Recommendation for a COUNCIL RECOMMENDATION on the 2018 National Reform Programme of Latvia and delivering a Council opinion on the 2018 Stability Programme of Latvia
Date: 2018-05-23
Institutions: European Commission, Secretariat-General
Subjects: Latvia, budget deficit, corruption, economic policy, economic reform, fiscal policy, labour market, pay policy, public sector, stability programme

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   EUROPEAN COMMISSION  Brussels, 23.5.2018  COM(2018) 413 final  Recommendation for a COUNCIL RECOMMENDATION on the 2018 National Reform Programme of Latvia  and delivering a Council opinion on the 2018 Stability Programme of Latvia  
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2018 National Reform Programme of Latvia 

and delivering a Council opinion on the 2018 Stability Programme of Latvia 

THE COUNCIL OF THE EUROPEAN UNION, 

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

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

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

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

Having regard to the opinion of the Social Protection Committee, 

Having regard to the opinion of the Economic Policy Committee, 

Whereas: 

(1) 

On 22 November 2017, the Commission adopted the Annual Growth Survey, marking 
the start of the 2018 European Semester of economic policy coordination. It took due 
account  of  the  European  Pillar  of  Social  Rights,  proclaimed  by  the  European 
Parliament, the Council and the Commission on 17 November 2017. The priorities of 
the  Annual  Growth  Survey  were  endorsed  by  the  European  Council  on  22  March 
2018.  On  22  November  2017,  on  the  basis  of  Regulation  (EU)  No  1176/2011,  the 
Commission  also  adopted  the  Alert  Mechanism  Report,  in  which  it  did  not  identify 
Latvia as one of the Member States for which an in-depth review would be carried out. 
On  the  same  day,  the  Commission  also  adopted  a  recommendation  for  a  Council 
recommendation on the economic policy of the euro area, which was endorsed by the 
European  Council  on  22  March  2018.  On  14  May  2018,  the  Council  adopted  the 
recommendation  on  the  economic  policy  of  the  euro  area  (‘recommendation  for  the 
euro area’). 

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OJ L 209, 2.8.1997, p. 1. 
COM(2018) 413 final. 
P8_TA(2018)0077 and P8_TA(2018)0078. 

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(2) 

(3) 

(4) 

(5) 

(6) 

As a Member State whose currency is the euro and in view of the close interlinkages 
between the economies in the economic and monetary union, Latvia should ensure the 
full and timely implementation of the recommendation on the economic policy for the 
euro area, as reflected in recommendations below, in particular (1) and (2). 
The  2018  country  report  for  Latvia4  was  published  on  7  March  2018.  It  assessed 
Latvia’s progress in addressing the country-specific recommendations adopted by the 
Council  on  11  July  2017,  the  follow-up  given  to  the  recommendations  adopted  in 
previous years and Latvia's progress towards its national Europe 2020 targets. 

On 11 April 2018, Latvia submitted its 2018 National Reform Programme and on 16 
April  its  2018  Stability  Programme.  To  take  account  of  their  interlinkages,  the  two 
programmes have been assessed at the same time. 

Relevant country-specific recommendations have been addressed in the programming 
of  the  European  Structural  and  Investment  Funds  for  the  2014-2020  period.  As 
foreseen in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament 
and  of  the  Council5,  where  it  is  necessary  to  support  the  implementation  of  relevant 
Council  recommendations,  the  Commission  may  request  a  Member  State  to  review 
and propose amendments to its Partnership Agreement and relevant programmes. The 
Commission has provided further details on how it would make use of that provision 
in  guidelines  on  the  application  of  the  measures  linking  the  effectiveness  of  the 
European Structural and Investment Funds to sound economic governance6.  

Latvia is currently in the preventive arm of the Stability and Growth Pact. In its 2018 
Stability  Programme,  the  government  plans  a  deterioration  of  the  headline  balance 
from a deficit of 0.5 % of GDP in 2017 to a deficit of 0.9 % of GDP in both 2018 and 
2019 before improving to 0.4 % of GDP in 2020 and 2021. This path is expected to be 
consistent with the medium-term budgetary objective of a structural deficit of 1 % of 
GDP and the allowed deviations based on the pension reform and the structural reform 
clause  for  the  healthcare  sector.  The  recalculated[1]  structural  balance  deficit  is 
estimated to increase from -1.2 % of GDP in 2017 to -1.7 % of GDP in 2018 and then 
decrease to -1.5 % of GDP in 2019. According to the 2018 Stability Programme, the 
general government debt-to-GDP ratio is expected to decrease from 40.1 % of GDP in 
2017 to 36 % of GDP by 2021. The Programme’s GDP growth projections appear to 
be  markedly  favourable  for  2018  and  plausible  for  2019,  as  compared  to  the 
Commission forecast. Risks to the budgetary position are tilted to the downside linked 
to the optimistic forecast of the yield of tax compliance-improving measures. 

(7) 

On  11  July  2017,  the  Council  recommended  Latvia  to  achieve  its  medium-term 
budgetary  objective  in  2018,  taking  into  account  the  allowances  linked  to  the 
implementation of the systemic pension reform and of the structural reforms for which 
a temporary deviation is granted. This is consistent with a maximum nominal growth 

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SWD(2018) 212 final. 
Regulation (EU) No 1303/2013 of the European Parliament and  of the Council of 17 December 2013 
laying  down  common  provisions  on  the  European  Regional  Development  Fund,  the  European  Social 
Fund, the  Cohesion Fund, the European Agricultural Fund for Rural Development and the European 
Maritime  and  Fisheries  Fund  and  laying  down  general  provisions  on  the  European  Regional 
Development  Fund,  the  European  Social  Fund,  the  Cohesion  Fund  and  the  European  Maritime  and 
Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320). 
COM(2014) 494 final. 

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(8) 

(9) 

rate  of  net  primary  government  expenditure7  of  6.0 %  in  2018,  corresponding  to  an 
allowed  deterioration  in  the  structural  balance  by  0.3 %  of  GDP.  Based  on  the 
Commission  2018  spring  forecast,  there  is  a  risk  of  a  significant  deviation  from  the 
medium-term  budgetary  objective  in  2018.  However,  as  a  result  of  the  better-than-
expected  outcome  for  2017,  such  risk  may  be  lower  in  2018.  At  the  same  time,  the 
plausibility tool based on the Commission 2018 spring forecast indicates a high degree 
of uncertainty surrounding the estimate of output gap for Latvia based on the common 
methodology. If confirmed, these factors will be considered in the ex post assessment 
for 2018 in spring 2019.  

In  2019,  Latvia  should  achieve  its  medium-term  budgetary  objective,  taking  into 
account the temporary allowance related to the implementation of the structural reform 
in  the  healthcare  sector  granted  for  2017-2019.  This  is  consistent  with  a  maximum 
nominal growth rate of net primary government expenditure of 4.3 % in 2019, which 
corresponds  to  a  required  improvement  in  the  structural  balance  of  0.4 %  of  GDP. 
Based on the Commission 2018 forecast, there is a risk of a significant deviation from 
that requirement in 2019 and over 2018 and 2019 taken together. Overall, the Council 
is  of  the  opinion  that  the  necessary  measures  should  be  taken  as  of  2018  to  comply 
with the provisions of the Stability and Growth Pact. 

Income  inequality  in  Latvia  is  high.  The  ratio  of  incomes  of  the  richest  20 %  of 
households to that of the poorest 20 % stood at 6.3 in 2017, among the highest in the 
EU, as the redistribution through the tax-benefit system is lower. Latvia's tax system 
has been overhauled and personal income tax progressivity increased; however, the tax 
wedge  on  low-wage  earners  remains  relatively  high  and  discourages  formal 
employment.  The  tax  reform  is  limited  in  terms  of  shifting  taxation  to  sources  less 
detrimental  to  growth  and  achieving  the  stated policy  objective  of  increasing  the  tax 
revenue share in GDP. The low share of tax revenue in GDP limits the resources for 
sustainable delivery of public services and social  inclusion. The revenue potential of 
property and capital taxation is underused relative to other EU countries. Despite some 
progress in fighting tax evasion, tax compliance remains a serious challenge. 

(10)  Weaknesses  in  the  social  safety  net  are  reflected  in  the  high  proportion  of  people  at 
risk  of  poverty  or  social  exclusion  and  indicate  challenges  on  minimum  income, 
pensions  and  the  inclusion  of  people  with  disabilities.  Poverty  rates  among  people 
with  disabilities  and  the  elderly  have  been  increasing  in  recent  years  and  are  among 
the highest in Europe. The minimum income level reform, announced in 2014, has not 
been implemented which negatively affects the poorest households. The adequacy of 
social assistance benefits increased only slightly and remains low. Minimum old-age 
pensions  have  not  been  increased  since  2006.  The  share  of  people  facing  severe 
housing deprivation is among the highest in Europe and social housing is scarce. 

(11)  The  labour  market  is  tightening  due  to  adverse  demographic  developments  and 
emigration.  While  employment  growth  is  becoming  constrained  by  falling  labour 
supply,  employment  opportunities  vary  between  regions  and  skill  levels.  Curriculum 
reform  in  vocational  education  and  training  aimed  at  aligning  education  with 

7 

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

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contemporary skills requirements has progressed. However, further efforts are needed 
to fully implement the reform and increase participation in both initial and continuous 
vocational education and training. The implementation of the new work-based learning 
approach  has  started,  with  the  involvement  of  social  partners  and  companies. 
However, few students are enrolled in the scheme. Adult participation in learning has 
increased only slightly and the involvement of the unemployed in active labour market 
measures is lower than in most other Member States. This is of concern in the context 
of  a  high  unemployment  rate  among  the  low-skilled.  In  a  broader  context, 
strengthening social partners' capacity is important to foster their engagement. 

(12)  Reforms  have  been  taking  place  in  the  health  system.  The  increased  funding  for 
healthcare is expected to address some access restrictions linked to the annual service 
limits and long waiting times. However, public financing for healthcare remains well 
below the EU average and efficiency-increasing measures are still to be implemented, 
including  effective  prevention  measures,  streamlining  of 
the  hospital  sector, 
strengthening  primary  care  and  targeting  quality  management.  Health  outcomes  are 
relatively  poor  and  timely  access  to  affordable  healthcare  for  everyone  remains  a 
concern. The high out-of-pocket payments and the division of health services into two 
baskets ("full" and "minimum") risks lowering access for some groups and leading to 
adverse health outcomes.  

(13)  Weaknesses  in  regulatory  quality  and  low  public  administration  efficiency  and 
effectiveness  are  detrimental  to  the  business  environment.  In  2016  the  government 
presented an ambitious reform plan for a leaner and more professional public sector, 
aiming to improve efficiency through reductions in staff and centralisation of support 
functions,  while 
increasing 
transparency.  This  plan  is  however  limited  to  the  central  administration,  despite  the 
fact  that  significant  efficiency  gains  could  also  be  achieved  at  municipality  level. 
State-owned  enterprises,  which  account  for  a  sizeable  share  of  the  economy,  are 
coordinated at government level. While companies owned by central government are 
subject  to  centralised  corporate  governance  framework,  ports  and  enterprises  owned 
by municipalities remain outside this mechanism. 

strengthening  performance-based  payment  and 

(14)  Corruption continues to hamper Latvia’s business environment, and the prevention of 
conflicts  of  interest  remains  rigid  and  formalistic.  The  delay  in  legislating  on 
whistleblower protection is detrimental to the accountability and efficiency of public 
administration.  Regulation  of 
insolvency  process  has  been  significantly 
strengthened over the recent years, limiting the opportunities for abuses. However, the 
Council  for  the  Judiciary  encouraged  investigating  accusations  of  past  abuses  in  the 
insolvency  system  by  reviewing  certain  cases.  It  has  recommended  improving  the 
judges' qualifications assessment and reviewing the available disciplinary measures. 

the 

(15)  Latvian banks serving non-resident clients are exposed to high risk of involvement in 
money laundering. This creates challenges to the integrity of the financial system, can 
damage  its  reputation  and  negatively  affect  investment  and  economic  growth.  The 
anti-money  laundering framework has  recently been  strengthened;  continuous efforts 
would  be  needed  to  achieve  sustainable  improvement.  Latvia  has  recently  adopted  a 
law  aimed  at  significantly  limiting  the  exposure  of  the  Latvian  financial  sector  to 
money-laundering  risks.  Key  elements  are  enhancing  the  exchange  of  information 
between financial institutions and law enforcement agencies and curbing transactions 
with shell companies. The consequences of the law and its effectiveness will need to 
be monitored. 

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(16) 

In  the  context  of  the  2018  European  Semester,  the  Commission  has  carried  out  a 
comprehensive  analysis  of  Latvia’s  economic  policy  and  published  it  in  the  2018 
country  report.  It  has  also  assessed  the  2018  Stability  Programme  and  the  2018 
National  Reform  Programme  and  the  follow-up  given  to  the  recommendations 
addressed to Latvia in previous years. It has taken into account not only their relevance 
for  sustainable  fiscal  and  socioeconomic  policy  in  Latvia  but  also  their  compliance 
with  Union  rules  and  guidance,  given  the  need  to  strengthen  the  Union’s  overall 
economic governance by providing Union-level input into future national decisions.  

(17) 

In  the  light  of  this  assessment,  the  Council  has  examined  the  2018  Stability 
Programme and its opinion8 is reflected in particular in recommendation 1. 

HEREBY RECOMMENDS that Latvia take action in 2018 and 2019 to: 

1. 

2. 

3. 

Achieve  the  medium-term  budgetary  objective  in  2019,  taking  into  account  the 
allowances  linked  to  the  implementation  of  the  structural  reforms  for  which  a 
temporary deviation is granted. Reduce taxation for low-income earners by shifting it 
to other sources, particularly capital and property, and by improving tax compliance. 

Improve the adequacy of minimum income benefits, minimum old-age pensions and 
income support for people with disabilities. Increase the labour market relevance of 
vocational  education  and  training,  and  foster  upskilling  of  low-skilled  workers  and 
jobseekers. Increase the accessibility, quality and cost-effectiveness of the healthcare 
system. 

Strengthen  the  efficiency  of  the  public  sector,  in  particular  with  regard  to  local 
authorities  and  state-owned  enterprises.  Strengthen  the  accountability  of  public 
administration  by  protecting  whistle-blowers,  preventing  conflicts  of  interest  and 
following-up  on  the  results  of  the  ongoing  assessment  of  past  insolvency 
proceedings. 

Done at Brussels, 

For the Council 
The President 

8 

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

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