smoothly and spurred notable 
activity  among  commercial  consumers.    As  of 
January  2018,  the  market  share  gained  by  new 
entrants  was  about  [25]%,  markedly  higher  than 
the  share  gained  following  the  opening  of  the 
electricity  market.  Households,  however,  have 
been  more  passive  to  change  their  supplier.  Also, 
as  part  of  the  market  liberalisation  process,  the 
separation  of 
transmission  and  storage 
activities  took  place  making  the  underground  gas 
storage  "Incukalns"  accessible  to  third  parties. 
Currently, Latvia is in the process of finalising the 

the 

(43)  Currently the project is planned to be completed by 2025 

unbundling  of 
integrated  gas 
the  vertically 
company  AS  Latvijas  Gaze.  The  company  has 
created a daughter entity for the distribution part of 
the  business,  but  its  adherence  to  independence 
requirements  is  still  subject  to  approval  by  the 
National Regulator. The government aims to carry 
out an assessment of the impact of the gas market 
opening,  including  the  impact  on  gas  prices,  one 
year after the unbundling.    

Price of electricity 

Latvia's  industry  faces  some  of  the  highest 
electricity  prices in  the  EU.  While,  the  energy 
the  electricity  prices(44)  has 
component  of 
decreased  considerably  since  2011,  in  large  part 
thanks  to  the  closer  integration  with  the  Nordic 
electricity  market,  and  is  below  the  EU  average, 
the  network  charge  component  and 
levies 
increased  significantly  over 
component  have 
in  2016  were  among 
the recent  years  and 
the highest in the EU (Graph 3.5.1). Crucially, the 
total  price  of  electricity  for  industrial  consumers 
was  some  20%  higher  than  in  the  neighbouring 
at 
countries.  This 
industry 
a competitive  disadvantage 
in  energy-intensive 
manufacturing.  

put  Latvia's 

to 

the 

the 

subsidy (45) to 

energy-intensive 

The  government  has  taken  steps  to  reduce  the 
burden  of  subsidies  and  reduce  the  cost  of 
electricity 
industrial 
consumers.  As  of  2018,  Latvia  has  considerably 
state-owned 
reduced 
combined  heat  and  power  plants  (CHP)  which 
accounted for around half of the entire cost of the 
scheme.  This will  help  to keep  the overall burden 
on  all  electricity  consumers  from  rising  as  the 
renewable  energy  part  of  the  support  scheme  is 
expected 
increasing  until  2020. 
Furthermore,  the  government  has  reduced  the 
renewable  component  of  the  levy  charge  to  the 
their 
industrial  consumers 
large 
competitiveness (46).  Taken 
these 

to  continue 

together, 

improve 

to 

(44)  Total  electricity  price  is  comprised  of  (i)  price  of  energy 
and supply, (ii) network tariff and (iii) levies and taxes 
(45)  The current energy subsidy scheme, financed by consumers 
through  a  levy  on  the  electricity  consumption  (light  blue 
bars  Graph  3.5.1),  supports  two  policy  objectives:  (i) 
promotion  of  renewable  energy  generation and  (ii)  high-
efficiency fossil fuel-powered CHP plants 

(46)  The  adoption  of  these  measures  were  given  green  light 
following  a  positive  decision  by  the  Commission  in  two 
state  aid  cases:  (i)  SA.43140  (2015/NN)  -  Support  to 
renewable energy and combined heat and power plants and  

41 

 
 
                                                           
                                                           
3.5. Sectoral policies 

in  2016 

the efficiency of the network operators. The sparse 
and declining population (see Section 1) is one of 
the main  reasons  why  the  network  operators  have 
struggled  to  bring  down  the  costs  for  electricity 
consumers.  Moreover, 
the  network 
operator  introduced  a  fixed  part  component  to  its 
tariffs,  which  they  hope  will  help  to  reduce  the 
number  of  connections whose  low  consumption 
does not generate sufficient revenue to cover their 
costs. Finally, while ministry has set a general goal 
to 
improve  efficiency,  concrete  operational 
efficiency  objectives  are  lacking.  The  drive  to 
improve  the operators’  efficiency  is  also  affected 
by  the  dividend  policy,  which  sees  90 %  of  their 
profits  being  paid  out  to  the  state,  the companies’ 
owner. 

Energy efficiency and renewable energy 

Latvia has achieved good progress in improving 
its  energy  efficiency.  While  Latvia  is  on  track  to 
achieve 
targets, 
its  2020  energy  efficiency 
the residential sector remains an important priority 
for  achieving  further  energy  savings  for  the  years 
to  come.  A  number  of  measures  taken  to  boost 
the energy  services  market  are  expected 
to 
contribute to energy efficient renovations of multi-
apartment buildings. The regulatory framework for 
energy  performance  contracting  is  still  under 
development.  With  a  37 %  share  of  renewable 
energy 
top 
performing  EU  countries  and  is  likely  to  meet  its 
2020  target  for  the  increase  in  the  renewable 
energy  share.  However,  the  share  of  renewable 
energy  used  in  transport  is  only  3 %  and  it  has 
progressed  little  since  2010.  In  this  regard,  the 
government  has  reviewed  the  biofuel  additive 
requirements  starting  and  will  develop  charging 
station network for electric vehicles in 2018, with 
a  view  to  increase  renewables’  share  in  the 
transport sector to 10 % by 2020 as a contribution 
to the national renewable energy target. 

in  2016,  Latvia 

is  among 

the 

Additional  measures  in  public  transportation  will 
be  implemented  in  the  following  years  with  the 
assistance  of  Cohesion  Fund  and  European 
Regional Development Fund. Main emphasis is on 
modernising  rail,  road  and  air 
transportation 
systems. 

measures  are  expected  to  reduce  the  price  of 
electricity  for  energy  intensive  manufacturers  by 
some 20%.  

Graph 3.5.1:  Electricity prices for industrial consumers, 2016 

(1) Consumption band: 20 - 70 GWh / year 
(2) The electricity prices are equally high also in 2 - 20 GWh / 
year band where Latvia had the 6th highest tariff among EU 
countries 
Source: European Commission 

The  future  renewable  energy  support  policy  is 
set  to  focus  on  increasing  its  cost-effectiveness. 
The current renewable energy support scheme has 
not  only  been  expensive  but  also  raises  concerns 
about  the  sustainability  of  some  of  the  renewable 
energy  plants  due  to  their  reliance  on  generous 
subsidies(47).  The  government  plans  to  come  up 
with a new renewable energy strategy in 2018. It is 
expected  to  focus  on  promoting  the  most  cost-
technologies.  The 
effective  renewable  energy 
type  of  renewable 
support  differentiation  by 
energy  has  been  among  the  main  reasons  for  the 
high overall cost of the current scheme.  

High  network  tariffs  reflect  the  efficiency 
challenges  faced  by  network  operators.  Latvian 
electricity  consumers  pay  among  the  highest 
network  tariffs  in  the  EU,  particularly  the  energy 
intensive  industrial  consumers,  (middle  part  of 
the bars  in  Graph  3.5.1),  raising  concern  about 

(ii)  SA.42854  (2015/N)  –  Support  to  energy  intensive 
industry 

(47)  In  some  cases,  the  feed-in  tariff  exceeds  4  times  the 

electricity market price 

42 

020406080100120140ITUKMTCYLVDESKPTIEBEDKESATLTEEHUFRCZHRPLROSIBGNLFISELUEnergy and supplyNetwork costsTaxes and levies 
 
                                                                                   
 
3.5. Sectoral policies 

waste  import,  as  well  as  an  obligatory  financial 
guarantee  from  the  waste  recycling  contractors  in 
order to improve their accountability. 

3.5.3.  RESEARCH AND DEVELOPMENT AND 

INNOVATION 

to 

the  group  of 

Latvia’s  innovation  performance  has  slightly 
improved  over  the 
last  years,  but  many 
challenges  remain.  While  Latvia  has  recently 
been  promoted 
‘moderate 
innovators’  (50-90 %  of  EU  average)  in  the 
European  Innovation  Scoreboard,  the  share  of 
high-tech  firms  in  the  economy  is  small  and  as  a 
result  also  the  private  sector’s  demand  for  R&D 
activities. Innovation in SMEs remains very low as 
the shares of SMEs introducing product or process 
innovations  and  of  those  engaging  in  innovation 
partnerships  are  the  lowest  in  the  EU.  Similarly, 
the  sales  share  of  innovative  products  has  further 
decreased in recent years, standing at only 21 % of 
the EU average. 

Private  R&D  investment  remains  particularly 
low.  Although  generous  tax  incentives  for  R&D 
investment exist, the take-up has been low. In the 
context of the recent reform of the tax system, the 
current  R&D  tax  incentives  will  be  replaced  by 
deferred  taxation  until  the  distribution  of  profits.. 
While SOEs, being some of the largest companies 
in  Latvia,  have  the  potential  to  become  leading 
private  sector  innovators,  their  engagement  in 
R&D  activities  has  so  far  been  limited,  although 
some  positive  developments  are  observed  for 
example 
and 
the 
in 
telecommunications(49) industries. 

forestry 

in 

Prioritisation  of  investments  in  the  context  of 
scarce  resources  is  essential.  EU  funds  are 
invested 
the  Smart 
accordance  with 
Specialisation  Strategy  (RIS3)  that  helps  to  focus 
investments  on  a  limited  number  of  priorities  and 
facilitates the entrepreneurial discovery process by 
bringing  together  the  research  community,  the 
entrepreneurs,  and  the  public  administration  to 
determine  areas  with  the  highest  development 
potential.  

Climate 

Latvia  is  on  track  to  meet  its  2020  target  of 
greenhouse  gas  (GHG)  emissions,  but  new  car 
emissions are still among the highest in the EU. 
Emissions  outside  the  emissions  trading  system 
(ETS)  are  expected  to  increase  by  8 %  between 
2005  and  2020;  this  is  9 percentage  points  below 
the  ceiling  of  a  17 %  increase.  Transport  and 
agriculture  account  for  more  than  half  of  these 
the  non-ETS  emissions 
emissions.  In  2015, 
accounted  for  80 %  of  Latvia's 
total  GHG 
emissions. The average CO2 emissions of new cars 
in 2016 were 128.9 g of CO2 per kilometre, down 
from  137.1 g  in  2015;  however  they  remain 
considerably  above  the  EU  average  of  118.1 g  of 
CO2 per kilometre. 

3.5.2.  WASTE MANAGEMENT 

Despite  notable  progress 
in  recent  years, 
reaching  the  recycling  targets  set  for  2020  will 
pose  a  considerable  challenge.  In  2015,  Latvia 
recycled  23 %  of  all  generated  waste,  this  is 
notably better than the 9 % in 2010. However, part 
of the improvement can be attributed to improved 
statistics and the progress in most recent years has 
slowed down making it unlikely for Latvia to reach 
the 50 % recycling rate target by 2020. The landfill 
tax  is  set  to  increase  more  than  fourfold  by  2020 
compared  with  2016,  thus  significantly  increasing 
the  financial  incentive  for  separate  collection. 
However,  the  municipalities,  notably  the  capital 
Riga,  which  accounts  for  more  than  half  of 
the Latvian  economy,  have  been  slow  with 
the implementation  of  separate  collection  and 
therefore the recycling rates. Regulatory incentives 
and  stricter  reporting  requirements  are  likely 
needed to speed up the implementation.  

disaster. 

The  government  is  set  to  tighten  its  end-of-
in  response  to  a  recent 
waste  regulation 
environmental 
2017, 
23 thousand  tonnes  of  unsorted,  illegally  dumped 
waste  burned  down  in  a  major  fire  causing 
considerable  damage  to  the  environment (48).  In 
response, 
the  Ministry  of  Environment  has 
proposed  tighter  rules  to  account  for  and  track 

June 

In 

(48)  The  authorities  have  acknowledged  that  while  the  activity 
is  suspect  on  criminal  intent,  the  current  regulations  were 
ineffective  at  ensuring  a  timely  response  and  at  the 
prevention of creating such a sizeable illegal dumpsite. 

(49)  State-owned  mobile  telecommunications  company  LMT 
has  launched  a  research  partnership  with  one  the  biggest 
electronics manufacturers in Latvia  (Mikrotik) to work on 
the development of the 5G network 

43 

 
                                                           
                                                           
innovation 

Latvia’s  research  and 
system 
strongly  depends  on  support  from  EU  funds. 
The  dependence  on  EU  funds  was  underlined  by 
the  sharp  drop (50)  in  R&D  investment  in  2016 
caused by the slowdown in EU fund flow. Latvia is 
still  a  long  way  off  its  national  R&D  investment 
target  of  1.5 %  of  GDP  by  2020,  reflecting 
the often low priority given to innovation policy in 
budgetary debates.  

the 

aims 

government 

There  is  a  lively  start-up  scene  in  the  country 
and 
to  provide 
an attractive  regulatory  and  tax  framework. 
EU-funded  venture  capital  has  been  an  important 
source of seed stage funding for many of Latvia’s 
start-ups. In addition to that, in 2016 Latvia set up 
a special tax regime aiming at placing Latvia as the 
regional  destination 
start-up  companies. 
for 
Although  the  incentives  were  generous,  the  strict 
conditions  saw  only  one  company  qualify  for 
support.  Latvia  is  now  reviewing  the  scheme  in 
order  to  attract  a  larger  number  of  enterprises. 
Given  its  small  scale,  the  main  challenge  of 
Latvia’s  start-up  policy  is  to  create  a  sufficiently 
attractive  ecosystem  that  could  keep  the  more 
successful  companies  from  relocating  to  other, 
more popular destinations. 

3.5.4.  DIGITAL ECONOMY 

The  use  of  digital  services  is  widespread  but 
digital skills are not keeping up.  The propensity 
of  individuals  to  use  internet  services  has  been 
increasing  over  time.  75 %  of  the  internet  users 
take  advantage  of  online  banking  possibilities 
(compared  to  EU  average  of  61 %),  47 %  use  e-
government  services,  and  55 %  have  made 
purchases  online  in  the  last  year  (European 
Commission,  2018b).  An  increasing  amount  of 
citizens  are  making  use  of  digital  public  services 
but  half  of  the  population  still  has  low  digital 
skills. 

Progress  has  been  achieved  in  the  digital 
infrastructure but at a slower pace than the EU 
average. The country is somewhat lagging behind 
take-up  of  fixed 
in  both 

the  coverage  and 

(50)  They  declined  from  0.63%  in  2015  to  0.44%  of  GDP  in 

2016 

3.5. Sectoral policies 

internet (51).  This  mainly 

broadband 
reflects 
the urban-rural  digital  divide,  which  is  further 
underlined  by  the  fact  that  the  share  of  fast-
broadband access in Latvia is among the highest in 
the  EU.  The  availability  of  broadband  access  in 
scarcely  populated  areas  is  supported  by  EU 
funding.  The  low  fixed  broadband  coverage  is 
partially  compensated  by  a  significant  increase  in 
take-up. 
mobile 
Nevertheless 
the quality  of 
is  outstanding. 
the  connection 
Indeed, the fiber-to-the-premises (FTTP) coverage 
(85.3 %)  is  three  times  higher  than  in  the  rest  of 
the  EU (European  Commission,  2017e)  and 
already 98% of the homes are connected with a 4G 
technology. 

broadband 

The integration of digital technology by Latvian 
businesses remains a challenge while IT related 
services  export  is  growing  fast.  The  Latvian 
Government  aims  to  restructure  Latvia's  economy 
towards a more intensive use of technology. There 
are  several  measures  in  place,  but  there  is  no 
overarching strategy in place for the digitisation of 
businesses. A relatively small share (52) of Latvian 
SMEs  are  selling  online  and  an  even  smaller 
percentage  of  SMEs  are  engaged  in  cross  border 
online sales (53). 

is  an 

The  shortage  of  high-skilled  professionals, 
including  ICT  specialists, 
increasing 
obstacle.  The  level  of  digital  skills  in  Latvia  is 
below the EU average (see Box 3.1.1). Half of the 
citizens are lacking basic digital skills and the gap 
with other EU countries becomes even wider when 
focusing on advanced skills. The shortage of high 
skilled specialists is an obstacle for investment and 
innovation (European  Commission,  2017f),  which 
will be exacerbated in the future.  

3.5.5.  TRANSPORT 

The  Rail  Baltica  project (54)  continues  to 
progress, despite a number of delays. The target 
date  for  completion  in  the  Baltic  States  is  2025. 
The  railway  is  expected  to  bring  economic  and 

(51)  93% and 61% respectively compared with EU averages of 

98% and 76% 

(52)  10.6 % compared to 17.2 % in the EU 
(53)  4.7 % compared to 8.4 % in the EU 
(54)  A  European-gauge  railway  connecting  the  three  Baltic 
countries (and Finland at a later stage) to the European rail 
network 

44 

 
                                                           
                                                           
3.5. Sectoral policies 

environmental  benefits  due  to  the  anticipated 
modal  shift  from  road  to  rail  in  passenger  and 
freight  transport.  Rail  Baltica’s  success  depends 
the  Baltic  Member  States’ 
primarily  on 
commitment  to  the  project’s  implementation  and 
on  the  effectiveness  of  their  cooperation.  It  was 
review 
agreed 
ensure 
the organisational 
the efficiency  of  EU  funding,  cost  minimisation, 
full interoperability and synchronisation of works.  

setup,  notably 

in  October 

2017 

to 

to 

Road safety needs further improvement. In spite 
of an impressive decrease in road fatalities of 16 % 
from  2015 
to  2016,  Latvia  remains  among 
the three  countries  with  the  highest  fatality  rates 
(80 fatalities  per  million  inhabitants  compared  to 
an  EU  average  of  50).  Proper  enforcement  of 
traffic rules (speed, seatbelt use and drunk driving) 
and  education  on  safe  driving  are  of  particular 
importance. 

45 

 
3.6. PUBLIC ADMINISTRATION 

3.6.1.  PUBLIC ADMINISTRATION 

administration reform is voluntary and there are no 
formal incentives to motivate them.  

and 

ageing 

Public  services  have  not  been  adjusted  to 
population. 
the declining 
The declining  population  and  urbanisation  leave 
infrastructure  and  public  services  underused  in 
the rural  areas.  Public  administration,  education, 
healthcare services require downscaling in scarcely 
populated  and  dwindling  areas,  while  a  further 
concentration of resources is required in centres of 
economic  activity  for  greater  efficiency  and 
quality.  

The  upcoming  public  administration  reform 
aims  at  increasing  the  quality  and  efficiency  of 
the  central  administration.  The  reform  plan 
targets  a  reduction  in  the  number  of  staff  in 
the central  administration  of  6% (55)  by  2020  as 
compared  to  2017 (56).  This  is  expected  to  be 
achieved  by  centralising  administrative  support 
administrative 
cutting  back 
and 
functions 
regulations.  The  subsequent 
procedures  and 
savings  will  be  used 
the 
remuneration of public sector employees making it 
sector. 
more  competitive  with 
However,  the  reform  is  limited  to  the  central 
government  and  only  includes  civil  servants. 
The reform 
the  growing  problem  of 
overcapacity,  which  results  from  the  declining 
population  and  which  increasingly  affects  all 
public  services  (sections  3.3.3  on  Healthcare  and 
3.3.4 on Education).  

the  private 

increasing 

tackles 

for 

The  local  authorities  and  SOEs  are  outside the 
scope  of  the  public  administration  reform.  The 
local  authorities  account  for  60%  of  public  sector 
reviews  have 
employees.  The  State  Audit 
service 
in 
demonstrated  notable  differences 
delivery  and  costs,  as  a  result  of 
limited 
cooperation,  low  use  of  shared  and  electronic 
services,  and 
inefficient  processes.  Moreover, 
some  local  authorities  are  actively  engaging  in 
commercial  activities.  However,  the  municipality-
owned  companies  are  often  inefficient  and  distort 
competition in their sectors. While there is clearly 
a  potential  for  efficiency  and  quality  gains,  local 
authorities'  and  SOEs'  participation  in  the  public 

(55)  Approximately 3 000 people 
(56)  The  army,  domestic  security  and  anti-corruption  services, 
EU funds management, Latvia's representatives abroad are 
excluded from the reform. 

Latvia  has  further  improved  its  e-government 
services. Latvia ranks 8th in the EU with respect to 
the  availability  of  online  government  services. 
The number  of  active  e-government  users  is  also 
above the EU average. Over the past years, Latvia 
has introduced its e-services in a number of areas – 
such  as  company  registration,  tax  declaration, 
application 
and 
construction 
communication with public institutions. Moreover, 
the  improvement  on  the  availability  of  online 
government 
with 
the implementation  of  the  National  open  data 
portal is expected to further increase the number of 
users.  At  the  same  time  challenges  remain  in 
crucial  services,  such  as  e-health  (see  Section 
3.3.4). 

achieved 

permits, 

services 

for 

3.6.2.  PUBLIC PROCUREMENT 

in 

but 

and 

have 

technical 

improved, 

specifications 

transparency 

continue  pointing 

public 
Efficiency 
not 
procurement 
significantly.  The  use  of  negotiated  procedures 
without prior publication has declined somewhat in 
2017  (57).  A  decrease  was  also  observed  in  the 
share of tenders awarded on the basis of only one 
bidder  (58),  marking  increased  competition  in 
public  tenders (European  Commission,  2018c). 
However,  businesses 
at 
procedures  where  discriminatory  or  unnecessarily 
complex 
hinder 
competition  (FICIL,  2018 (59)).  The  negative 
perception  of  the  fairness  of  the  procurement 
procedure  could  lead  to  decreased  competition 
because  of  the  dissuasive  effects  on  potential 
bidders. The wider use of e-procurement could not 
only be beneficial in terms of transparency but also 
for  an  increased  efficiency  of  public  projects.  No 
specific  steps  have  been  undertaken  to  boost  the 
fight  against  possible  corruptive  practices  where 
such  could  be  linked  to  tailor-made  technical 
specifications.  In  cases  of  appeals,  the  relatively 
long duration of the review procedures could lead 
to  problems 
and 
contracting authorities.  

economic  operators 

for 

(57)  10 % compared to 12 % in 2016; EU average 5 % 
(58)  27 % compared to 31 % in 2016; EU average 22 % 
(59)  http://www.ficil.lv/wp-

content/uploads/2017/04/Ficil_Sentiment_Index_2017_rep
ort.pdf 

46 

 
 
                                                           
                                                           
3.6. Public administration 

3.6.3.  INSOLVENCY 

power  which  will  contribute  to  the  independence 
of the judiciary.   

to 

the 

has 

improve 

government 

the  number  of 

The 
strengthened 
the supervision  of  insolvency  administrators, 
but  challenges  remain.  The  Insolvency  Policy 
Development Guidelines for 2016 to 2020 contain 
specific  measures 
insolvency 
framework  and  the  regulation  of  the  insolvency 
administrators’  profession.  The  goals  are 
to 
increase 
restructurings  and 
the insolvency  recovery  rate,  and  to  strengthen 
the trust in the profession. With regard to the latter, 
the  profession's  regulatory  framework  has  been 
overhauled  with  closer  oversight,  stricter  conflict 
of  interest  provisions,  and  harsher  penalties  for 
misconduct.  The  court  system  has  also  been 
reformed  by  reducing  the  number  of  courts;  this 
should improve the overall quality of decisions and 
improve the functioning of random case allocation 
to  judges.  Although  major  efforts  have  been 
insolvency 
strengthen 
undertaken 
framework and process, concerns persist regarding 
the judicial system’s capacity to deal with cases of 
professional  misconduct  by  judges  in  insolvency 
proceedings  (irir.lv,  2017).  A  number  of  judges 
have  expressed  concern  that  this  contributes  to 
undermining  the  trust  in  the  judicial  system.  To 
address this concern, the council of the judiciary is 
considering stepping up efforts to identify cases of 
professional  misconduct  and 
the 
mechanism  to  address  them.  Overall  trust  in  the 
judicial  system 
independence  of 
the  Latvian 
(European 
comparatively 
remains 
Commission,  2018  EU 
Justice  Scoreboard, 
forthcoming)..  

improve 

low 

the 

to 

to 

3.6.4.  JUSTICE SYSTEM 

The  quality  of  the  justice  system  shows  room 
for  improvement  also  in  other  respects.  Access 
to  legal  aid  for  consumers  at  risk  of  poverty 
remains  difficult.  In  light  of  the  relatively  high 
level of court fees the difficulty in accessing legal 
aid  may  have  a  discouraging  effect  for  people  at 
risk  of  poverty.  Furthermore,  decisions  about 
financial  resources  of  the  judiciary  appear  to  be 
largely  based  on  historic  costs  and  not  on  other 
criteria  such  as 
the  number  of  resolved  or 
incoming  cases  (European  Commission,  2017h). 
At  the  same  time  progress  was  made  with  the 
passing  of  amendments  to  the  law  on  judicial 

3.6.5.  CORRUPTION 

in  Latvia  according 

Corruption  remains  a  concern  for  Latvia. 
Corruption  is  the  fourth  most  problematic  factor 
for  doing  business 
to 
the Global  Competitiveness  Report.  Latvia  scores 
particularly  bad  in  favouritism  in  government 
decision-making (60).  Moreover, 
2017 
Eurobarometer  survey  (European  Commission, 
2017i)  shows 
is  both  more 
that  corruption 
widespread  and  tolerated  than  in  some  other  EU 
countries(61).  The  share  of  businesses  pointing  to 
corruption  being  an  obstacle  to  their  business  is 
decreasing, however.  

the 

Independence of the Corruption Prevention and 
Combating  Bureau  (KNAB)  was  strengthened, 
while there is room to improve its effectiveness. 
Amendments to the Law on Corruption Prevention 
and Combating Bureau (Law on the KNAB) were 
adopted  on  5  April  2016,  strengthening  KNAB’s 
functional  independence.  A  new  head  of  the 
Bureau  has  been  appointed  by  the  Parliament 
(Saeima)  in  June  2017,  upon  a  proposal  from  a 
selection  committee  involving  both  members  of 
the  government  and  civil  society.  However,  years 
of  in-fighting  have  damaged  KNAB's  credibility 
among the population as only 30% of respondents 
say  they  would  report  corruption  if  they  were  to 
experience or witness it and would trust KNAB to 
deal  with 
the  new 
the  allegations.  Under 
leadership,  KNAB  underwent  a  reorganisation 
with  the  aim  to  boost  the  personnel's  morale  and 
restore  the  bureau's  credibility.  At  the  same  time, 
lower  paygrades  than  in  other  law  enforcement 
bodies in Latvia, have left KNAB understaffed. As 
regards  prosecution,  most  cases  investigated  and 
brought  to  court  were  related  to  traffic  police 
bribery, while several high-profile corruption cases 
have eventually been dropped by the prosecutor. 

Legislative initiatives to improve the corruption 
framework  are  ongoing,  but 
prevention 

(60)  Latvia's  score  is  2.5  out  of  7  and  it  is  ranked  103rd  out  of 

137 countries 

(61)  84 % consider that corruption is widespread in Latvia (EU 
average  68%).  59%  consider  that  corruption  is  tolerated 
(EU  average  26%),  whereas  only  31%  consider 
it 
unacceptable (EU average 70%). 

47 

 
                                                           
3.6. Public administration 

and  municipality-owned  companies  are  excluded 
from  this  scheme,  that  leaves  about  40%  of  all 
SOE’s  (by  number  of  employees)  outside  the 
scope of the centralised coordination.  

from 

political 

intransigence 

The  main  challenges  for  Latvia’s  SOEs  have 
been  ensuring  competent  governance  and 
interference. 
freedom 
Establishment of independent supervisory councils 
was  a  pre-condition  for  Latvia's  accession  to  the 
OECD  and  ultimately  a  litmus  test  for  SOE’s 
independence  from  political  interference.  Despite 
some  ministries, 
of 
the 
the establishment  of  the  supervisory  councils  has 
progressed  well (63).  However,  in  some  cases 
independence  criteria  have  been 
the member 
shirked (64).  Further 
to  SOE 
improvements 
management  being  considered  are  an  even  more 
centralised  selection  of  the  Supervisory  Council 
members  and  the  creation  of  a  clear  long-term 
investment  and  dividend  policy.  Listing  the  SOEs 
on  the  stock  exchange  is  also  considered  with 
the  SOE’s  reporting  and 
a view 
to 
governance 
facilitate 
the development of the capital market.  

standards 

improve 

and 

(63)  So  far,  supervisory  councils  have  been  established  in  12 
largest  SOEs  and  there  are  plans  to  subject  also  medium-
sized SOEs and the 3 largest hospitals to such councils.  
(64)  Of  the  39  Council  members  appointed  by  the  government 
since  2016,  6  do  not  meet  the  established  criteria  for 
independence due to close links with line ministries. 

in  March  2017.  However, 

the conflict  of  interest  declarations  are  not 
systemically  verified.  A  draft  law  on  whistle-
blower protection was submitted to the Parliament 
the 
for  adoption 
responsible  parliamentary  committee  put  the  draft 
law  on  hold,  despite  strong  support 
from 
stakeholders.  Instead,  a  parliamentary  working 
group  was  set  up  and  asked  to  come  up  with 
alternative legislative proposals by autumn of 2018 
(Saeima,  2017).  A  regulation  on  the  essential 
requirements  of  an  internal  control  system  for 
preventing  corruption  and  the  risk  of  conflict  of 
interest  in  the  public  institutions  was  adopted  by 
the  Cabinet  of  Ministers 
in  October  2017. 
The regulation  provides  for  the  establishment  of 
an internal  control  system  for  the  prevention  of 
corruption  and  the  risk  of  conflict  of  interest  in 
each  public  institution,  including  SOEs,  and  at 
municipal level. The verification of the assets and 
interest  declarations  for  public  officials  is  done 
of 
systematically, 
competencies  and  the  coordination  between  the 
two  bodies  in  charge,  the  State  Revenue  Service 
and  the  KNAB,  remain  unclear.  Part  of  the 
recommendations  by  the  State  Audit  Office  have 
already been implemented and the remaining three 
recommendations  are  currently  being  worked  on 
with implementation planned for end of 2018. 

however 

division 

the 

3.6.6.  STATE OWNED ENTERPRISES 

The transparency and quality of governance of 
the  state-owned  enterprises  (SOEs)  is  ensured 
by coordinating these aspects at the government 
level.  However,  some  SOEs  fall  outside  the 
scope of this mechanism. SOEs in Latvia account 
for  a  sizable  share  of  the  economy  employing 
nearly  10%  of  all  private  sector  employees. 
The SOEs  in  charge  of  strategically-important 
assets,  account  for  most  of  the  total  turnover  and 
profits.  They  are  concentrated  in  the  energy, 
railways, forestry and telecommunications sectors. 
A  central  SOE  coordinator (62)  evaluates  SOE 
strategies,  participates  in  the  Management  Board 
and  Supervisory  Council  nomination  committees, 
produces an annual report on SOE operations, and 
issues. 
them  on  governance-related 
advises 
linking 
The coordination 
for 
with 
the companies’ 
the country's  development  goals.  However,  ports 

also 
strategic 

objectives 

allows 

(62)  Cross-Sectoral Coordination Centre 

48 

 
                                                           
                                                           
ANNEX A  

OVERVIEW TABLE 

Commitments 

2016 Country-specific recommendations (CSRs) 

CSR 1:  Pursue  its  fiscal  policy  in  line  with  the 
requirements  of  the  preventive  arm  of  the  Stability 
and  Growth  Pact,  which  entails  achieving 
its 
medium-term  budgetary  objective  in  2018,  taking 
into  account 
the 
the  allowances 
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 
tax 
compliance. 

to  growth  and  by 

improving 

linked 

to 

  Pursue 

its 

fiscal  policy 

line  with 
in 
the  preventive  arm  of 

the 
requirements  of 
the 
Stability  and  Growth  Pact,  which  entails 
achieving 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 
shifting 
detrimental to growth… 

taxation  for 
it 

to  other  sources 

low-income  earners  by 
less 

that  are 

Summary assessment (65) 

Latvia has made some progress in addressing 
CSR 1.  

This  overall  assessment  of  CSR  1  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 2017 will be 
available. 

  Some  Progress  The  tax  wedge  on  low 
wages  is  reduced,  but  it  is  estimated  to 
remain  relatively  high  compared  to  other 
the 
Member  States.  The 
in 
income-differentiated  basic 
allowance, 
which is the most effective at reducing the 
tax  wedge  for  single  low  income  earners, 

increase 

(65)  The following categories are used to assess progress in implementing the 2017 country-specific recommendations (CSRs): 
No progress: The Member State has not credibly announced nor adopted any measures to address the CSR. This category covers a 
number  of  typical  situations,  to  be  interpreted  on  a  case-by-case  basis  taking  into  account  country-specific  conditions.  They 
include the following: 
 

no  legal,  administrative,  or  budgetary  measures  have  been  announced  in  the  national  reform  programme,  in  any  other 
official  communication  to  the  national  Parliament/relevant  parliamentary  committees  or  the  European  Commission,  
publicly (e.g. in a press statement or on the government's website);  
no non-legislative acts have been presented by the governing or legislative 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 to be taken (unless the CSR explicitly asks for orientations or exploratory actions). 
However, it has not proposed any clearly-specified measure(s) to address the CSR. 

 
 

Limited progress: The Member State has: 

 
 

 

announced certain measures but these address the CSR only to a limited extent; and/or 
presented legislative acts in the governing or legislative body but these have not been adopted yet and substantial further, 
non-legislative work is needed before the CSR is implemented;  
presented non-legislative acts, but has not followed these up with the implementation needed to address the CSR. 

 
 

Some progress: The Member State has adopted measures:  
that partly address the CSR; and/or  
that address the CSR, but a fair amount of work is still needed to address the CSR fully as only a few of the measures 
have  been  implemented.  For  instance,  a  measure  or  measures  have  been  adopted  by  the  national  Parliament  or  by 
ministerial decision, but no implementing decisions are in place. 

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

have been implemented. 

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

49 

 
 
                                                           
A. Overview Table 

accounts  for  the  small  share  of  the  total 
reform costs. The tax cutting measures are 
only  partly  compensated  by  the  increases 
stricter  VAT 
in  excise  duties  and 
administration, 
shifting 
tax 
principle is only partly observed. 

thus 

the 

  …and by improving tax compliance. 

CSR 2: Improve the adequacy of the social safety net 
and  upskill  the  labour  force  by  speeding  up  the 
curricula reform in vocational education. Increase the 
cost-effectiveness  of  and  access 
to  healthcare, 
including  by  reducing  out-of-pocket  payments  and 
long waiting times. 

 

Improve the adequacy of the social safety net… 

  …and upskill the labour force by speeding up the 

curricula reform in vocational education. 

 

Increase  the  cost-effectiveness  of  and  access  to 
healthcare,  including  by  reducing  out-of-pocket 
payments and long waiting times. 

50 

tax 

evasion 

  Some  Progress  Administrative  measures 
being 
are 
limiting 
implemented.  The 
tax  administration 
adopts cooperative approach – the ‘consult 
first’  principle.  The  tax  administration  is 
reformed  by  streamlining  operations  and 
strengthening capacity. 

Latvia has made some progress in addressing 
CSR 2: 

  Limited  Progress  Guaranteed  minimum 
income will be increased from EUR 49.80 
to EUR 53 as of January 2018; some steps 
taken to improve current pension adequacy 
and  family  state  benefits.  The  minimum 
income 
substantially 
improving  social  safety  net  was  not 
implemented  in  2017  as  planned  and  no 
follow-up has been decided. 

reform 

level 

  Some  Progress  As  of  2017/2108  school 
year, modular programmes in 29 out of 56 
professional  qualifications  developed  so 
far are taught in 24 VET schools (doubling 
over  the  previous  year).  Development  of 
10 planned  modular  programmes  was 
initiated in 2017, but 174 programmes still 
remain  to  be  developed.  Development  of 
56 
remaining) 
professional standards has been initiated in 
2017 and 22 of them were approved by the 
tripartite  council  for  co-operation  in  VET 
by the December 2017.  

(out  of  160 

total 

  Some  Progress  Public 

financing 

for 
healthcare  is  increased,  but  little  progress 
on  efficiency  enhancing  measures.  Access 
to  the  universal  healthcare  is  expected  to 
be  limited  by  linking  service  provision  to 

 
A. Overview Table 

social contributions. 

Latvia has made some progress in addressing 
CSR 3: 

sector, 

CSR 3: Increase efficiency and accountability in the 
simplifying 
public 
administrative  procedures  and  strengthening 
the 
conflict-of-interest  prevention  regime,  including  for 
insolvency administrators. 

in  particular  by 

 

Increase  efficiency  (..)  in  the  public  sector,  in 
particular 
administrative 
simplifying 
procedures (..) 

by 

  Some  Progress  A  top-down  targets  for 
staff reduction and increasing efficiency of 
support  services  are  set  for  the  central 
government,  while  the  more  numerous 
local authorities are not covered. 

 

Increase (..) accountability in the public sector, in 
particular  by  (..)  strengthening  the  conflict-of-
for 
interest  prevention 
insolvency administrators. 

including 

regime, 

control 

requirements 

  Limited  Progress  A  regulation  on  the 
internal 
for 
prevention  of  risks  of  conflict  of  interest 
and  corruption  in  public  institutions  was 
adopted  by  the  Cabinet  of  Ministers  in 
October  2017.  However,  a  lack  of  clarity 
persists  on  the  mechanism  of  verification 
of  the  conflicts  of  interest  and  revenues 
declarations for public officials, as well as 
on the division of competencies among the 
law  on 
institutions 
whistle-blower 
been 
dropped by the parliament. 

involved.  A  draft 
protection 

has 

Europe 2020 (national targets and progress) 

Employment rate: 73% 

R&D: 1.5 % of GDP 

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

The employment rate (for the age group 20-64 
year  old)  reached  the  target  in  2016  (73.2 %) 
and  continues  to  increase  rapidly  (75.5 %  in 
Q3-2017)  offsetting  the  impact  of  the  decline 
in working age population on employment. 

R&D  expenditure  was  0.44 %  of  GDP  in 
2016,  down  from  0.63 %  of  GDP  in  2015. 
Latvia is not on track to meet its target. 

According  to  the  latest  national  projections 
and taking into account existing measures, the 
target is expected to be achieved: 8 % in 2020 
compared 
(with  a  margin  of 
to  2005 
9 percentage points). 

Furthermore, while the target for 2016 was an 
increase  of  no  more  than  12 %  compared  to 
2005,  the  preliminary  figures  show  that  the 
non-ETS  emissions  increased  by  4 %.  The 
interim target has thus been achieved. 

51 

 
 
 
A. Overview Table 

Renewable energy target: 40% 

In  2016,  Latvia's  share  of  renewable  energy 
declined  by  0.6  pps.  to  37.0 %.  This  is  3 % 
short of its 2020 target. 

In 2016, Latvia's primary energy consumption 
stayed  at  4.3  Mtoe  as  in  2015.  The  final 
energy 
at 
3.8 Mtoe. Given the current trend, Latvia is on 
track to achieve its energy efficiency target. 

consumption 

remained 

also 

Having increased over the past years, at 10 % 
the  early  school  leaving  rate  was  just  at  the 
target  in  2016.  In  addition,  this  rate  is  higher 
for boys (13.7 %) than for girls (6.2 %). 

The  tertiary  attainment  rate  was  42.8 %  in 
2016,  i.e.  well  above  the  target.  Gender 
disparities  are  however  strong:  30.1 %  for 
men and 56.1 % for women. 

The number of people living at risk of poverty 
and/or  living  in  jobless  households  has  been 
reduced  by  125  000  compared  to  2008,  thus 
Latvia has met its poverty target. 

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% attainment rate for age group 
30 - 34 

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. 

52 

 
ANNEX B  

MACROECONOMIC IMBALANCE PROCEDURE SCOREBOARD 

Table B.1:  Macroeconomic imbalances scoreboard 

(1)  This table provides data as published under the Alert Mechanism Report 2018, which reports data as of 24 Oct 2017. 
Please note that figures reported in this table may therefore differ from more recent data elsewhere in this document.  
(2) Figures highlighted are those falling outside the threshold established in the European Commission's Alert Mechanism 
Report.         
Source:  Source: European Commission 2017, Statistical Annex to the Alert Mechanism Report 2018, SWD(2017) 661. 

53 

Thresholds201120122013201420152016Current account balance, % of GDP 3 year average-4%/6%2.2 -1.6 -3.2 -2.7 -1.6 -0.3 Net international investment position% of GDP-35%-74.4 -67.2 -66.3 -65.9 -63.8 -58.9 Real effective exchange rate - 42 trading partners, HICP deflator3 year % change±5% (EA) ±11% (Non-EA)-2.4 -8.6 -1.6 0.4 2.7 4.9 Export market share - % of world exports5 year % change-6%26.8 8.4 6.3 11.5 12.9 9.3 Nominal unit labour cost index (2010=100)3 year % change9% (EA) 12% (Non-EA)-21.0 -6.9 7.9 16.1 17.5 16.5 House price index (2015=100), deflated 1 year % change6%4.1 -0.4 6.5 4.3 -2.4 7.4 Private sector credit flow, consolidated% of GDP14%-2.0 -2.1 0.9 -11.8 0.7 0.3 Private sector debt, consolidated% of GDP133%115.3 97.9 92.4 96.0 88.8 88.3 General government gross debt% of GDP60%42.7 41.2 39.0 40.9 36.9 40.6 Unemployment rate3 year average10%17.7 16.9 14.4 12.6 10.9 10.1 Total financial sector liabilities, non-consolidated1 year % change16.5%-4.1 5.2 5.2 10.4 12.2 5.8 Activity rate - % of total population aged 15-643 year change in pp-0.2 pp-1.4 0.9 1.0 1.8 1.3 2.3 Long-term unemployment rate - % of active population aged 15-743 year change in pp0.5 pp6.9 3.3 -3.1 -4.2 -3.3 -1.7 Youth unemployment rate - % of active population aged 15-243 year change in pp2 pp17.4 -4.8 -13.0 -11.4 -12.2 -5.9 External imbalances and competitivenessInternal imbalancesEmployment indicators 
 
 
 
 
 
ANNEX C  

STANDARD TABLES 

Table C.1: 

Financial market indicators 

(1) Latest data Q3 2017. 
(2) Latest data Q2 2017. 
(3) As per ECB definition of gross non-performing debt instruments 
(4) 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). 

54 

201220132014201520162017Total assets of the banking sector (% of GDP)(1)128.5127.9130.3131.1118.1103.3Share of assets of the five largest banks (% of total assets)64.164.163.664.566.5-Foreign ownership of banking system (% of total assets)(2)61.359.052.547.449.751.8Financial soundness indicators:2)              - non-performing loans (% of total loans)(3)7.95.67.75.15.25.0              - capital adequacy ratio (%)16.718.020.221.820.420.5              - return on equity (%)(4)4.98.810.210.714.35.0Bank loans to the private sector (year-on-year % change)(1)-0.4-2.0-4.5-0.16.3-1.7Lending for house purchase (year-on-year % change)(1)-4.5-4.5-3.4-3.3-0.50.2Loan to deposit ratio(1)161.7132.3119.4109.3107.8107.2Central Bank liquidity as % of liabilities--0.31.01.01.1Private debt (% of GDP)97.992.496.088.888.3-Gross external debt (% of GDP)(2) - public32.330.536.330.432.930.4    - private40.842.039.040.140.238.7Long-term interest rate spread versus Bund (basis points)*307.0177.0134.546.844.453.7Credit default swap spreads for sovereign securities (5-year)*213.2110.399.676.562.048.9 
 
 
 
 
 
C. Standard Tables 

Table C.2: 

Headline Social Scoreboard indicators 

(1) People at risk of poverty or social exclusion (AROPE): individuals who are at risk of poverty (AROP) and/or suffering from 
severe material deprivation (SMD) and/or living in households with zero or very low work intensity (LWI).       
(2) Unemployed persons are all those who were not employed but had actively sought work and were ready to begin 
working immediately or within two weeks.       
(3) Gross disposable household income is defined in unadjusted terms, according to the draft Joint Employment Report 2018.       
(4) Reduction in percentage of the risk of poverty rate, due to social transfers (calculated comparing at-risk-of poverty rates 
before social transfers with those after transfers; pensions are not considered as social transfers in the calculation).       
(5) Average of first three quarters of 2017 for the employment rate and gender employment gap. 
Source: Eurostat 

55 

201220132014201520162017 (5)Equal opportunities and access to the labour marketEarly leavers from education and training (% of population aged 18-24)10.69.88.59.910.0:Gender employment gap (pps)3.64.24.64.12.94.2Income inequality, measured as quintile share ratio (S80/S20)6.56.36.56.56.26.3At-risk-of-poverty or social exclusion rate(1) (AROPE)36.235.132.730.928.528.2Young people neither in employment nor in education and training (% of population aged 15-24)14.913.012.010.511.2:Dynamic labour markets and fair working conditionsEmployment rate (20-64 years)68.169.770.772.573.274.4Unemployment rate(2) (15-74 years)15.011.910.89.99.68.9Participation in activation labour market policies(per 100 persons wanting to work)5.76.86.84.35.8:Gross disposable income of households in real terms per capita(3) (Index 2008=100) ::91.698.5103.1:Compensation of employees per hour worked (EUR)6.06.36.77.47.9:Public support / Social protection and inclusionImpact of social transfers (excluding pensions) on poverty reduction(4)25.325.421.517.621.621.9Children aged less than 3 years in formal childcare23.023.021.622.9::Self-reported unmet need for medical care12.413.812.58.48.2:Individuals who have basic or above basic overall digital skills (% of population aged 16-74):::49.050.048.0 
 
 
 
 
C. Standard Tables 

Table C.3: 

Labour market and education indicators 

* Non-scoreboard indicator       
(1) Long-term unemployed are people who have been unemployed for at least 12 months.       
(2) Difference between the average gross hourly earnings of male paid employees and of female paid employees as a 
percentage of average gross hourly earnings of male paid employees. It is defined as "unadjusted", as it does not correct for 
the distribution of individual characteristics (and thus gives an overall picture of gender inequalities in terms of pay). All 
employees working in firms with ten or more employees, without restrictions for age and hours worked, are included.       
(3) PISA (OECD) results for low achievement in mathematics for 15 year-olds.       
(4) Impact of socio-economic and cultural status on PISA (OECD) scores. Values for 2012 and 2015 refer respectively to 
mathematics and science.       
(5) Average of first three quarters of 2017, unless for the youth unemployment rate (annual figure).  
Source: Eurostat, OECD 

56 

Labour market indicators201220132014201520162017 (5)Activity rate (15-64)74.474.074.675.776.3:Employment in current job by durationFrom 0 to 11 months17.416.414.714.513.5:From 12 to 23 months10.910.811.310.110.2:From 24 to 59 months19.118.720.119.120.1:60 months or over52.654.153.856.256.1:Employment growth* (% change from previous year)1.42.3-1.31.4-0.3-0.3Employment rate of women(% of female population aged 20-64)66.467.768.570.571.872.3Employment rate of men (% of male population aged 20-64)70.071.973.174.674.776.5Employment rate of older workers* (% of population aged 55-64)52.854.856.459.461.461.7Part-time employment* (% of total employment, aged 15-64)8.97.56.87.28.57.8Fixed-term employment* (% of employees with a fixed term contract, aged 15-64)4.74.33.33.83.73.0Transition rate from temporary to permanent employment(3-year average)37.844.350.257.257.9:Long-term unemployment rate(1) (% of labour force)7.85.74.64.54.03.5Youth unemployment rate (% active population aged 15-24)28.523.219.616.317.316.9Gender gap in part-time employment4.33.84.25.54.75.7Gender pay gap(2) (in undadjusted form)14.916.017.317.0::Education and training indicators201220132014201520162017Adult participation in learning(% of people aged 25-64 participating in education and  training)7.26.85.65.77.3:Underachievement in education(3)19.9::21.4::Tertiary educational attainment (% of population aged 30-34 having successfully completed tertiary education)37.240.739.941.342.8:Variation in performance explained by students' socio-economic status(4)502::490:: 
 
 
 
 
C. Standard Tables 

Table C.4: 

Social inclusion and health indicators 

* Non-scoreboard indicator       
(1) At-risk-of-poverty rate (AROP): proportion of people with an equivalised disposable income below 60 % of the national 
equivalised median income.        
(2) 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.       
(3) Percentage of total population living in overcrowded dwellings and exhibiting housing deprivation.       
(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) Ratio of the median individual gross pensions of people aged 65-74 relative to the median individual gross earnings of 
people aged 50-59.       
(6) Fixed broadband take up (33%), mobile broadband take up (22%), speed (33%) and affordability (11%), from the Digital 
Scoreboard. 
Source: Eurostat, OECD 

57 

201220132014201520162017Expenditure on social protection benefits* (% of GDP)Sickness/healthcare3.33.43.53.6::Disability1.21.21.31.4::Old age and survivors7.87.77.47.3::Family/children1.01.21.31.6::Unemployment0.50.60.60.6::Housing0.10.10.10.1::Social exclusion n.e.c.0.20.10.10.1::Total14.114.414.314.6::of which: means-tested benefits0.40.30.20.2::General government expenditure by function (% of GDP)Social protection11.411.611.511.5::Health3.93.73.83.8::Education5.75.75.96.0::Out-of-pocket expenditure on healthcare::39.142.1::Children at risk of poverty or social exclusion (% of people aged 0-17)*40.038.435.331.324.723.9At-risk-of-poverty  rate(1) (% of total population)19.219.421.222.521.822.1In-work at-risk-of-poverty rate (% of persons employed)8.68.98.19.28.38.8Severe material deprivation rate(2)  (% of total population)25.624.019.216.412.811.3Severe housing deprivation rate(3), by tenure statusOwner, with mortgage or loan7.68.310.66.96.97.9Tenant, rent at market price29.923.128.326.725.824.7Proportion of people living in low work intensity households(4) (% of people aged 0-59)11.710.09.67.87.27.8Poverty thresholds, expressed in national currency at constant prices*198020292263251727432844Healthy life yearsFemales6.44.24.64.0::Males5.34.04.04.1::Aggregate replacement ratio for pensions(5) (at the age of 65)0.50.50.40.40.40.4Connectivity dimension of the Digital Economy and Society Inedex (DESI)(6)::54.858.763.363.7GINI coefficient before taxes and transfers*53.152.051.249.8::GINI coefficient after taxes and transfers*35.735.235.535.4:: 
 
 
 
 
C. Standard Tables 

Table C.5: 

Product market performance and policy indicators 

(1) The methodologies, including the assumptions, for this indicator are shown in detail here: 
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 don't know.       
(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 here: http://www.oecd.org/competition/reform/indicatorsofproductmarketregulationhomepage.htm       
(6) Aggregate OECD indicators of regulation in energy, transport and communications (ETCR). 
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). 

58 

Performance Indicators2010201120122013201420152016Labour productivity (real, per person employed, year-on-year % change)Labour productivity in Industry8.80-1.50-1.54-2.581.977.693.76Labour productivity in Construction-20.6516.8511.46-2.01-0.754.62-11.52Labour productivity in Market Services1.997.652.91-1.361.212.902.29Unit labour costs (ULC) (whole economy, year-on-year % change)ULC in Industry-10.521.469.408.105.161.941.37ULC in Construction17.49-24.591.229.267.275.4017.24ULC in Market Services-6.81-3.197.084.515.536.774.08Business Environment2010201120122013201420152016Time needed to enforce contracts(1) (days)309.0369.0469.0469.0469.0469.0469.0Time needed to start a business(1) (days)15.515.515.512.512.55.55.5Outcome of applications by SMEs for bank loans(2)na0.88na0.851.190.490.84Research and innovation2010201120122013201420152016R&D intensity0.610.700.660.610.690.630.44General government expenditure on education as % of GDP6.205.905.705.705.906.00naPersons with tertiary education and/or employed in science and technology as % of total employment42424444434545Population having completed tertiary education(3)23242527272830Young people with upper secondary level education(4)80818486878685Trade balance of high technology products as % of GDP-1.83-1.68-1.17-1.03-1.23-1.19naProduct and service markets and competition200320082013OECD product market regulation (PMR)(5), overallnana1.61OECD PMR5, retailnana0.40OECD PMR5, professional servicesnananaOECD PMR5, network industries(6)nana2.66 
 
 
 
 
C. Standard Tables 

Table C.6:  Green growth 

All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2010 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 % of total value added for the economy 
Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (in 2010 EUR)  
Real unit energy costs for manufacturing industry excluding refining : real costs as % 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 GHG emissions covered by EU emissions trading system (ETS) (excluding aviation): based on GHG 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 2010 EUR) 
Transport carbon intensity: GHG 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 covering natural gas, total petrol products, nuclear heat, renewable 
energies and solid fuels 
* European Commission and European Environment Agency 
Source: European Commission and European Environment Agency (Share of GHG emissions covered by ETS); European 
Commission (Environmental taxes over labour taxes and GDP); Eurostat (all other indicators) 

59 

Green growth performance201120122013201420152016MacroeconomicEnergy intensity kgoe / €0.230.230.220.220.210.20Carbon intensity kg / €0.600.580.560.540.53-Resource intensity (reciprocal of resource productivity)kg / €2.162.002.072.012.062.10Waste intensity kg / €-0.12-0.13--Energy balance of trade % GDP-5.4-6.1-5.3-4.2-3.2-2.3Weighting of energy in HICP%15.5115.7015.9315.4215.1014.27Difference between energy price change and inflation %6.97.3-1.7-1.74.4-6.8Real unit of energy cost% of value added20.120.520.220.2--Ratio of environmental taxes to labour taxesratio0.180.170.180.190.20-Environmental taxes% GDP3.03.03.43.63.73.7Sectoral Industry energy intensity kgoe / € 0.250.270.260.270.260.24Real unit energy cost for manufacturing industry excl. refining% of value added19.219.719.519.3--Share of energy-intensive industries in the economy% GDP10.289.989.078.728.91-Electricity prices for medium-sized industrial users€ / kWh0.100.110.110.120.120.12Gas prices for medium-sized industrial users€ / kWh0.030.040.040.040.030.03Public R&D for energy % GDP0.010.010.010.010.010.01Public R&D for environmental protection% GDP0.010.010.010.010.020.01Municipal waste recycling rate%9.714.725.927.028.725.2Share of GHG emissions covered by ETS*%25.324.023.220.720.019.9Transport energy intensitykgoe / €0.550.510.510.520.590.59Transport carbon intensitykg / €1.481.351.371.411.62-Security of energy supplyEnergy import dependency%59.956.455.940.651.247.2Aggregated supplier concentration indexHHI47.447.347.223.141.9-Diversification of energy mixHHI0.290.300.300.290.300.32 
 
 
 
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