Recommendation for a COUNCIL RECOMMENDATION on the 2019 National Reform Programme of Latvia and delivering a Council opinion on the 2019 Stability Programme of Latvia
Date: 2019-06-05
Institutions: European Commission, Secretariat-General
Subjects: Latvia, budget deficit, economic growth, economic policy, economic reform, health care, investment, social policy, stability pact, stability programme

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   EUROPEAN COMMISSION  Brussels, 5.6.2019  COM(2019) 514 final  Recommendation for a COUNCIL RECOMMENDATION on the 2019 National Reform Programme of Latvia and delivering a Council opinion on the 2019 Stability Programme of Latvia    
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2019 National Reform Programme of Latvia and delivering a Council opinion on 
the 2019 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 Commission, 

Having regard to the resolutions of the European Parliament, 

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 21 November 2018, the Commission adopted the Annual Growth Survey, marking 
the start of the 2019 European Semester for 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  21  March 
2019.  On  21  November  2018,  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  date,  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  21  March  2019.  On  9  April  2019,  the  Council  adopted  the 
recommendation  on  the  economic  policy  of  the  euro  area  (‘Recommendation  for  the 
euro area’).  

(2) 

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

1 

OJ L 209, 2.8.1997, p. 1. 

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(3) 

(4) 

(5) 

(6) 

full and timely implementation of the Recommendation for the euro area, as reflected 
in recommendations (1) to (4) below.  In particular, focusing economic policy related 
to investment in the specified areas and measures to improve skills will help address 
the first euro area recommendation as regards productivity improvements for euro area 
rebalancing and tax measures will help address the third euro area recommendation as 
regards the functioning of the labour market. 
The 2019 country report for  Latvia2  was published on 27 February 2019.  It  assessed 
Latvia’s progress in addressing the country-specific recommendations adopted by the 
Council  on  13  July  2018,  the  follow-up  given  to  the  recommendations  adopted  in 
previous years and Latvia's progress towards its national Europe 2020 targets. 

On 15 April 2019, Latvia submitted its 2019 National Reform Programme and, on 17 
April  2019,  its  2019  Stability  Programme.  In  order  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  ('ESI  Funds')  for  the  2014-2020 
period.  As  provided  for  in  Article  23  of  Regulation  (EU)  No  1303/2013  of  the 
European  Parliament  and  of  the  Council3,  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 ESI Funds to sound economic governance4.  

Latvia is currently in the preventive arm of the Stability and Growth Pact. In its 2019 
Stability  Programme,  the  government  plans  an  improvement  of  the  headline  balance 
from a deficit of 1.0% of GDP in 2018 to a deficit of 0.5% of GDP in 2019 and 0.4% 
of GDP in 2020 and 20215. Based on the recalculated structural balance6, the medium-
term budgetary objective, set at a deficit of 1% of GDP in structural terms, is planned 
to be reached in 2019, taking into account the allowance linked to the implementation 
of the structural reforms for which a temporary deviation is granted. According to the 
2019  Stability  Programme,  the  general  government  debt-to-GDP  ratio  is  expected  to 
decrease  to  33.1%  of  GDP  by  2022.  The  2019  Stability  Programme's  GDP  growth 
projections appear to be plausible. Risks to the budgetary position are balanced.  

(7) 

On  13  July  2018,  the  Council  recommended  that  Latvia  achieve  its  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. 
This  is  consistent  with  a  maximum  nominal  growth  rate  of  net  primary  government 
expenditure7  of  4.8%  in  2019,  corresponding  to  an  improvement  in  the  structural 

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SWD(2019) 1013 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. 

Cyclically-adjusted  balance  net  of  one-off  and  temporary  measures,  recalculated  by  the  Commission 
using the commonly agreed methodology. 
Net  primary  government  expenditure  comprises  total  government  expenditure  excluding  interest 
expenditure,  expenditure  on  Union  programmes  fully  matched  by  Union  funds  revenue  and  non-

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balance  by  0.2%  of  GDP.  Based  on  the  Commission  2019  spring  forecast,  Latvia  is 
expected to be close to its medium-term budgetary objective, taking into account the 
allowance  linked  to  the  implementation  of  the  structural  reforms  for  which  a 
temporary deviation is granted. Thus, the current assessment indicates a risk of some 
deviation  in  2019.  At  the  same  time,  projected  nominal  growth  rate  of  net  primary 
government expenditure would currently point to a risk of a significant deviation from 
the requirement in 2019. If the structural balance is no longer projected to be close to 
the medium-term budgetary objective, taking into account the allowance linked to the 
implementation of the structural reforms for which a temporary deviation is granted, in 
future  assessments  an overall assessment  would  need to  take into  account  a possible 
deviation from the requirement.  

In 2020, in view of Latvia's projected output gap of 1.3%, the nominal growth rate of 
net  primary  government  expenditure  should  not  exceed  3.5%,  in  line  with  the 
structural  adjustment  of  0.5%  of  GDP  stemming  from  the  commonly  agreed 
adjustment matrix of requirements under the Stability and Growth Pact. Based on the 
Commission 2019 spring forecast under unchanged policies, Latvia is expected to be 
close to its medium-term budgetary objective. Thus, the current assessment indicates 
risk of some deviation in 2020. At the same time, the projected nominal growth rate of 
net  primary  government  expenditure  would  currently  point  to  a  risk  of  a  significant 
deviation from the requirement in 2020. If the structural balance is no longer projected 
to be close to the medium-term budgetary objective, in future assessments an overall 
assessment would need to take into account a possible deviation from the requirement. 
Overall, the Council is of the opinion that Latvia needs to stand ready to take further 
measures as of 2019 to comply with the provisions of the Stability and Growth Pact. 

The tax revenue as  a share of the gross  domestic product  of  Latvia is  low compared 
with  the  Union  average  and  limits  to  some  extent  the  delivery  of  public  services,  in 
particular  healthcare,  and  social  inclusion.  Capital  and  property  are  relatively 
undertaxed and the freezing of the values used to calculate land and property taxes will 
reduce their revenue further. At the same time, the tax burden on labour remains high 
for  low-wage  earners  relative  to  the  average  of  the  European  Union,  despite  having 
been  reduced.  The  share  of  the  shadow  economy  appears  to  have  declined  over  the 
past years by different estimates. Nevertheless, the share of under-reported economic 
activity is higher in Latvia than in other Baltic States. In particular, underreporting of 
salaries (‘envelope wages’), particularly in the construction sector, accounts for a large 
share of the shadow economy. 

(8) 

(9) 

(10)  Following the closure of its third largest bank due to allegations of money laundering, 
Latvia  tightened  the  regulation  concerning  non-resident  clients.  As  a  result,  non-
resident deposits, which are the main source of money laundering risk in Latvia, have 
significantly  decreased  since  May  2018,  but  challenges  regarding  fighting  money 
laundering  remain.  Moreover,  Latvia  has  come  up  with  a  detailed  action  plan  for 
improving  its  anti-money  laundering/counter  terrorist  financing  strategy.    The  main 
priorities listed in the action plan include enhancing risk-based supervision, ensuring 
the  required  human  resources  for  the  supervisory  authorities,  and  ensuring  effective 
information  exchange and collaboration among the investigative  authorities and with 
the  private  sector.  Attention  should  be  paid  to  the  effective  implementation  of  these 

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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measures,  once  adopted.  Finally,  law  enforcement  and  judicial  authorities’  capacity 
also need to be increased. 

(11)  Latvia  faces  challenges  on  delivering  on  several  of  social  protection  and  inclusion 
principles of the European Pillar of Social Rights. Income inequality in Latvia is high, 
as  the  redistribution  through  the  tax-benefit  system  is  low.  The  adequacy  of  social 
benefits  remains  low  and  the  impact  of  social  transfers  on  poverty  and  inequality 
reduction  is  limited.  The  poverty  risk  among  the  elderly  and  the  people  with 
disabilities  is  relatively  high  and  increasing  due  to  benefits  not  keeping  pace  with 
wage growth. The at-risk-of-poverty or social exclusion rate for the elderly was 49.0% 
in  2018  (European  Union  average:  18.2%  in  2017)  and  for  the  disabled  people  with 
disabilities 40.7% in 2017, (European Union average: 29.3% in 2017). The state social 
security benefit for people with disabilities and minimum old-age pensions, have not 
been revised since 2006. The minimum income level reform, announced in 2014, has 
not  been  implemented,  which  negatively  affects  the  poorest  households.  Access  to 
long-term  care  also  remains  weak.  Investments  are  thus  required  to  address  social 
exclusion,  including  food  and  material  aid  for  the  most  deprived.  Moreover, 
investments, including infrastructure, are needed to improve access to childcare, long-
term  care,  employment  and  other  social  services,  and  to  enable  integration  of  health 
and  social  services,  including  the  transition  from  institutional  to  community-based 
care.  The  share  of  people  facing  severe  housing  deprivation  is  among  the  highest  in 
Europe (15.2% vs 4.0% in average in 2017 in the European Union) and social housing 
is scarce. Investment is needed to improve the provision of affordable housing. 

(12)  While  overall  employment  rates  are  high  and  increasing,  headcount  employment  is 
negatively  affected  by  the  adverse  demographic  developments  and  emigration.  In 
addition,  employment  varies  between  regions  and  skill  levels.  Older  people  with 
outdated  skills  encounter  more  difficulties.  The  low  level  of  digital  skills  among  the 
labour force limits the use of digital technologies by businesses and the potential for 
innovation. Adult participation in learning and the involvement of the unemployed in 
active labour market measures is lower than the average of the European Union. 

(13)  The  education  system  faces  a  challenge  to  consolidate  resources  while  improving 
quality  and  efficiency.  While  Latvia’s  education  system  performs  well  in  terms  of 
learning achievement, access  to  quality education remains dependent  on the place of 
residence and type of school. Curriculum reform in vocational education and training 
aimed  at  aligning  it  with  new  skills  requirements  has  progressed  and  the  vocational 
school  environment  is  significantly  improved.  However,  attractiveness  remains  low 
with enrolment rates and the employment rate of recent graduates below the average of 
the European Union.  

(14)  Ensuring skills’ supply is one of the main areas where demand for investment remains 
significant.  Matching  investment,  including  through  infrastructure,  is  required  to 
improve  the  quality,  effectiveness  and  labour  market  relevance  of  education  and 
training,  and  to  promote  lifelong  learning,  notably  flexible  upskilling  and  reskilling 
opportunities. Investment are also needed to improve access to employment, including 
to  improve  outreach  and  coverage  of  active  labour  market  policies,  enhance  the 
workability of workforce, as well as sectoral and regional labour mobility. In a broader 
context,  strengthening  social  partners'  capacity  is  important  in  promoting  the  fair 
working conditions and delivering on the European Pillar of Social Rights. 

(15)  Low  public  spending  for  healthcare  and  unhealthy  lifestyle  choices  are  the  main 
reasons for the population’s poor health outcomes. The recently increased funding for 

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healthcare addresses some of the access restrictions linked to the annual service limits 
and long waiting times. However, public financing for healthcare remains well below 
the  European  Union  average.  Timely  and  equal  access  to  healthcare  is  limited.  This 
leads to high self-reported unmet needs for care due to high out-of-pocket payments, 
especially  for  vulnerable  groups,  as  well  as  inequality  of  opportunities.  Reforms  to 
boost efficiency and quality in healthcare are progressing but are in an early phase and 
should  be  accelerated,  including  effective  prevention  measures,  streamlining  of  the 
hospital  sector,  strengthening  primary  care  and  targeting  quality  management.  In 
addition, Latvia faces health workforce shortages, especially of nurses, which hamper 
the delivery of public healthcare and pose risks to the success of the health reforms. If 
the  division  of  health  services  into  two  baskets  ("full"  and  "minimum")  comes  into 
effect,  it  risks  further  limiting  equitable  access  to  healthcare  and  leading  to  adverse 
health  outcomes.  Matching  investments  in  healthcare,  including  infrastructure,  are 
needed to increase the accessibility, affordability and quality of healthcare in order to 
improve the population’s health status and ensure healthier and longer working lives. 

(16)  Latvia invests little in research and development and its investment gap in innovation 
is important. In 2017, Latvia’s share of expenditure on research and development was 
among  the  lowest  in  the  European  Union  and  has  been  rather  stable  over  the  past 
decade. Moreover, research funding relies almost entirely on European Union Funds. 
As  a  result,  Latvia  is  a  moderate  innovator  with  some  strong  points,  such  as  its 
information,  communications  and  technology  infrastructure  but  its  performance  lags 
behind in human resources, in public-private sector cooperation and in investment in 
intellectual property.  

(17) 

Important  investment  gaps  also  remain  to  address  regional  disparities.  Significant 
economic differences persist between Riga and Latvia’s other regions. While Latvia as 
a  whole  is  converging  with  the  European  Union,  the  gap  in  economic  performance 
between  the  capital  region  and  the  other  regions  has  not  narrowed  since  Latvia’s 
accession to the European Union. The competitiveness and quality of public services 
differs  considerably  among  the  different  Latvian  regions,  influencing  their  territorial 
therefore  address  significant  regional 
attractiveness.  Investment  needs  should 
differences  in  mobility  and  digital  infrastructure,  in  particular  the  last  mile 
connections. Gaps in connectivity in the Trans-European Transport Network and with 
peripheral and border regions are still extremely pronounced having a negative impact 
on  Latvia’s economic activities and exports. Investments  gaps also  exist to complete 
the Rail Baltica project and the key electricity infrastructure projects that form part of 
the  Baltic  energy  market  interconnection  plan.  Additionally,  investment  in  resource 
efficiency is also needed in order to speed up Latvia's energy transition. More efforts 
are  needed  to  improve  overall  energy  efficiency,  in  particular  in  the  residential  and 
transport sectors. 

(18)  The recent adoption of the whistleblower law marks a positive step and the country’s 
anti-corruption body has also  gathered momentum recently thanks to  it uncovering a 
number of high profile corruption cases. Nevertheless, government decision-making is 
still  perceived  to  be  influenced  by  favouritism  and  the  procurement  process  as 
susceptible  to  corruption  due  to  lack  of  transparency,  in  particular  in  municipalities 
and  state-owned  and  municipal  enterprises.  Legislative  amendments  on  conflict  of 
interest regime may give rise to abuses. The recently adopted Code of Ethics does not 
cover politically appointed persons. 

(19)  Public  services  have  not  been  adjusted  to  the  declining  and  ageing  population.  The 
declining  population  and  urbanisation  leave  infrastructure  and  public  services 

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underused  in  the  rural  areas.  Public  administration,  education,  healthcare  services 
require  strategies  to  preserve  access  to  quality  services  in  scarcely  populated  and 
dwindling areas, while ensuring greater efficiency. A general administrative territorial 
reform to be implemented by December 2021 has been recently announced. A timely 
implementation  of  this  reform  could  contribute  to  enhancing  the  accountability  and 
efficiency of the public sector, all the more in light of the operational programme for 
European Union funds, which is to be approved by the year 2020. 

(20)  The programming of EU funds for the period 2021-2027 could help address some of 
the  gaps  identified  in  the  recommendations,  in  particular  in  the  areas  covered  by 
Annex D to the country report8. This would allow Latvia to make the best use of those 
funds  in  respect  of  the  identified  sectors,  taking  into  account  regional  disparities. 
Strengthening the country’s administrative capacity for the management of these funds 
is an important factor for the success of this investment. 

(21) 

In  the  context  of  the  2019  European  Semester,  the  Commission  has  carried  out  a 
comprehensive  analysis  of  Latvia’s  economic  policy  and  published  it  in  the  2019 
country  report.  It  has  also  assessed  the  2019  Stability  Programme  and  the  2019 
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.  

(22) 

In  the  light  of  this  assessment,  the  Council  has  examined  the  2019  Stability 
Programme and its opinion9 is reflected in particular in recommendation (1) below. 

HEREBY RECOMMENDS that Latvia take action in 2019 and 2020 to: 

1. 

2. 

3. 

Ensure that the nominal growth rate of net primary government expenditure does not 
exceed  3.5%  in  2020,  corresponding  to  an  annual  structural  adjustment  of  0.5%  of 
GDP.  Reduce  taxation  for  low-income  earners  by  shifting  it  to  other  sources, 
particularly capital and property, and by improving tax compliance. Ensure effective 
supervision and the enforcement of the anti-money laundering framework. 

Address  social  exclusion  notably  by  improving  the  adequacy  of  minimum  income 
benefits, minimum old-age pensions and income support for people with disabilities. 
Increase  the  quality  and  efficiency  of  education  and  training  in  particular  of  low-
skilled  workers  and  jobseekers,  including  by  strengthening  the  participation  in 
vocational  education  and  training  and  adult  learning.  Increase  the  accessibility, 
quality and cost-effectiveness of the healthcare system. 

Focus  investment-related  economic  policy  on  innovation,  provision  of  affordable 
housing,  transport  notably  on  its  sustainability,  resource  efficiency  and  energy 
efficiency, energy interconnections and on digital infrastructure, taking into account 
regional disparities. 

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SWD(2019) 1013 final. 
Under Article 5(2) of Council Regulation (EC) No 1466/97. 

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4. 

Strengthen  the  accountability  and  efficiency  of  the  public  sector,  in  particular  with 
regard to local authorities and state-owned and municipal enterprises and the conflict 
of interest regime. 

Done at Brussels, 

For the Council 
The President 

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