Recommendation for a COUNCIL RECOMMENDATION delivering a Council opinion on the 2021 Stability Programme of Latvia
Date: 2021-06-02
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Latvia, economic recovery, economic reform, investment, organisation of health care, public finance, social security, stability pact, stability programme, structural adjustment

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   EUROPEAN COMMISSION  Brussels, 2.6.2021  COM(2021) 514 final  Recommendation for a COUNCIL RECOMMENDATION delivering a Council opinion on the 2021 Stability Programme of Latvia {SWD(2021) 501 final}  
 
Recommendation for a 

COUNCIL RECOMMENDATION 

delivering a Council opinion on the 2021 Stability Programme of Latvia 

THE COUNCIL OF THE EUROPEAN UNION, 

Having regard to the Treaty on the Functioning of the European Union, 

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, 

After consulting the Economic and Financial Committee, 

Whereas: 

(1) 

(2) 

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On  20  March  2020,  the  Commission  adopted  a  Communication  on  the  activation  of 
the  general  escape  clause2  of  the  Stability  and  Growth  Pact.3  In  its  Communication, 
the  Commission  set  out its  view  that,  given  the expected  severe  economic  downturn 
resulting from  the COVID-19 outbreak, the  conditions  to  activate the general  escape 
clause were met. On 23 March 2020, the Ministers of Finance of the Member States 
agreed with the assessment of the Commission. The general escape clause has granted 
Member  States  budgetary  flexibility  to  deal  with  the  crisis.  It  has  facilitated  the 
coordination  of  budgetary  policies  in  times  of  severe  economic  downturn.  Its 
activation  allows  for  a  temporary  departure  from  the  adjustment  path  towards  the 
medium-term  budgetary  objective  of  each  Member  State,  provided  this  does  not 
endanger  fiscal  sustainability  in  the  medium  term.  On  17  September  2020,  in  its 
Annual  Sustainable  Growth  Strategy,  the  Commission  announced  that  the  general 
escape clause would remain active in 2021.4  
On 20 July 2020, the Council recommended Latvia5 to take all necessary measures, in 
line  with  the  general  escape  clause,  to  effectively  address  the  pandemic,  sustain  the 
economy  and  support  the  ensuing  recovery.  It  also  recommended  Latvia  to  pursue, 

OJ L 209, 2.8.1997, p. 1. 
The  clause,  as  set  out  in  Articles  5(1),  6(3),  9(1)  and  10(3)  of  Regulation  (EC)  1466/97  and  Articles 
3(5) and 5(2) of Regulation (EC) 1467/97, facilitates the coordination of budgetary policies in times of 
severe economic downturn. 
Communication from the Commission to the Council on the activation of the general escape clause of   
the Stability and Growth Pact, Brussels, 20.3.2020, COM(2020) 123 final. 
Communication  from  the  Commission  on  Annual  Sustainable  Growth  Strategy  2021,  Brussels, 
17.9.2020, COM(2020) 575 final. 
Council Recommendation of 20 July 2020 on the National Reform Programme of Latvia and delivering 
a Council opinion on the 2020 Stability Programme of Latvia, OJ C 282, 26.8.2020, p. 89. 

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(3) 

(4) 

(5) 

(6) 

when economic conditions allow, fiscal policies aimed at achieving prudent medium-
term fiscal positions and ensuring debt sustainability, while enhancing investment. 

The Council Recommendation on the economic policy of the euro area indicated that 
fiscal policies remain supportive in all euro area Member States throughout 2021 and 
that  policy  measures  should  be  tailored  to  country-specific  circumstances  and  be 
timely, temporary  and targeted6. When the epidemiological  and economic conditions 
allow,  emergency  measures  should  be  phased  out,  while  combatting  the  social  and 
labour-market impact of the crisis. Fiscal policies should be pursued that are aimed at 
achieving prudent medium-term fiscal positions and ensuring debt sustainability, while 
enhancing  investment.  Member  States  should  pursue  reforms  that  strengthen  the 
coverage, adequacy, and sustainability of health and social protection systems for all. 

On  18  November  2020,  the  Commission  adopted  its  Opinions  on  the  2021  Draft 
Budgetary  Plans  of  the  euro  area  Member  States,  which  were  based  on  a  qualitative 
assessment of the fiscal measures. The Commission was of the opinion that the Draft 
Budgetary Plan of Latvia was overall in line with the fiscal policy recommendations 
adopted by the Council on 20 July 2020, and that most of the measures included in the 
plan supported economic activity against the background of considerable uncertainty.  

Next  Generation  EU,  including  the  Recovery  and  Resilience  Facility,  will  ensure  a 
sustainable,  inclusive  and  fair  recovery.  Regulation  (EU)  2021/241  establishing  the 
Recovery and Resilience Facility7 came into force on 19 February 2021. This Facility 
will  provide  financial  support  for  the  implementation  of  reforms  and  investment, 
entailing  a  fiscal  impulse  financed  by  the  EU.  It  will  contribute  to  the  economic 
recovery,  to  the  implementation  of  sustainable  and  growth-enhancing  reforms  and 
investment, notably to promote the green and digital transitions, and it will strengthen 
the  economies’  resilience  and  potential  growth.  In  turn,  it  will  also  help  public 
finances to return to more favourable positions in the near term and will contribute to 
strengthening sustainable public finances, growth and job creation in the medium and 
long term.  

On 3 March 2021, the Commission adopted a Communication providing further policy 
orientations  to  facilitate  the  coordination  of  fiscal  policies  and  the  preparation  of 
Member  States’  Stability  and  Convergence  Programmes.8  The  overall  fiscal  stance, 
taking into account national budgets and the Recovery and Resilience Facility, should 
remain  supportive  in  2021  and  2022.  At  the  same  time,  given  the  expectation  of 
economic activity  gradually normalising in the second half of 2021, Member States’ 
fiscal  policies  should  become  more  differentiated  in  2022.  Member  States’  fiscal 
policies should take into account the state of the recovery, fiscal sustainability and the 
need  to  reduce  economic,  social  and  territorial  divergences.  In  view  of  the  need  to 
support a sustainable recovery for the EU, Member States with low sustainability risks 
should  gear  their  budgets  towards  maintaining  a  supportive  fiscal  policy  in  2022, 
taking into account the impact of the Recovery and Resilience Facility. Member States 
with high debt levels should pursue prudent fiscal policies, while preserving nationally 
financed  investment  and  making  use  of  grants  under  the  Recovery  and  Resilience 
Facility to fund additional high-quality investment projects and structural reforms. For 

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Pending final adoption by the Council, after endorsement by the European Council. The text agreed by 
the Eurogroup on 16 December 2020 is available at: https://data.consilium.europa.eu/doc/document/ST-
14356-2020-INIT/en/pdf 
OJ L57, 18.2.2021, p.17. 
Communication  from  the  Commission  to  the  Council  on  one  year  since  the  outbreak  of  COVID-19: 
fiscal policy response, Brussels, 3.3.2021, COM(2021) 105 final. 

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(7) 

(8) 

(9) 

the  period  beyond  2022,  fiscal  policies  should  continue  to  take  into  account  the 
strength of the recovery, the degree of economic uncertainty and fiscal sustainability 
considerations.  A  refocusing  of  fiscal  policies  towards  achieving  prudent  medium-
term  fiscal  positions,  including  by  phasing  out  support  measures  in  due  course,  will 
contribute to ensuring fiscal sustainability in the medium term.  

The Communication of 3 March 2021 also announced the Commission’s view that the 
decision  on  the  deactivation  or  continued  application  of  the  general  escape  clause 
should be taken as an overall assessment of the state of the economy, with the level of 
economic activity in the EU or euro area compared to pre-crisis levels (end-2019) as 
key quantitative criterion. On the basis of the Commission’s 2021 spring forecast, on 2 
June the Commission considered that the conditions to continue to apply the general 
escape  clause  in  2022  and  to  deactivate  it  as  of  2023  were  met.  Country-specific 
situations will continue to be taken into account  after the deactivation of  the general 
escape clause.9 

On  15  April  2021,  Latvia  submitted  its  2021  Stability  Programme,  in  line  with 
Article 4 of Regulation (EC) No 1466/97.  

In 2020, based on data validated by Eurostat, Latvia’s general government deficit was 
4.5% of GDP, while general government debt increased to 43.5% of GDP. The annual 
change  in  the  primary  budget  balance  amounted  to  -4%  of  GDP,  including 
discretionary budgetary measures of 3.5% of GDP in support of the economy and the 
operation of automatic stabilisers. Latvia also provided liquidity support to companies 
and households (such as guarantees and tax deferrals, which do not have a direct and 
immediate budgetary impact) estimated at 1.7% of GDP.    

On  2  June  2021,  the  Commission  issued  a  report  under  Article  126(3)  TFEU.  This 
report discusses the budgetary situation of Latvia, as its general government deficit in 
2020 exceeded the 3% of GDP Treaty reference value. The report concluded that the 
deficit criterion was not fulfilled.  

(10)  The  macroeconomic  scenario  underpinning  the  budgetary  projections  is  cautious  in 
2021  and  2022.  Real  GDP  growth  rates  are  projected  to  be  lower  in  the  Stability 
Programme  than  in  the  Commission’s  2021  spring  forecast,  mostly  due  to  lower 
export  growth.  Moreover,  the  Stability  Programme  expects  a  further  decline  in 
employment in 2021 and a slower recovery in 2022 than in the Commission forecast.  

(11) 

In  its  2021  Stability  Programme,  the  government  plans  an  increase  of  the  general 
government  deficit  from  5.4%  of  GDP  in  2020  to  9.3%  of  GDP  in  2021,  while  the 
debt  ratio  is  planned  to  increase  to  48.9%  of  GDP  in  2021.  According  to  the 
programme, the change in the primary budget balance in 2021 compared with the pre-
crisis  level  (2019)  is  set  to  amount  to  -8.7%  of  GDP,  reflecting  the  discretionary 
budgetary measures of 2.9% of GDP in support of the economy and the operation of 
automatic  stabilisers.  The  deficit  and  debt  projections  are  above  the  Commission’s 
2021  spring  forecast.  The  Stability  Programme  expects  a  higher  increase  in 
expenditure,  in  particular  in  other  expenditure,  than  the  Commission’s  2021  spring 
forecast. Moreover, revenue developments are projected to be more favourable in the 
Commission  forecast,  in  line  with  the  more  upbeat  macroeconomic  scenario  in  the 
Commission forecast.  

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Communication from the Commission on Economic policy coordination in 2021: overcoming COVID-
19, supporting the recovery and modernising our economy, Brussels, 2.6.2021, COM(2021)500 final. 

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(12) 

In  response  to  the  COVID-19  pandemic  and  related  economic  downturn,  Latvia  has 
adopted budgetary measures to strengthen the capacity of its health system, contain the 
pandemic  and  provide  relief  to  those  individuals  and  sectors  that  have  been 
particularly  affected.  This  forceful  policy  response  has  cushioned  the  contraction  in 
GDP,  which,  in  turn,  curtailed  the  increase  in  government  deficit  and  public  debt. 
Fiscal measures should maximise support to the recovery without pre-empting future 
fiscal  trajectories.  Therefore, measures should  avoid  creating  a permanent burden on 
public  finances.  When  Member  States  introduce  permanent  measures,  they  should 
properly fund them to ensure budgetary neutrality in the medium term. The measures 
taken by Latvia in 2020 and 2021 have been in line with the Council Recommendation 
of  20  July  2020.  Some  of  the  discretionary  measures  adopted  by  the  government  in 
2020  and  2021  do  not  appear  to  be  temporary  or  matched  by  offsetting  measures. 
Beyond  the  horizon  of  the  Commission’s  forecast,  in  2023,  the  remaining  impact  of 
those  non-temporary  measures  is  preliminarily  estimated  at  around  1%  of  GDP, 
mainly consisting of public sector wage increases, notably for healthcare workers. 

(13)  The  2021  Stability  Programme  assumes  investment  and  reforms  financed  by  grants 
under the Recovery and Resilience Facility amounting to 0.1% in 2021, 0.8% in 2022 
and 0.8% in 2023. The programme assumes expenditure financed by the Recovery and 
Resilience Facility  to  be slightly  back-loaded, with  higher spending planned in  2024 
and  2025.  The  Commission’s  spring  forecast  includes  these  grants  in  its  budgetary 
projections.  

(14)  The established indicators of fiscal adjustment set out in Regulation (EC) No 1466/97 
need  to  be  considered  in  the  context  of  the  current  circumstances.  First,  there  is 
significant  uncertainty  surrounding  output  gap  estimates.  Second,  there  is  a  need  for 
fiscal policy to stand ready to rapidly adapt to the evolution of the pandemic, shifting 
from  emergency  relief  to  more  targeted  measures  once  health  risks  diminish.  Third, 
the  current  context  is  characterised  by  a  significant  policy  response  to  support 
economic activity. In the presence of sizeable transfers from the EU budget  (such as 
those  from  the  Recovery  and  Resilience  Facility),  the  established  indicators  do  not 
capture  the  full  impulse  provided  by  fiscal  policies  to  the  economy.  Against  this 
background,  the  structural  balance  does  not  appear  adequate  in  the  current 
circumstances.  The  expenditure  benchmark,  in  turn,  needs  to  be  adapted10  and 
complemented  with  additional  information  in  order  to  fully  gauge  the  fiscal  policy 
orientation. 

First, similarly to the approach pursed in the assessment of the 2021 Draft Budgetary 
Plans,  temporary  emergency  measures  have  been  excluded  from  the  expenditure 
aggregate. These crisis-related temporary emergency measures support health systems 
and  compensate  workers  and  firms  for  the  losses  in  income  due  to  lockdowns  and 
supply chain  disruptions; their reversal  by the public authorities is  contingent  on the 
return of the public health and economic situation to normality.  

Second, to assess the overall fiscal stance at the current juncture, the sizeable transfers 
from the EU budget (such as those from the Recovery and Resilience Facility) should 
be included in the relevant expenditure aggregate. 

Therefore, the fiscal stance is then measured by the change in primary expenditure (net 
of  discretionary  revenue  measures  and  excluding  crisis-related  temporary  emergency 

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In  particular,  the  4-year  smoothing  of  investment  used  in  the  expenditure  benchmark  does  not  allow 
assessing properly the fiscal support to the recovery provided by nationally financed investments. 

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measures)  including  expenditure  financed  by  grants  under  the  Recovery  and 
Resilience Facility and other EU funds.  

Going  beyond  the  overall  fiscal  stance,  the  analysis  also  aims  at  assessing  whether 
national  fiscal  policy  is  prudent  and  its  composition  is  conducive  to  a  sustainable 
recovery  consistent  with  the  green  and  digital  transitions.  For  that  reason,  particular 
attention  is  paid  to  the  evolution  of  nationally  financed  primary  current  expenditure 
and investment.  

(15) 

In  its  2021  Stability  Programme,  Latvia’s  general  government  deficit  is  planned  to 
decrease to  2.7% of GDP in  2022, mainly due to a discontinuation of the temporary 
support  measures  adopted  in  2020  and  2021.  The  general  government  debt  ratio  is 
planned  to  increase  to  50.3%  of  GDP  in  2022.  These  projections  are  above  the 
favourable 
forecast,  mainly  due 
Commission’s  2021  spring 
macroeconomic scenario in the Commission forecast.   

the  more 

to 

Based on the Commission’s forecast, the overall fiscal stance as defined above – also 
including the impact on aggregate demand in 2022 from investment financed by both 
the  national  and  the  EU  budgets,  notably  the  Recovery  and  Resilience  Facility  –  is 
estimated  at -0.8%  of  GDP.  11  The  positive  contribution  of  expenditure  financed  by 
Recovery and Resilience Facility grants and other EU funds is projected to increase by 
0.6 percentage points of GDP. Nationally financed investment is projected to provide 
a  contractionary  contribution  of  0.3  percentage  point  of  GDP.12  Nationally  financed 
primary  current  expenditure  (net  of  discretionary  revenue  measures)  is  projected  to 
provide an expansionary contribution of 0.5 percentage points of GDP. 

(16)  The  quality  of  Member  States’  budgetary  measures  appears  particularly  important. 
Fiscal structural reforms aimed at improving the composition of national budgets can 
support  potential  growth,  create  much-needed  fiscal  space  and  help  ensuring  fiscal 
sustainability  over  the  longer  term,  including  in  view  of  climate  change  and  health 
challenges. On the revenue side, the COVID-19 crisis has reinforced the importance of 
reforms for more efficient and fairer public revenue systems. On the expenditure side, 
it  has  made  even  more  crucial  to  increase  the  level  and  quality  of  sustainable  and 
growth-enhancing  investments,  consistent  with  serving  the  objectives  of  enhancing 
growth  potential,  economic  and  social  resilience,  and  the  green  and  digital  twin 
transition. The Recovery and Resilience Plans will allow to improve the composition 
of national budgets. 

(17)  According to the programme’s medium-term budgetary plans, the general government 

deficit is planned to decrease from 1.3% in 2023, to 0.3% of GDP in 2024. 

Based  on  the  programme,  the  overall  fiscal  stance  –  also  including  the  impact  on 
aggregate demand from investment financed by both the national and the EU budgets, 
notably the Recovery and Resilience Facility –is estimated at +1.4% of GDP in 2023 
and 2024 on average. The positive contribution of expenditure financed by Recovery 
and  Resilience  Facility  grants  and  other  EU  funds  is  projected  to  decrease  by  0.3 
percentage  point  of  GDP  in  2023  and  2024  on  average.  Nationally  financed 
investment  is  projected  to  provide  a  contractionary  contribution  of  0.1  percentage 
point of GDP.13 Nationally financed primary current expenditure (net of discretionary 

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A negative sign of the indicator corresponds to an excess of the primary expenditure growth compared 
with medium-term economic growth, which indicates an expansionary fiscal policy. 
Other nationally financed capital expenditure is projected to provide a neutral contribution. 
Other nationally financed capital expenditure is projected to provide a neutral contribution. 

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revenue  measures)  is  projected  to  provide  a  contractionary  contribution  of  1 
percentage point of GDP. 
The  current  estimate  of  the  10-year  average  nominal  potential  growth  is  4¾%14. 
However, this estimate does not include the impact of the reforms that are part of the 
Recovery and Resilience Plan and can boost Latvia’s potential growth. 

(18)  The general government debt ratio is planned to decrease from 48.8% of GDP in 2023 
to 48.5% of GDP in 2024. Latvia is considered to face low fiscal sustainability risks 
over the medium term, as per the latest debt sustainability analysis.15 

(19) 

In view of the currently still exceptionally high degree of uncertainty, the fiscal policy 
guidance should remain  predominantly  qualitative. More precise quantified  guidance 
for  the  later  years  should  be  provided  in  2022,  if  the  degree  of  uncertainty  has 
sufficiently declined by then.  

The Council has assessed the 2021 Stability Programme and the follow-up by Latvia 
to the Council Recommendation of 20 July 2020. 

HEREBY RECOMMENDS LATVIA TO: 

1. 

2. 

3. 

In  2022,  maintain  a  supportive  fiscal stance,  including  the  impulse  provided  by  the 
Recovery and Resilience Facility, and preserve nationally financed investment. Keep 
the growth of nationally financed current expenditure under control. 

When economic conditions allow, pursue a fiscal policy aimed at achieving prudent 
medium-term fiscal positions and ensuring fiscal sustainability in the medium term. 
At the same time, enhance investment to boost growth potential. 

Pay  particular  attention  to  the  composition  of  public  finances,  both  on  the  revenue 
and  expenditure  sides  of  the  budget,  and  to  the  quality  of  budgetary  measures,  to 
ensure  a  sustainable  and  inclusive  recovery.  Prioritise  sustainable  and  growth-
enhancing  investment,  notably  supporting  the  green  and  digital  transition.  Give 
priority to fiscal structural reforms that will help provide financing for public policy 
priorities and contribute to the long-term sustainability of public finances, including 
by  strengthening  the  coverage,  adequacy,  and  sustainability  of  health  and  social 
protection systems for all. 

Done at Brussels, 

For the Council 
The President 

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Estimated by the Commission, following the commonly agreed methodology.  
See Commission Staff Working Document – Statistical Annex providing background data relevant for 
the assessment of the 2021 Stability and Convergence Programmes 

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