Recommendation for a COUNCIL RECOMMENDATION on the 2022 National Reform Programme of Latvia and delivering a Council opinion on the 2022 Stability Programme of Latvia
Date: 2022-05-23
Institutions: European Commission, Secretariat-General
Subjects: Latvia, economic policy, economic recovery, economic reform, energy policy, financing, public finance, small and medium-sized enterprises, stability pact, stability programme

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   EUROPEAN COMMISSION  Brussels, 23.5.2022  COM(2022) 619 final  Recommendation for a COUNCIL RECOMMENDATION on the 2022 National Reform Programme of Latvia and delivering a Council opinion on the 2022 Stability Programme of Latvia {SWD(2022) 619 final} - {SWD(2022) 640 final}  
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2022 National Reform Programme of Latvia and delivering a Council opinion on 
the 2022 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) 

(2) 

Regulation  (EU)  2021/241  of  the  European  Parliament  and  of  the  Council2  ,  which 
established  the  Recovery  and  Resilience  Facility,  entered  into  force  on  19  February 
2021.  The  Recovery  and  Resilience  Facility  provides  financial  support  for  the 
implementation of reforms and investment, entailing a fiscal impulse financed by the 
Union.  It  contributes  to  the  economic  recovery  and  to  the  implementation  of 
sustainable and growth-enhancing reforms and investment, in particular to promote the 
green and digital transition, while strengthening the resilience and potential growth of 
the Member States’ economies. It also helps strengthen sustainable public finances and 
boost growth and job creation in the medium and long term. The maximum financial 
contribution  per  Member  State  under  the  Recovery  and  Resilience  Facility  [was] 
updated on [XX] June 2022, in line with Article 11(2) of Regulation (EU) 2021/241.  

On  24  November  2021,  the  Commission  adopted  the  Annual  Sustainable  Growth 
Survey,  marking  the  start  of  the  2022  European  Semester  for  economic  policy 
coordination.  It  took  due  account  of  the  reaffirmed  joint  commitment  of  the  Porto 
Social Summit of May 2021 to further implement the European Pillar of Social Rights, 
proclaimed  by  the  European  Parliament,  the  Council  and  the  Commission  on  17 
November  2017.  The  European  Council  endorsed  the  priorities  of  the  2022  Annual 

1 
2 
establishing the Recovery and Resilience Facility (OJ L 57, 18.2.2021, p. 17). 

OJ L 209, 2.8.1997, p. 1. 
Regulation  (EU)  2021/241  of  the  European  Parliament  and  of  the  Council  of  12  February  2021 

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Sustainable Growth Survey on 25 March 2022. On 24 November 2021, on the basis of 
Regulation  (EU)  No  1176/2011,  the  Commission  also  adopted  the  Alert  Mechanism 
Report,  which  did  not  identify  Latvia  as  one  of  the  Member  States  for  which  an  in-
depth  review3  would  be  needed.  On  the  same  date,  the  Commission  also  adopted  a 
recommendation  for  a  Council  recommendation  on  the  economic  policy  of  the  euro 
area, which was adopted on 5 April 2022 by the Council, as well as the proposal for 
the 2022 Joint Employment Report analysing the implementation of the Employment 
Guidelines  and  the  principles  of  the  European  Pillar  of  Social  Rights,  which  was 
adopted by the Council on 14 March 2022. 

Russia’s  invasion  of  Ukraine,  in  the  wake  of  the  global  pandemic,  has  significantly 
altered the geopolitical and economic context. The impact of the invasion on Member 
States’ economies has been felt for example through higher energy and food prices and 
weaker  growth  prospects.  The  higher  energy  prices  weigh  particularly  on  the  most 
vulnerable households experiencing or at risk of energy poverty. The EU is also seeing 
an unprecedented inflow of people fleeing Ukraine. In this context, on 4 March 2022, 
the  Temporary  Protection  Directive  was  triggered4    for  the  first  time,  granting 
displaced persons from Ukraine the right to legally stay in the EU, as well as access to 
education and training, the labour market, healthcare, housing and social welfare.   

Taking  account  of  the  rapidly  changing  economic  and  geopolitical  situation,  the 
European Semester resumes its broad economic and employment policy coordination 
in 2022, while evolving in line with the implementation requirements of the Recovery 
and  Resilience  Facility,  as  outlined  in  the  2022  Annual  Sustainable  Growth  Survey. 
The  implementation  of  the  adopted  recovery  and  resilience  plans  is  essential  for  the 
delivery of the policy priorities under the European Semester, as the plans address all 
or a significant subset of the relevant country-specific recommendations issued in the 
2019  and  2020  Semester  cycles.  The  2019  and  2020  country-specific 
recommendations  remain  equally  relevant  also  for  recovery  and  resilience  plans 
revised, updated, or amended in accordance with Articles 14, 18 and 21 of Regulation 
(EU) 2021/241, in addition to any country-specific recommendations issued up to the 
date of submission of the modified plan.  
The General Escape Clause has been active since March 20205. In its Communication 
of  3  March  20216,  the  Commission  set  out  its  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 a key quantitative 
criterion. Heightened uncertainty and strong downside risks to  the economic outlook 
in  the  context  of  war  in  Europe,  unprecedented  energy  price  hikes  and  continued 
supply  chain  disturbances  warrant  the  extension  of  the  general  escape  clause  of  the 
Stability and Growth Pact through 2023. 

(3) 

(4) 

(5) 

Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 

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on the prevention and correction of macroeconomic imbalances, OJ L 306, 23.11.2011, p. 25. 
4 
Council Implementing Decision (EU) 2022/382 of 4 March 2022 establishing the existence of a mass 
influx of displaced persons from Ukraine within the meaning of Article 5 of Directive 2001/55/EC, and having 
the effect of introducing temporary protection, OJ L 71, 4.3.2022, p. 1.   
5 

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. 

6 

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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(6) 

(7) 

Following the approach in the Council opinion of 18 June 2021 on the 2021 Stability 
Programme,  the  fiscal  stance  is  currently  best  measured  as  the  change  in  primary 
expenditure  (net  of  discretionary  revenue  measures),  excluding  COVID-19  crisis-
related  temporary  emergency  measures  but  including  expenditure  financed  by  non-
repayable  support  (grants)  from  the  Recovery  and  Resilience  Facility  and  other  EU 
funds,  relative  to  medium-term  potential  growth7.  Going  beyond  the  overall  fiscal 
stance, in order to assess whether national fiscal policy is prudent and its composition 
is conducive to a sustainable recovery consistent with the green and digital transitions, 
attention  is  also  paid  to  the  evolution  of  nationally-financed8  primary  current 
expenditure  (net  of  discretionary  revenue  measures  and  excluding  COVID-19  crisis-
related temporary emergency measures) and investment. 

On  2  March  2022,  the  Commission  adopted  a  Communication  providing  broad 
guidance  for  fiscal  policy  in  2023,  aiming  at  supporting  the  preparation  of  Member 
States’  Stability  and  Convergence  Programmes  and  thereby  strengthening  policy 
coordination9.  The  Commission  noted  that,  based  on  the  macroeconomic  outlook  of 
the  2022  winter  forecast,  transitioning  from  an  aggregate  supportive  fiscal  stance  in 
2020-2022  to  a  broadly  neutral  aggregate  fiscal  stance  would  appear  appropriate  in 
2023,  while  standing  ready  to  react  to  the  evolving  economic  situation.  The 
Commission announced that the fiscal recommendations for 2023 should continue to 
differentiate  across  Member  States  and  take  into  account  possible  cross-country 
spillovers. The Commission invited the Member States to reflect the guidance in their 
Stability  and  Convergence  Programmes.  The  Commission  committed  to  closely 
monitor  the  economic  developments  and  adjust  its  policy  guidance  as  needed  and  at 
the latest in its Semester spring package of late May 2022. 

(8)  With  respect  to  the  fiscal  guidance  provided  on  2  March  2022,  the  fiscal 
recommendations  for  2023  take  into  account  the  worsened  economic  outlook,  the 
heightened uncertainty and further downside risks, and the higher inflation compared 
to the winter forecast. Against these considerations, the fiscal response has to expand 
public investment for the green and digital transition and energy security, and sustain 
the purchasing power of the most vulnerable households so as to cushion the impact of 
the energy price hike and help limit inflationary pressures from second round effects 
via targeted and temporary measures; fiscal policy has to remain agile so as to adjust 
to the rapidly evolving circumstances, and be differentiated across countries depending 
on their fiscal and economic situation, including as regards the exposure to the crisis 
and the inflow of displaced persons from Ukraine. 

(9) 

On  30  April  2021,  Latvia  submitted  its  national  recovery  and  resilience  plan  to  the 
Commission, in accordance with Article 18(1) of Regulation (EU) 2021/241. Pursuant 
to  Article  19  of  Regulation  (EU)  2021/241,  the  Commission  assessed  the  relevance, 
effectiveness,  efficiency  and  coherence  of  the  recovery  and  resilience  plan,  in 
accordance with the assessment guidelines of Annex V to that Regulation. On 13 July 

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The  estimates  on  the  fiscal  stance  and  its  components  in  this  recommendation  are  Commission 
estimates  based  on  the  assumptions  underlying  the  Commission  2022  spring  forecast.  The 
Commission’s estimates of medium-term potential growth do not include the positive impact of reforms 
that are part of the Recovery and Resilience Plan and that can boost potential growth.  

Not financed by grants from the Recovery and Resilience Facility and other EU funds. 

Communication  from  the  Commission  to  the  Council:  Fiscal  policy  guidance  for  2023,  Brussels, 
2.3.2022, COM(2022) 85 final. 

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2021,  the  Council  adopted  its  Decision  on  the  approval  of  the  assessment  of  the 
recovery and resilience plan for Latvia10. The release of instalments is conditional on a 
decision  by  the  Commission,  taken  in  accordance  with  Article  24(5)  of  Regulation 
(EU)  2021/241,  that  Latvia  has  satisfactorily  fulfilled  the  relevant  milestones  and 
targets  set  out  in  the  Council  Implementing  Decision.  Satisfactory  fulfilment 
presupposes  that  the  achievement  of  preceding  milestones  and  targets  has  not  been 
reversed. 

(10)  On 22 April 2022, Latvia submitted its 2022 National Reform Programme and, on 26 
April  2022,  its  2022  Stability  Programme,  in  line  with  the  deadline  established  in 
Article 4 of Regulation  (EC) No 1466/97. To take account of their interlinkages, the 
two  programmes  have  been  assessed  together.  In  accordance  with  Article  27  of 
Regulation  (EU)  2021/241,  the  2022  National  Reform  Programme  also  reflects 
Latvia’s  bi-annual  reporting  on  the  progress  made  in  achieving  its  recovery  and 
resilience plan.  

in 

the 

relevant 

progress 

addressing 

(11)  The Commission published the 2022 country report for Latvia11  on 23 May 2022. It 
country-specific 
assessed  Latvia’s 
recommendations adopted by the Council in 2019, 2020 and 2021, and took stock of 
Latvia’ s implementation of the recovery and resilience plan, building on the Recovery 
and Resilience Scoreboard. Based on this analysis, the country report identified gaps 
with respect to those challenges that are not addressed or only partially addressed by 
the  recovery  and  resilience  plan,  as  well  as  new  and  emerging  challenges,  including 
those emerging from Russia’s invasion of Ukraine. It also assessed Latvia’s progress 
on  implementing  the  European  Pillar  of  Social  Rights  and  on  achieving  the  EU 
headline  targets  on  employment,  skills  and  poverty  reduction,  as  well  as  progress  in 
achieving the UN’s Sustainable Development Goals.  

(12)  On  23  May  2022,  the  Commission  issued  a  report  under  Article  126(3)  TFEU.  This 
report discussed the budgetary situation of Latvia, as its general government deficit in 
2021 exceeded the 3% of GDP Treaty reference value. The report concluded that the 
deficit  criterion  was  not  fulfilled.  In  line  with  the  Communication  of  2  March  2022, 
the  Commission  did  not  propose  to  open  new  excessive  deficit  procedures  in  spring 
2022  and  it  will  reassess  the  relevance  of  proposing  to  open  excessive  deficit 
procedures in autumn 2022. 

the  ensuing  recovery. 

the economy  and  support 

(13)  On  20  July  2020,  the  Council  recommended  Latvia  to  take  in  2020  and  2021  all 
necessary measures, in  line with  the general  escape clause, to  effectively  address  the 
pandemic,  sustain 
It  also 
recommended Latvia to pursue, when economic conditions allow, fiscal policies aimed 
at  achieving  prudent  medium-term  fiscal  positions  and  ensuring  debt  sustainability, 
while  enhancing  investment.  In  2021,  based  on  data  validated  by  Eurostat,  Latvia’s 
general government deficit increased from 4.5% of GDP in 2020 to 7.3% in 2021. The 
fiscal  policy  response  by  Latvia  supported  the  economic  recovery  in  2021,  while 
temporary emergency support measures increased from 2.8% of GDP in 2020 to 5.2% 
in  2021.  The  measures  taken  by  Latvia  in  2021  have  been  in  line  with  the  Council 
Recommendation of 20 July 2020. The discretionary budgetary measures adopted by 
the  government  in  2020  and  2021  were  mostly  temporary  or  matched  by  offsetting 

Council Implementing Decision of 13 July 2021 on the approval of the assessment of the recovery and 

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resilience plan for Latvia (2021/0164 (NLE)). 
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SWD(2022)619 final. 

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measures.  At  the  same  time,  some  of  the  discretionary  measures  adopted  by  the 
government over the period 2020 to 2021 were not temporary or matched by offsetting 
measures, mainly consisting of a reduction of the social security contribution rate, an 
increase in the threshold for personal income tax allowance, an increase in wages for 
medical  personnel  and  teachers  as  well  as  an  increase  of  minimum  social  benefits. 
Based on data validated by Eurostat, general government debt stood at 44.8% of GDP 
in 2021. 

(14)  The  macroeconomic  scenario  underpinning  the  budgetary  projections  in  the  2022 
Stability  Programme  is  realistic  in  2022  and  cautious  thereafter.  The  government 
projects  real  GDP  to  grow  by  2.1%  in  2022  and  2.5%  in  2023.  By  comparison,  the 
Commission’s  2022  spring  forecast  projects  a  similar  real  GDP  growth  of  2.0%  in 
2022  and  a  slightly  higher  growth  of  2.9%  in  2023,  mainly  due  to  a  more  positive 
outlook  for  private  consumption  and  exports.  In  its  2022  Stability  Programme,  the 
government  expects  that  the  headline  deficit  will  decrease  to  6.5 %  of  GDP  in  2022 
and to 2.8 % in 2023. The large deficit in 2022 mainly reflects measures included in 
the 2022 budget, namely an in increase in income tax allowance, a sizeable investment 
package  and  an  increase  in  wages  for  healthcare,  interior  and  education  sector 
employees.  Moreover,  broad  government  support  to  households  and  companies  to 
mitigate the  rise in  energy prices,  as well as  projected slower  growth of  tax revenue 
due to the negative impact on the economy from the Russian invasion of Ukraine, will 
keep  the  deficit  elevated,  despite  COVID-19  support  to  the  economy  being 
significantly  lower  in  2022  than  in  2021.  According  to  the  Programme,  the  general 
government debt-to-GDP ratio is expected to increase to 45.7% in 2022, and to decline 
to  45.2 in  2023. Based on policy measures known at  the cut-off date of the forecast, 
the Commission 2022 spring forecast projects a government deficit for 2022 and 2023 
of 7.2% of GDP and 3.0% respectively.  This is higher than the deficit projected in the 
2022 Stability Programme, mainly  due to  additional policy  measures included in  the 
Commission forecast, namely the creation of national energy supply security reserves 
according to recent amendments to the Energy Law (estimated fiscal impact of 0.6% 
of GDP in 2022). The creation of the reserves has been credibly announced, but was 
not known at the time of the preparation of the Stability programme. The Commission 
2022 spring forecast projects general government debt-to-GDP ratio of 47.0% in 2022 
and 46.5% in 2023, above the Stability programme projection. The difference is due to 
a higher deficit projection and a lower forecast of nominal GDP.  

(15) 

Based  on  the  Commission  spring  2022  forecast,  the  medium-term  (10-year  average) 
potential output growth is estimated at 2.3 %. 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. 

In 2022, the government phased out the majority of measures taken in response to the 
COVID-19 crisis, such that the temporary emergency support measures  are projected 
to  decline  from  5.2%  of  GDP  in  2021  to  0.8%  in  2022.  The  government  deficit  is 
impacted  by  measures  adopted  to  counter  the  economic  and  social  impact  of  the 
increase in energy prices, which in the Commission spring 2022 forecast are estimated 
at  0.9%  of  GDP  in  2022  and  are  expected  to  be  phased  out  in  in  2023.12  These 
measures  mainly  consist  of  price  caps  on  energy  prices  to  households  and 
entrepreneurs, full-coverage of certain sub-components of electricity tariff by the state, 

12 

The figures represent the level of annual budgetary costs of those measures taken since autumn 2021, 
including current revenue and expenditure as well as – where relevant – capital expenditure measures. 

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as well as support to particular social groups and poorer households. These measures 
have  been  announced  as  temporary.  However,  in  case  energy  prices  remain  elevated 
also in 2023, some of these measures could be continued. Some of these measures are 
not targeted, notably the general price caps on energy prices. The government deficit is 
also  impacted  by  the  costs  to  offer  temporary  protection  to  displaced  persons  from 
Ukraine, which in the Commission 2022 spring forecast are projected at 0.3% of GDP 
in  2022  and  0.5%  of  GDP  in  202313,  as  well  as  the  increased  cost  of  defence 
expenditure by 0.1 % of GDP in 2022 and 0.3 % of GDP in 2023.  

(16)  On  18  June  2021,  the  Council  recommended  that  in  2022  Latvia14  maintains  a 
supportive  fiscal  stance,  including  from  the  impulse  provided  by  the  Recovery  and 
Resilience  Facility,  and  preserves  nationally-financed  investment.  The  Council  also 
recommended  Latvia  to  keep  the  growth  of  nationally-financed  current  expenditure 
under  control.  It  also  recommended  Latvia  to  pursue,  when  economic  conditions 
allow,  a  fiscal  policy  aimed  at  achieving  prudent  medium-term  fiscal  positions  and 
ensuring  fiscal  sustainability  in  the  medium  term,  and  at  the  same  time,  to  enhance 
investment to boost growth potential. 

(17) 

In  2022,  based  on  the  Commission’s  2022  spring  forecast  and  including  the 
information  incorporated  in  Latvia’s  2022  Stability  Programme,  the  fiscal  stance  is 
projected to be supportive at -3.3% of GDP, as recommended by the Council.15 Latvia 
plans to provide continued support to the recovery by making use of the Recovery and 
Resilience Facility to finance additional investment as recommended by the Council. 
The  positive  contribution  to  economic  activity  of  expenditure  financed  by  Recovery 
and Resilience Facility grants and other EU funds is projected to increase by 0.8% of 
GDP  compared  to  2021.  Nationally-financed  investment  is  projected  to  provide  an 
expansionary  contribution  to  the  fiscal  stance  of  0.3  percentage  points  in  2022.16 
Therefore,  Latvia  plans  to  preserve  nationally  financed  investment,  as  recommended 
by  the  Council.  At  the  same  time,  the  growth  in  nationally-financed  primary  current 
expenditure  (net  of  new  revenue  measures)  in  2022  is  projected  to  provide  an 
expansionary  contribution  of  1.5  percentage  points  to  the  overall  fiscal  stance.  This 
significant expansionary contribution includes the additional impact of the measures to 
address  the  economic  and  social  impact  of  the  increase  in  energy  prices  (0.8  %  of 
GDP)    as  well  as  the  costs  to  offer  temporary  protection  to  displaced  persons  from 
Ukraine (0.3 % of GDP). Latvia broadly keeps under control the growth of nationally-
financed  current  expenditure in  2022,  as  the significant  expansionary contribution  of 
nationally-financed  current  expenditure  in  2022  is  mainly  due  to  the  measures  to 

13 

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15 

16 

The total number of displaced persons from Ukraine to the EU is assumed to gradually reach 6 million 
by  the  end  of  2022,  and  their  geographical  distribution  is  estimated  based  on  the  size  of  the  existing 
diaspora, the relative population of the receiving Member State, and the actual distribution of displaced 
persons from Ukraine across the EU as of March 2022. For budgetary costs per person, estimates are 
based on the Euromod microsimulation model of the Commission’s Joint Research Centre, taking into 
account both cash transfers people may be eligible for as well as in-kind benefits such as education and 
healthcare. 
Council  Recommendation  of  18  June  2021  delivering  a  Council  opinion  on  the  2021  Stability 
Programme of Latvia, OJ C 304, 29.7.2021, p. 63. 
A negative (positive) sign of the indicator corresponds to an excess (shortfall) of primary expenditure 
growth  compared  with  medium-term  economic  growth,  indicating  an  expansionary  (contractionary) 
fiscal policy. 
Other  nationally-financed  capital  expenditure  is  projected  to  provide  an  expansionary  contribution  of 
0.7 percentage points of GDP as Commission forecast includes the fiscal impact of creation of energy 
supply security reserves according to recent amendments to the Energy Law. 

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(18) 

(19) 

address the economic and social impact of the increase in energy prices as well as the 
costs to offer temporary protection to displaced persons from Ukraine. 

In  2023,  the  fiscal  stance  is  projected  in  the  Commission  2022  spring  forecast  at 
+3.2%  of  GDP  on  a  no-policy  change  assumption.17  Latvia  is  projected  to  continue 
using  the  grants  from  the  Recovery  and  Resilience  Facility  in  2023  to  finance 
additional  investment  in  support  of  the  recovery.  The  positive  contribution  to 
economic activity of expenditure financed by Recovery and Resilience Facility grants 
and other EU funds is projected to increase by 0.9 percentage points of GDP compared 
to  2022.  Nationally-financed  investment  is  projected  to  provide  a  contractionary 
contribution to the fiscal stance of 0.8 percentage points in 2023.18 At the same time, 
the  growth  in  nationally-financed  primary  current  expenditure  (net  of  new  revenue 
measures)  in  2023  is  projected  to  provide  a  contractionary  contribution  of  2.7 
percentage  points  to  the  overall  fiscal  stance.  This  includes  the  impact  from  the 
phasing  out  of  the  measures  addressing  the  increased  energy  prices  (0.9  %  of  GDP) 
and additional costs to offer temporary protection to displaced persons from Ukraine 
(0.1% of GDP). 

In  the  2022  Stability  Programme,  the  general  government  deficit  is  expected  to 
gradually decline to 2.3% of GDP in 2024 and to 1.7% by 2025. Therefore, the general 
government  deficit  is  planned  to  remain  below  3%  of  GDP  over  the  programme 
horizon.  These  projections  assume  phasing  out  of  support  programmes  and  solid 
growth of tax revenue. According to the Programme, the general government debt-to-
GDP ratio is  expected to  decrease by  2025, specifically with  a decrease to  44.5% in 
2024 and to 43.4% in 2025. Based on the Commission’s analysis, debt sustainability 
risks appear low over the medium term. 

(20)  Latvia’s tax revenue as a share of GDP is significantly below the EU average, limiting 
the  funding  to  public  services.  Latvia  collects  the  lowest  revenue  from  corporate 
income taxes in the EU (0.7 % of GDP in 2020), while revenue from property taxes is 
1.0 % of GDP compared with the EU average of 2.3 % of GDP. Moreover, while the 
tax  wedge  on  an  average  earner  is  around  the  EU  average,  the  implicit  tax  rate  on 
labour is among the lowest in the EU, pointing to considerable scope for increasing the 
revenue  from  labour  taxation  through  better  collection  and  higher  progressivity. 
Latvia’s  public  expenditure  on  healthcare  and  social  protection  are  particularly  low 
compared  to  the  EU  average,  hampering  timely  and  equal  access  to  healthcare  and 
adequate  social  assistance.  As  a  result,  Latvia  has  some  of  the  highest  income 
inequality,  lowest  poverty  reduction  impact  of  social  transfers  and  worst  health 
outcomes  in  the  EU.  Despite  recent  increases,  the  minimum  income,  minimum 
pensions  and  disability  benefits  fall  below  the  poverty  line.  Limited  access  to  and 
quality  of  social  assistance  and  services  for  vulnerable  groups  further  hinder  social 
inclusion.  The  long-term  care  system  is  underdeveloped,  with  a  limited  supply  of 
home care and community-based services. Social housing is scarce and often does not 
provide  adequate  living  conditions.  Furthermore,  social  assistance  varies  across 

17 

18 

A negative (positive) sign of the indicator corresponds to an excess (shortfall) of primary expenditure 
growth  compared  with  medium-term  economic  growth,  indicating  an  expansionary  (contractionary) 
fiscal policy. 
Other  nationally-financed  capital  expenditure  is  projected  to  provide  a  contractionary  contribution  of 
0.6  percentage  points  of  GDP  which  is  due  to  the  base  effect,  namely  in  2022  Commission  forecast 
foresees  the  fiscal  impact  of  creation  of  the  energy  supply  security  reserves  but  such  measure  is  not 
projected for 2023. 

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(21) 

municipalities  and  is  often  not  targeted  enough.  Higher  taxation  of  property  and 
capital  and  more  progressivity  of  income  taxation  offer  the  best  potential  for 
increasing  tax  revenue  as  these  sources  remain  underutilised  compared  to  the  EU 
average. Moreover, efforts to reduce the shadow economy should continue beyond the 
measures planned in the recovery and resilience plan.  

In  accordance  with  Article  19(3), point (b) of Regulation  (EU) 2021/241  and Annex 
V, criterion 2.2, the recovery and resilience plan includes an extensive set of mutually 
reinforcing reforms and investments to be implemented by 2026. These help address 
all  or  a  significant  subset  of  the  economic  and  social  challenges  outlined  in  the 
country-specific recommendations addressed to Latvia by the Council in the European 
Semester  in  2019  and  2020,  in  addition  to  any  country-specific  recommendations 
issued  up  to  the  date  of  adoption  of  a  plan.  In  particular,  Latvia’s  plan  includes 
measures  addressing,  to  a  varying  extent,  all  six  broad  challenges  –  fiscal,  human 
capital,  public  administration,  productivity  and  the  digital  and  green  transitions.  The 
plan  includes  reforms  related  to  the  governance  and  financing  of  higher  education 
institutions,  the  implementation  of  a  comprehensive  human  resources  strategy  in 
healthcare and the introduction of indexation for minimum income benefits. Sizeable 
investments include the greening of the Riga transport area by acquiring clean public 
vehicles  and  the  energy  renovation  of  both  private  and  public  buildings  and 
businesses.  Significant  investment  is  also  planned  to  promote  regional  development: 
building  schools,  industrial  parks  and  affordable  housing  and  modernising  hospitals. 
These  measures  are  expected  to  boost  the  growth  potential  of  the  economy  in  a 
sustainable manner.   

(22)  The  implementation  of  the  recovery  and  resilience  plan  of  Latvia  is  expected  to 
contribute  to  making  further  progress  on  the  green  and  digital  transition.  Measures 
supporting  the  climate  objectives  in  Latvia  account  for  37.6%  of  the  plan’s  total 
allocation, while measures supporting digital objectives account for 21% of the plan’s 
total allocation. The fully-fledged implementation of the recovery and resilience plan, 
in line with the relevant milestones and targets, will help Latvia swiftly recover from 
the fallout of the COVID-19 crisis, while strengthening its resilience. The systematic 
involvement of social partners and other  relevant  stakeholders  remains important  for 
the  successful  implementation  of  the  recovery  and  resilience  plan,  as  well  as  other 
economic and employment policies going beyond the plan, to ensure broad ownership 
of the overall policy agenda. 

(23)  Latvia  has  not  yet  formally  submitted  the  Partnership  Agreement  and  the  other 
cohesion  policy  programming  documents19.  In  line  with  Regulation  (EU)  2021/1060 
of the European Parliament and of the Council of 24 June 2021, Latvia shall take into 
account  the  relevant  country-specific  recommendations  in  the  programming  of  the 
2021-2027  cohesion  policy  funds.  This  is  a  prerequisite  for  improving  the 
effectiveness and maximising the added value of the financial support to be received 
from  cohesion  policy  funds,  while  promoting  the  coordination,  complementarity  and 
coherence between these funds and other Union instruments and funds. The successful 

19 
Regulation  (EU)  2021/1060  of  the  European  Parliament  and  of  the  Council  of  24  June  2021  laying 
down  common  provisions  on  the  European  Regional  Development  Fund,  the  European  Social  Fund  Plus,  the 
Cohesion  Fund,  the  Just  Transition  Fund  and  the  European  Maritime,  Fisheries  and  Aquaculture  Fund  and 
financial rules for those and for the Asylum, Migration and Integration Fund, the Internal Security Fund and the 
Instrument for Financial Support for Border Management and Visa Policy. OJ L 231, 30.6.2021, p. 159. 

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implementation  of  the  Recovery  and  Resilience  Facility  and  cohesion  policy 
programmes also depends on the removal of bottlenecks to investment to support the 
green and digital transition and balanced territorial development.  

(24)  Beyond the economic and social challenges addressed by the recovery and resilience 
plan,  Latvia faces a number of additional challenges  including access  to bank credit. 
Credit flow to the private sector has been negative for most of the last decade. It turned 
positive in 2016 but the growth rate of credit remained below the growth rate of GDP. 
In 2020, private sector debt stood at 66.5% of GDP compared with 78.3% of GDP  5 
years earlier. Small and medium-sized enterprises have found it particularly difficult to 
get credit, partially due to their higher credit risk, but they also face a relatively high 
cost  of  credit  and  burdensome  paperwork.  Furthermore,  poor  liquidity  of  the  assets 
offered for collateral, make it particularly hard to get credit outside of the Riga region. 
This presents a significant barrier both for mortgage lending and lending to businesses. 
Moreover, financing for consumer green technologies could be made more affordable 
through  cheaper  and  longer-term  credit  products.  Policy  efforts  have  mainly  focused 
on supporting lending by combining it with public grants. However, this comes with a 
significant  cost  to  the  government  budget  and  is  therefore  not  a  sustainable  way  of 
boosting lending. Easing the credit supply constraints requires  general improvements 
in  transparency  and  trust  in  the  business  environment,  including  a  reduction  of  the 
shadow  economy.  Furthermore,  there  is  room  for  increasing  the  loan  recovery  rates, 
which would reduce the banks’ costs associated with non-performing loans and which 
could  be  facilitated  by  a  more  efficient  legal  system.  Targeted  loan  and  guarantee 
schemes  could  help  lower  the  liquidity  risks  faced  by  the  banks  when  accepting 
collateral  in  relatively  illiquid  markets.  Public  lending  schemes  for  strategically 
important  investments,  like  the  green  transition  and  regional  development,  could 
increase effective competition in the banking market or fill a market gap where bank 
financing  is  either  too  expensive  or  not  available.  Moreover,  public  guarantee  and 
lending  schemes  offer  a  significantly  more  cost-efficient  way  of  supporting  private 
borrowing  than  grant  schemes.  Besides  the  barriers  to  bank  financing,  the  Latvian 
market  for  alternative  sources  of  finance  is  underdeveloped  and  holds  potential  for 
improving firms’ access to finance. 

(25) 

In  response  to  the  mandate  by  the  EU  Heads  of  State  or  Government,  set  out  in  the 
Versailles Declaration, the REPowerEU plan aims to phase out the European Union´s 
dependence  on  fossil  fuel  imports  from  Russia as  soon  as  possible.  For  this  purpose 
the most suitable projects, investments and reforms at national, regional and EU level 
are being identified in dialogue with the Member States. These measures aim to reduce 
overall reliance on fossil fuels and shift fossil fuel imports away from Russia.  

(26)  According  to  2020  data,  oil  products  (33.8%)  and  natural  gas  (21.6%)  constitute 
around  half  of  Latvia’s  energy  mix,  the  rest  consists  mainly  of  renewable  energy 
(44.1%).  Russia  supplied  all  of  Latvia’s  natural  gas  imports  (higher  than  the  EU 
average  of  44%  of  Russian  gas  import  dependence)  and  was  a  key  source  (20%)  of 
Latvia’s oil product imports (largely in line with the EU average of 26% of Russian oil 
import  dependence).20    Latvia’s  dependence  on  Russia’s  gas  supplies  is  significantly 
reduced  by  its  gas  connection  to  Lithuania,  which  gives  Latvia  access  to  Klaipeda’s 
liquefied  natural  gas  terminal.  Latvia  is  further  connected  to  Estonia  and  Finland, 

20 

Eurostat (2020), share of Russian imports over total imports of natural gas, crude oil. For the EU27 average, the 
total imports are based on extra-EU27 imports. For Latvia, total imports include intra-EU trade. Crude oil does not 
include refined oil products. 

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making  the  four  countries  part  of  the  same  market  for  natural  gas.  A  gas  storage 
facility located in Latvia allows for smoothing out the seasonal mismatches in supply 
and demand and stores a security reserve for the Baltic market. New infrastructure and 
network  investments  related  to  gas  are  recommended  to  be  future-proof  where 
possible, in order to facilitate their long-term sustainability, through future repurposing 
for sustainable fuels. Completing the ongoing synchronisation with the EU continental 
power  grid,  ensuring  sufficient  capacity  for  the  interconnections  with  neighbouring 
Member  States  and  pursuing  joint  renewables  projects  should  nevertheless  remain  a 
policy  priority.  Besides  the  improvements  to  gas  infrastructure  aimed  at  securing 
alternative  sources  of  supply,  reducing  energy  dependence  on  Russia  will  require 
Latvia  to  accelerate  the  deployment  of  renewables  and  increase  energy  efficiency, 
especially in the building and transport sectors. Latvia’s  recovery and resilience plan 
includes  measures  that  aim  to  facilitate  private  investments  in  onshore  wind  energy. 
Their earlier-than-planned implementation, as recently announced by the government, 
could  help  accelerate  investments  in  onshore  wind  energy.  However,  increasing  the 
share  of  renewables  would  also  require  Latvia  to  explore  opportunities  in  offshore 
wind  energy.  Energy  efficiency  measures  including  deep  renovation  could  be 
reinforced,  in  particular  in  buildings,  transport  and  industry.  To  diversify  the  energy 
mix,  Latvia  is  considering  investing  in  nuclear  energy  in  cooperation  with 
neighbouring  Member  States.  Further  increase  in  ambition  for  reducing  green  house 
gas  emissions  and  increasing  renewables  and  energy  efficiency  will  be  needed  for 
Latvia to be in line with the ‘Fit for 55’ objectives. 

(27)  While  the  acceleration  of  the  transition  towards  climate  neutrality  and  away  from 
fossil  fuels  will  create  significant  restructuring  costs  in  several  sectors,  Latvia  can 
make  use  of  the  Just  Transition  Mechanism  in  the  context  of  cohesion  policty  to 
alleviate the socio-economic impact  of the transition  in  the most  affected  regions.  In 
addition,  Latvia  can  make  use  of  the  the  European  Social  Fund  Plus  to  improve 
employment opporunities and strengthen social cohesion.  

(28) 

(29) 

In  the  light  of  the  Commission’s  assessment,  the  Council  has  examined  the  2022 
Stability  Programme  and  its  opinion21  is  reflected  notably  in  recommendation  (1) 
below. 

In view of the close interlinkages between the economies of euro area Member States 
and  their  collective  contribution  to  the  functioning  of  the  Economic  and  Monetary 
Union,  the  Council  recommended  that  the  euro  area  Member  States  take  action, 
including 
the 
recommendation on the economic policy of the euro area. For Latvia, this is reflected 
in particular in recommendations (1), (2) and (3) below. 

resilience  plans, 

recovery  and 

implement 

through 

their 

to 

HEREBY RECOMMENDS that Latvia take action in 2022 and 2023 to:  

1. 

In 2023, ensure that the growth of nationally-financed current expenditure is in line 
with  an  overall  neutral  policy  stance,  taking  into  account  continued  temporary  and 
targeted support to households and firms most vulnerable to energy price hikes and 
to  people  fleeing  Ukraine.  Stand  ready  to  adjust  current  spending  to  the  evolving 
situation.  Expand  public  investment  for  the  green  and  digital  transition  and  for 
energy  security,  including  by  making  use  of  the  RRF,  RePowerEU  and  other  EU 
funds. For the period beyond 2023, pursue a fiscal policy aimed at achieving prudent 

21 

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

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2. 

3. 

4. 

medium-term  fiscal  positions.  Broaden  taxation, including  of  property  and  capital, 
and strengthen the adequacy of healthcare and social protection to reduce inequality.  

Proceed with the implementation of its recovery and resilience plan, in line with the 
milestones  and  targets  included  in  the  Council  Implementing  Decision  of  13  July 
2021. Submit the 2021-2027 cohesion policy programming documents with a view to 
finalising  their  negotiations  with  the  Commission  and  subsequently  starting  their 
implementation.  

Improve  access  to  finance  for  small  and  medium-sized  enterprises  through  public 
lending  and  guarantee  schemes  aimed  at  facilitating  investments  of  strategic 
importance, in particular the green transition and regional development.  

Reduce  overall  reliance  on  fossil  fuels  and  diversify  imports  of  fossil  fuels  by 
accelerating  the  deployment  of  renewables,  ensuring  sufficient  interconnection 
capacity,  diversifying  energy  supplies  and  routes  and  reducing  overall  energy 
consumption through ambitious energy efficiency measures. 

Done at Brussels, 

For the Council 
The President 

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