Recommendation for a COUNCIL RECOMMENDATION on the 2023 National Reform Programme of Latvia and delivering a Council opinion on the Stability Programme of Latvia
Date: 2023-05-24
Institutions: European Commission, Secretariat-General
Subjects: Latvia, economic policy, economic recovery, economic reform, energy policy, fiscal policy, public finance, renewable energy, stability pact, stability programme

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   EUROPEAN COMMISSION  Brussels, 24.5.2023  COM(2023) 614 final  Recommendation for a COUNCIL RECOMMENDATION on the 2023 National Reform Programme of Latvia and delivering a Council opinion on the Stability Programme of Latvia {SWD(2023) 614 final}  
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2023 National Reform Programme of Latvia and delivering a Council opinion on 
the 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  Regulation  (EU)  No  1176/2011  of  the  European  Parliament  and  of  the 
Council  of  16  November  2011  on  the  prevention  and  correction  of  macroeconomic 
imbalances2, and in particular Article 6(1) 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) 

Regulation  (EU)  2021/241  of  the  European  Parliament  and  of  the  Council3,  which 
established  the  Recovery  and  Resilience  Facility,  entered  into  force  on  19  February 
2021. The Recovery and Resilience Facility provides financial support to the Member 
States  for  the  implementation  of  reforms  and  investments,  entailing  a  fiscal  impulse 
financed  by  the  EU.  In  line  with  the  European  Semester  priorities,  it  contributes  to 
economic  and  social  recovery  and  to  the  implementation  of  sustainable  reforms  and 
investments,  in  particular  to  promote  the  green  and  digital  transition  and  make  the 
Member States’ economies more resilient. It also helps strengthen public finances and 
boost  growth  and  job  creation  in  the  medium  and  long  term,  improve  territorial 
cohesion  within  the  EU  and  support  the  continued  implementation  of  the  European 
Pillar of Social Rights. The maximum financial contribution per Member State under 
the Recovery and Resilience Facility was updated on 30 June 2022  in accordance with 
Article 11(2) of Regulation (EU) 2021/241.  

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3 

OJ L 209, 2.8.1997, p. 1. 
OJ L 306, 23.11.2011, p. 25. 
Regulation  (EU)  2021/241  of  the  European  Parliament  and  of  the  Council  of  12  February  2021 
establishing the Recovery and Resilience Facility (OJ L 57, 18.2.2021, p. 17). 

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(2) 

On 22 November 2022, the Commission adopted the 2023 Annual Sustainable Growth 
Survey4,  marking  the  start  of  the  2023  European  Semester  for  economic  policy 
coordination. The European Council endorsed the priorities of the  survey  around the 
four  dimensions  of  competitive  sustainability  on  23  March  2023.  On  22  November 
2022,  on  the  basis  of  Regulation  (EU)  No  1176/2011,  the  Commission  also  adopted 
the 2023 Alert Mechanism Report, in which it identified Latvia as one of the Member 
States that may be affected or may be at risk of being affected by imbalances, and for 
which  an  in-depth  review  would  be  needed.  On  24  February  2023,  the  Commission 
also adopted an opinion on Latvia’s 2023 draft budgetary plan. The Commission also 
adopted a recommendation for a Council recommendation on the economic policy of 
the  euro  area,  which  the  European  Council  endorsed  on  23  March  2023  and  the 
Council  adopted  on  16  May  2023,  as  well  as  the  proposal  for  the  2023  Joint 
Employment Report analysing the implementation of the Employment Guidelines and 
the principles of the European Pillar of Social Rights, which the Council  adopted on 
13 March 2023.  

(3)  While the  EU  economies are showing remarkable resilience, the  geopolitical  context 
continues  to  have  a  negative  impact.  As  the  EU  stands  firmly  with  Ukraine,  the  EU 
economic  and  social  policy  agenda  is  focused  on  reducing  the  negative  impact  of 
energy shocks on both vulnerable households and companies in the short term, and on 
keeping  up  efforts  to  deliver  on  the  green  and  digital  transition,  support  sustainable 
and inclusive growth, safeguard macroeconomic stability and increase resilience in the 
medium  term.  It  also  focuses  heavily  on  increasing  the  EU’s  competitiveness  and 
productivity. 

(4) 

On  1  February  2023,  the  Commission  issued  the  Communication  A  Green  Deal 
Industrial  Plan  for  the  Net-Zero  Age5  to  boost  the  competitiveness  of  the  EU’s  net-
zero  industry  and  support  the  fast  transition  to  climate  neutrality.  The  plan 
complements  ongoing  efforts  under  the  European  Green  Deal  and  REPowerEU.  It 
aims to provide a more supportive environment for scaling up the EU’s manufacturing 
capacity  for  the  net-zero  technologies  and  products  required  to  meet  the  EU’s 
ambitious climate targets, as well as ensuring access to relevant critical raw materials, 
including  by  diversifying  sourcing,  properly  exploiting  geological  resources  in 
Member States and maximising the recycling  of raw materials. The plan  is  based on 
four pillars:  a predictable and simplified regulatory  environment,  speeding up access 
to finance, enhancing skills, and open trade for resilient supply chains. On 16 March 
2023,  the  Commission  also  issued  the  Communication  Long-term  competitiveness  of 
the EU: looking beyond 20306, structured along nine mutually reinforcing drivers with 
the objective to work towards a growth-enhancing regulatory framework. It sets policy 
priorities  aimed  at  actively  ensuring  structural 
improvements,  well  focused 
investments and regulatory measures for the long-term competitiveness of the EU and 
its Member States. The recommendations below help address those priorities. 

(5) 

In 2023, the European Semester for economic policy coordination continues to evolve 
in  line  with  the  implementation  of  the  Recovery  and  Resilience  Facility.  Fully 
implementing the recovery and resilience plans remains essential for delivering 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  recent  years.  The 

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COM(2022) 780 final. 
COM(2023) 62 final.  
COM(2023) 168 final.  

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(6) 

(7) 

2019, 2020 and 2022 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.  
The REPowerEU Regulation7 adopted on 27 February 2023, aims to rapidly phase out 
the  EU’s  dependence  on  Russian  fossil  fuel  imports.  This  will  contribute  towards 
energy security and the diversification of the EU’s energy supply, while increasing the 
uptake of renewables, energy storage capacities and energy efficiency. The Regulation 
enables  Member  States  to  add  a  new  REPowerEU  chapter  to  their  national  recovery 
and  resilience  plans  in  order  to  finance  key  reforms  and  investments  that  will  help 
achieve the REPowerEU objectives. They will also help boost the competitiveness of 
the EU’s net-zero industry as outlined in the Green Deal  Industrial Plan for the Net-
Zero Age and address the energy-related country-specific recommendations issued to 
the  Member  States  in  2022  and,  where  applicable,  in  2023.  The  REPowerEU 
Regulation  introduces  a  new  category  of  non-repayable  financial  support,  made 
available  to  Member  States  to  finance  new  energy-related  reforms  and  investments 
under their recovery and resilience plans.  

On 8 March 2023, the Commission adopted a communication providing fiscal policy 
guidance for 2024. It aims to support the preparation of Member States’ stability and 
thereby  strengthen  policy  coordination8.  The 
convergence  programmes  and 
Commission recalled that the general escape clause of the Stability and Growth Pact 
will be deactivated at  the end of 2023.  It  called  for fiscal  policies in  2023-2024 that 
ensure  medium-term  debt  sustainability  as  well  as  raise  potential  growth  in  a 
sustainable manner. Member States were invited to set out in their 2023  stability and 
convergence programmes how their fiscal plans will ensure that the 3% of GDP deficit 
reference value is adhered to as well as plausible and continuous debt reduction, or for 
debt  to  be  kept  at  prudent  levels  in  the  medium  term.  The  Commission  invited 
Member States to phase out national fiscal measures introduced to protect households 
and  firms  from  the  energy  price  shock,  starting  with  the  least  targeted  ones.  It 
indicated that, if support measures needed to be extended because of renewed energy 
price  pressures,  Member  States  should  target  such  measures  much  better  than  in  the 
past  towards  vulnerable  households  and  firms.  The  Commission  proposed  that  the 
fiscal  recommendations would be  quantified and differentiated  and be  formulated on 
the basis of net primary expenditure as proposed in its Communication on orientations 
for  a  reform  of  the  EU  economic  governance  framework9.  It  recommended  that  all 
Member States should  continue to  protect  nationally  financed investment and ensure 
the  effective  use  of  the  Recovery  and  Resilience  Facility  and  other  EU  funds,  in 
particular  in  light  of  the  green  and  digital  transition  and  resilience  objectives.  The 
Commission  indicated  that  it  will  propose  to  the  Council  to  open  deficit-based 
excessive deficit procedures in spring 2024 on the basis of the outturn data for 2023, in 
line with existing legal provisions. 

(8) 

On  26  April  2023,  the  Commission  presented  legislative  proposals  to  implement  a 
comprehensive  reform of the EU's economic  governance rules. The central  objective 

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Regulation  (EU)  2023/435  of  the  European  Parliament  and  of  the  Council  of  27  February  2023 
amending Regulation (EU) 2021/241 as regards REPowerEU chapters in recovery and resilience plans 
and  amending  Regulations  (EU)  No  1303/2013,  (EU)  2021/1060  and  (EU)  2021/1755,  and  Directive 
2003/87/EC (OJ L 63, 28.2.2023, p. 1). 
COM(2023) 141 final. 
COM(2022) 583 final. 

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(9) 

of the proposals is to strengthen public debt sustainability and promote sustainable and 
inclusive growth in all Member States through reforms and investments. The proposals 
aim at providing Member States with more control over the design of their medium-
term plans, while putting in place a more stringent enforcement regime to ensure that 
Member  States  deliver  on  the  commitments  undertaken  in  their  medium-term  fiscal-
structural plans. The objective is to conclude the legislative work in 2023. 

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 
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 25 April 2023, Latvia submitted its 2023 National Reform Programme and, on 17 
April 2023, its 2023 Stability Programme, in line with Article 4(1) 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 
2023  National  Reform  Programme  also  reflects  Latvia’s  biannual  reporting  on  the 
progress made in achieving its recovery and resilience plan.  

in 

progress 

addressing 

(11)  The Commission  published the 2023 country  report for  Latvia11 on 24 May  2023.  It 
country-specific 
assessed  Latvia’s 
recommendations  adopted by  the Council  between 2019  and  2022 and  took stock of 
Latvia’s  implementation  of  the  recovery  and  resilience  plan.  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. 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.  

relevant 

the 

(12)  The  Commission  carried  out  an  in-depth  review  under  Article  5  of  Regulation  (EU) 
No 1176/2011 for Latvia and published its results on 24 May 202312. It concluded that 
Latvia  is  not  experiencing  macroeconomic  imbalances.  In  particular,  vulnerabilities 
relating to  external  borrowing and housing remain  mild; risks to  competitiveness  are 
pertinent,  but  overall  seem  contained  in  the  near  future.  The  recent  widening  of  the 
current  account  deficit  was  significant,  but  the  deficit  is  expected  to  narrow 
substantially  this  year  and  further  in  2024.  Latvia’s  net  international  investment 
position, which improved markedly in the past decade, is expected to remain broadly 
stable. Nonetheless, inflation and wage pressures, if persistent, risk impairing Latvia’s 

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Council Implementing Decision of 13 July 2021 on the approval of the assessment of the recovery and 
resilience plan for Latvia (ST 10157/21; ST 10157/21 ADD 1; ST 10157/21 ADD 1 COR 1). 
SWD(2023) 614 final. 
SWD(2023) 636 final. 

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competitiveness,  particularly  as  core  inflation  is  well  above  the  euro  area  average. 
While  house  price  growth  has  been  elevated  recently,  the  house  price  overvaluation 
does not appear to be substantial. Moreover, house price growth slowed down in late 
2022,  mortgage  lending  has  been  weak,  and  household  debt  is  limited  and  falling  in 
terms of household income. Latvia faces key structural economic challenges related to 
declining  labour  supply,  which  has  contributed  to  fast  unit  labour  cost  increases  and 
risks  impairing  competitiveness  over  the  medium  term.  The  policy  setting  is  overall 
favourable, although some additional efforts could help to address the risks from the 
identified vulnerabilities. Policies to safeguard competitiveness, including measures to 
increase the quality and quantity of labour supply, would be important in that respect. 
Shortening the construction permitting process would help supporting housing supply 
and improve the housing market situation.  

(13)  Based on data validated by Eurostat,13 Latvia’s general government deficit decreased 
from 7.1% of GDP in 2021 to 4.4% in 2022, while general government debt fell from 
43.7% of GDP at the end of 2021 to 40.8% at the end of 2022. On 24 May 2023, the 
Commission published a report under Article 126(3) TFEU;14 the report discussed the 
budgetary situation of Latvia, as its general government deficit in 2022 exceeded the 
3% of GDP Treaty reference value. The report concluded that the deficit criterion was 
not fulfilled. In line with the Communication of 8 March 2023,15 the Commission did 
not  propose  to  open  new  excessive  deficit  procedures  in  spring  2023;  in  turn,  the 
Commission  stated  that  it  would  propose  to  the  Council  to  open  deficit-based 
excessive deficit procedures in spring 2024, on the basis of the outturn data for 2023. 
Latvia should take account of this in the execution of its 2023 budget and in preparing 
the Draft Budgetary Plan for 2024.  

(14)  The  general  government  balance  has  been  impacted  by  the  fiscal  policy  measures 
adopted to mitigate the economic and social impact of the increase in energy prices. In 
2022,  such  expenditure-increasing  measures  included  cost  compensation  for  heating 
(based  on  the  energy  source  used)  and  reduction  of  electricity  bills  for  households; 
monthly benefits to vulnerable households and families with children as well as earlier 
indexation of pensions; grants to energy intensive companies and compensation for the 
increase  of  electricity  costs  for  companies.  The  Commission  estimates  the  net 
budgetary  cost  of  these  measures  at  1.5%  of  GDP  in  2022.  The  general  government 
balance  has  also  been  impacted  by  the  budgetary  cost  of  temporary  protection  to 
displaced persons from  Ukraine, which is estimated at 0.2% of GDP in 2022. At the 
same time, the estimated cost of COVID-19 temporary emergency measures dropped 
to 1.2% of GDP in 2022, from 5.0% in 2021. 

(15)  On  18  June  2021,  the  Council  recommended  that  in  2022  Latvia16  maintain  a 
supportive  fiscal  stance,  including  from  the  impulse  provided  by  the  Recovery  and 
Resilience  Facility,  and  preserve  nationally  financed  investment.  The  Council  also 
recommended  Latvia  to  keep  the  growth  of  nationally  financed  current  expenditure 
under control. 

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Eurostat-Euro Indicators, 47/2023, 21.4.2023 

COM(2023) 631 final, 24.05.2023. 

COM(2023) 141 final, 8.3.2023. 

Council  Recommendation  of  18  June  2021  delivering  a  Council  opinion  on  the  2021  Stability 
Programme of Latvia,  OJ C 304, 29.07.2021, p. 63. 

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(16)  According  to  the  Commission  estimates,  the  fiscal  stance17  in  2022  was  neutral,  at 
0.0% of GDP, which was appropriate in a context of high inflation. As recommended 
by the Council, Latvia continued to support the recovery with investments financed by 
the  Recovery  and  Resilience  Facility.  Expenditure  financed  by  Recovery  and 
Resilience  Facility  grants  and  other  EU  funds  amounted  to  1.1%  of  GDP  in  2022 
(1.3% of GDP in 2021). Due to capacity constraints and a rise in construction prices, 
some investments financed by Recovery and Resilience Facility grants and other EU 
funds in 2022 were delayed, leading to the small decrease in expenditure. Nationally 
financed investment provided a contractionary contribution of 1.2 percentage points to 
the  fiscal  stance.18  Latvia  therefore  did  not  preserve  nationally  financed  investment, 
which is not in line with the Council recommendation. At the same time, the growth in 
nationally  financed  primary  current  expenditure  (net  of  new  revenue  measures) 
provided  a  contractionary  contribution  of  0.3  percentage  points  to  the  fiscal  stance. 
Latvia  therefore  kept  under  control  the  growth  in  nationally  financed  current 
expenditure. 

(17)  The macroeconomic scenario underpinning the budgetary projections in  the Stability 
Programme is cautious in 2023 and thereafter. The government projects  real GDP to 
stagnate  in  2023  and  grow  by  2.0%  in  2024.  By  comparison,  the  Commission  2023 
spring forecast projects a higher real GDP growth of 1.4% in 2023 and 2.8% in 2024, 
reflecting the incorporation of new data releases compared to the Stability Programme, 
namely data revisions of 2022 GDP growth as well as the flash estimate for the first 
quarter of 2023, both of which put the GDP growth higher than previously expected. 
However, in  nominal  terms,  GDP  growth  is closer in  both forecasts  with  11.7%  and 
5.5%  growth  expected  for  2023  and  2024,  respectively,  in  the  Stability  Programme 
and 10.5% and 5.6% growth forecast for the respective years by the Commission. 

(18) 

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18 

In its 2023 Stability Programme, the government expects that the general government 
deficit will decrease to 4.0% of GDP in 2023. The deficit adjustment in 2023 mainly 
reflects expenditure developments. A deficit-decreasing contribution is expected from 
the  phasing  out  of  most  pandemic-related  support  measures  and  the  lump-sum 
expenditure in 2022 for the creation of a national gas reserve is not foreseen for 2023. 
These  savings  are  set  to  be  partially  offset  by  expenditure  measures  included  in  the 
2023 budget package, such as a wage increase for public administration and medical 
personnel,  higher  current  expenditure  for  healthcare  services,  science,  research  and 
higher  education  as  well  as  a  substantial  public  investment  package  for  defence  and 
internal security. Moreover, higher spending is expected for pensions and allowances 

The  fiscal  stance  is  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, 
in 
the Fiscal Statistical Tables.   

growth. For  more 

to  medium-term 

see  Box 1 

potential 

relative 

details 

This  contractionary  contribution  is  due  in  particular  to  lower  spending  on  investment  projects  co-
financed by EU funds which also affected the national co-financing developments (in particular at the 
local  government  level)  as  well  as  due  to  the  transfer  of  military  equipment  to  Ukraine  which  is 
recorded as a negative GFCF off-set by a capital transfer. 

At the same time, other nationally financed capital expenditure  provided an expansionary contribution 
of 1.7 percentage points of GDP. Increase in the other capital expenditure is largely explained by two 
factors  –  creation  of  natural  gas  reserves  for  the  security  of  national  energy  supply  as  well  as  by 
delivery of military equipment to Ukraine. 

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due  to  higher  indexation  coefficients.  According  to  the  Programme,  the  general 
government debt-to-GDP ratio is expected to decrease from 40.8% at the end of 2022 
to  39.6%  at  the  end  of  2023.  The  Commission  2023  spring  forecast  projects  a 
government deficit of 3.8% of GDP for 2023. This is in line with the deficit projected 
in the Stability Programme. The Commission 2023 spring forecast projects a slightly 
higher general government debt-to-GDP ratio, of 39.8% at the end of 2023. 

(19)  The  government  balance  in  2023  is  expected  to  continue  to  be  impacted  by  the 
measures adopted to mitigate the economic and social impact of the increase in energy 
prices. They mainly consist of measures extended from 2022. The net budgetary cost 
of the support measures is projected in the Commission 2023 spring forecast at 1.0% 
of  GDP  in  202319.  Most  measures  in  2023  do  not  appear  targeted  to  the  most 
vulnerable  households  or  firms,  and  do  not  fully  preserve  the  price  signal  to  reduce 
energy  demand  and  increase  energy  efficiency.  As  a  result,  the  amount  of  targeted 
support measures, to be taken into account in the assessment of compliance with the 
recommendation  for  2023,  is  estimated  in  the  Commission  2023  spring  forecast  at 
0.1%  of  GDP  in  2023  (compared  to  0.5%  of  GDP  in  2022).  The  budgetary  cost  of 
temporary protection to displaced persons from Ukraine is projected to increase by 0.1 
pps. of GDP compared to 2022. Finally, the 2023 government balance is expected to 
benefit from the phasing out of COVID-19 temporary emergency measures of 1.2% of 
GDP. 

(20)  On 12 July 2022, the Council recommended20 that Latvia take action to ensure in 2023 
that  the  growth  of  nationally  financed  primary  current  expenditure  is  in  line  with  an 
overall neutral  policy stance21, taking into account  continued temporary  and targeted 
support to households and firms most vulnerable to energy price hikes and to people 
fleeing Ukraine. Latvia should stand ready to adjust current spending to the evolving 
situation. Latvia was also recommended to expand public investment for the green and 
digital  transitions,  and  for  energy  security  taking  into  account  the  REPowerEU 
initiative, including by making use of the Recovery and Resilience Facility and other 
Union funds. 

(21) 

In  2023,  the  fiscal  stance  is  projected  in  the  Commission  2023  spring  forecast  to  be 
expansionary (- 0.9% of GDP), in a context of high inflation. This follows a   neutral 
fiscal  stance  in  2022  (0.0%  of  GDP).  The  growth  in  nationally  financed  primary 
current  expenditure  (net  of  discretionary  revenue  measures)  in  2023  is  projected  to 
provide  an  expansionary  contribution  of  0.5%  of  GDP  to  the  fiscal  stance.  This 
includes  the  reduced  cost  of  the  targeted  support  measures  to  households  and  firms 
most vulnerable to energy price hikes by 0.4% of GDP. This also includes higher costs 
to  offer  temporary  protection  to  displaced  persons  from  Ukraine  (by  0.1%  of  GDP). 
The expansionary contribution of nationally financed net primary current expenditure 
is therefore not due to the targeted support to households and firms most vulnerable to 
energy  price  hikes  and  to  people  fleeing  Ukraine.  The  expansionary  growth  in 
nationally  financed  primary  current  expenditure  (net  of  discretionary  revenue 
measures)  is  driven  by  expenditure  measures  included  in  the  2023  budget  package, 

19 

20 

21 

The  figure represents the level of annual budgetary cost of those  measures, including current revenue 
and expenditure as well as – where relevant – capital expenditure measures. 
Council Recommendation of 12 July 2022 on the National Reform Programme of Latvia and delivering 
a Council opinion on the 2022 Stability Programme of Latvia OJ C 334, 01.09.2022, p. 112. 
Based  on  the  Commission  spring  2023  forecast,  the  medium-term  (10-year  average)  potential  output 
growth of Latvia, which is used to measure the fiscal stance, is estimated at 11.5% in nominal terms. 

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such  as  wage  increase  for  administration  and  medical  personnel,  additional  current 
expenditure financing oncology, science and research and other discretionary  current 
expenditure  for  national  administration  as  well  as  higher  spending  for  pensions  and 
allowances.  In  sum,  the  projected  growth  of  nationally  financed  primary  current 
expenditure  is  not  in  line  with  the  recommendation  of  the  Council.  Expenditure 
financed by Recovery and Resilience Facility grants and other EU funds is projected 
to amounte to 2.2% of GDP in 2023, while nationally financed investment is projected 
to provide an expansionary contribution to the fiscal stance of 1.0 percentage points22. 
Therefore,  Latvia  plans  to  finance  additional  investment  through  the  Recovery  and 
Resilience  Facility  and  other  EU  funds,  and  it  is  projected  to  preserve  nationally 
financed  investment.  It  plans  to  finance  public  investment  for  the  green  and  digital 
transitions, and for energy security, such as the purchase of electric vehicles for public 
transport, improving the energy efficiency of multi-apartment  buildings and business 
properties,  modernising  the  electricity  transmission  and  distribution  networks, 
strengthening the response capacity of rescue services, centralising governance digital 
platforms  and  systems  in  the  public  sector,  developing  the  digital  skills  and 
digitisation  of processes in  businesses, broadband infrastructure development  as  well 
as  fostering  digitalisation  in  the  education  sector,  which  are  largely  funded  by  the 
Recovery and Resilience Facility and other EU funds.  

(22)  According  to  the  Stability  Programme  the  general  government  deficit  is  expected  to 
decline to 2.5% of GDP in 2024. The decrease in 2024 mainly reflects the phasing out 
of  support  measures  to  mitigate  the  impact  of  high  energy  prices  and  absence  of 
COVID-19  pandemic  related  current  expenditure  and  finalisation  in  2023  of 
investment  to  support  the  recovery  from  the  pandemic.  The  programme  expects  the 
general  government  debt-to-GDP  ratio  to  increase  slightly  to  39.7%  at  the  end  of 
2024.  Based  on  policy  measures  known  at  the  cut-off  date  of  the  forecast,  the 
Commission  2023  spring  forecast  projects  a  government  deficit  of  2.7%  of  GDP  in 
2024.  This  is  in  line  with  the  deficit  projected  in  the  programme.  The  Commission 
2023  spring  forecast  projects  a  higher  general  government  debt-to-GDP  ratio,  of 
40.5% at the end of 2024, mainly due to the lower nominal GDP. 

(23)  The  Stability  Programme  envisages  the  phasing  out  of  all  of  the  energy  support 
measures in  2024. The  Commission  also  assumes full phasing out  of energy support 
measures  in  2024.  This  hinges  upon  the  assumption  of  no  renewed  energy  price 
increases. 

(24)  Council Regulation (EC) No 1466/97 calls for an annual improvement in the structural 
budget balance toward the medium-term objective by 0.5% of GDP as a benchmark.23 
Taking  into  account  fiscal  sustainability  considerations,24  and  the  need  to  reduce  the 
deficit  to  below  the  3%  of  GDP  reference  value,  an  improvement  in  the  structural  

22 

23 

24 

Other nationally financed capital expenditure is projected to provide a contractionary contribution of 1.7 
percentage points of GDP due the fact that Commission forecast for 2023 does not include creation of 
natural gas reserves for security of energy supply and military assistance to Ukraine. 

Cf. Article 5 of Council Regulation (EC) No 1466/97, which also requires an adjustment of  more than 
0.5%  of  GDP  for  Member  States  with  a  government  debt  exceeding  60%  of  GDP,  or  with  more 
pronounced debt sustainability risks. 
The Commission estimated that Latvia would need an average annual increase in the structural primary 
balance as a share of GDP of 0.0 percentage points to ensure that government debt is kept at prudent 
levels  in  the  medium  term.  This  estimate  was  based  on  the  Commission  autumn  2022  forecast.  The 
starting point for this estimate was the projected government deficit and debt for 2024 which assumed 
the withdrawal of energy support measures in 2024.  

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balance  of  at  least  0.5%  of  GDP  for  2024  would  be  appropriate.  To  ensure  such  an 
improvement,  the  growth  in  net  nationally  financed  primary  expenditure25  in  2024 
should not exceed 3.0%, as reflected in this recommendation. This will also contribute 
to reducing core inflation, which is well above the euro area average, and which could 
lead  to  competitiveness  losses  if  persistent.  At  the  same  time,  the  remaining  energy 
support  measures  (currently  estimated  by  the  Commission  at  1.0%  of  GDP  in  2023) 
should be phased out, contingent on energy market developments and starting from the 
least targeted ones, and the related savings should be used to  reduce the government 
deficit.  Based  on  Commission  estimates,  this  would  lead  to  a  growth  in  net  primary 
expenditure  below  the  recommended  maximum  growth  rate  for  2024.  In  addition, 
according  to  the  Commission  2023  spring  forecast,  the  growth  in  net  nationally 
financed primary current expenditure in 2023 is not in line with the recommendation 
of the Council. If this is confirmed, lower growth in net primary expenditure in 2024 
would be appropriate. 

(25)  Assuming  unchanged  policies,  the  Commission  2023  spring  forecast  projects  net 
nationally financed primary expenditure to grow at 1.3% in 2024 which is below the 
recommended growth rate.  

(26)  According  to  the  programme,  government  investment  is  expected  to  increase  from 
5.5%  of  GDP  in  2023  to  6.1%  of  GDP  in  2024.  This  reflects  both  higher  nationally 
financed investment and higher investment financed by the EU, including through the 
Recovery and Resilience Facility.  

(27)  The Stability Programme outlines a medium-term fiscal path until 2026. According to 
the programme, the general government deficit is expected to decline to 2.2% of GDP 
in 2025 and to 0.7% by 2026. The general government deficit is therefore planned to 
decrease  below  3%  of  GDP  in  2024  and  remain  below  3%  of  GDP  over  the 
programme  horizon.  According  to  the  programme,  the  general  government  debt-to-
GDP ratio is expected to decrease from 39.7% at the end of 2024 to 38.9% by the end 
of 2026. 

(28)  Latvia’s  tax  revenue  as  a  share  of  GDP  is  significantly  below  the  EU  average.  This 
limits the delivery of public services, in particular in healthcare and social protection. 
Capital  and  property  are  relatively  undertaxed  compared  with  the  EU  average  and 
offer  potential  for  increasing  tax  revenue.  Moreover,  Latvia  collects  relatively  low 
revenues  from  labour  taxation  despite  relatively  high  tax  rates.  This  suggests  that 
continued  efforts  are  needed  to  improve  tax  compliance  and  tackle  the  shadow 
economy.  Poverty  and  inequality  remain  high,  in  particular  due  to  low  spending  on 
social protection. The adequacy of the social safety net has improved, but the risk of 
poverty  or  social  exclusion  remains  high,  in  particular  for  the  most  vulnerable.  The 
poverty or social exclusion risk in old age is the highest in the EU (45.9% compared to 
19.5%  in  the  EU  in  2021)  and  also  remains  very  high  for  people  with  disabilities 
(41.2%  against  29.7%  in  the  EU  in  2021).  Access  to  and  the  quality  of  individual 
needs-based social services remains a challenge due to the shortage and high workload 
of  social  workers  as  well  as  disparities  across  municipalities.  The  long-term  care 
system is fragmented, with limited progress in the transition from institutional care to 
home  care  and  community-based  services.  The  adequacy  and  availability  of  social 
housing is limited due to insufficient long-term funding. Public spending on healthcare 

25 

Net  primary  expenditure  is  defined  as  nationally  financed  expenditure  net  of  discretionary  revenues 
measures and excluding interest expenditure as well as cyclical unemployment expenditure. 

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(29) 

as  a  share  of  GDP  is  low  compared  to  the  EU  average,  and  the  medium-term 
budgetary plans expect it to decrease, notably from 5.6% of GDP in 2022 to 3.6% in 
2026 according to the 2023 Stability Programme. This is also significantly below the 
needed  public  financing  for  healthcare  of  6%  of  GDP  by  2027  as  indicated  in  the 
Public  Health  Policy  Guidelines  2021-2027.  While  the  decrease  is  mainly  due  to 
temporary  COVID-19  support  being  gradually  phased  out,  plans  for  the  sustainable 
financing  of  healthcare  are  also  lacking.  In  addition,  Latvia  faces  health  workforce 
shortages,  especially  of  nurses.  As  a  result,  timely  and  equal  access  to  healthcare  is 
limited. 

In accordance with Article 19(3), point (b) and Annex V, criterion 2.2 of Regulation 
(EU) 2021/241, the recovery and resilience plan includes an extensive set of mutually 
reinforcing reforms and investments to be implemented by 2026. The implementation 
of  Latvia’s  recovery  and  resilience  plan  is  well  underway.  Latvia  has  submitted  1 
payment  request,  corresponding  to  9  milestones  and  resulting  in  an  overall 
disbursement  of  EUR  201  million.  As  a  result  of  objective  circumstances  related  to 
increases  in  the  prices  of  energy  and  construction  materials,  and  supply  chain 
constraints  due  to  Russia’s  aggression  against  Ukraine,  Latvia  intends  to  submit 
modifications  to  the  plan,  as  well  as  a  REPowerEU  chapter  to  accelerate  the 
decarbonisation  of  the  economy  and  reduce  dependence  on  fossil  fuels.    The  swift 
inclusion  of  the  new  REPowerEU  chapter  in  the  recovery  and  resilience  plan  will 
allow  additional  reforms  and  investments  to  be  financed  in  support  of  Latvia’s 
strategic objectives in the field of energy and the green transition. The systematic and 
effective  involvement  of  local  and  regional  authorities,  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.   

(30)  The Commission approved all of Latvia’s cohesion policy programming documents in 
2022. Proceeding with the swift implementation of the cohesion policy programmes in 
complementarity  and  synergy  with  the  recovery  and  resilience  plan,  including  the 
REPowerEU  chapter,  is  key  to  achieving  the  green  and  digital  transition,  increasing 
economic and social resilience as well as achieving balanced territorial development in 
Latvia. 

(31)  Beyond the economic and social challenges addressed by the recovery and resilience 
plan,  Latvia  faces  challenges  related  to  access  to  finance,  energy  and  the  green 
transition.  

(32)  Private sector  credit flow  amounted to  1% of GDP  in  2021, which was considerably 
below  the  growth  rate  of  the  economy.  This  leads  to  a  further  reduction  of  private 
sector  debt,  which  is  among  the  lowest  in  the  EU.  This  weak  credit  growth  to  some 
extent reflects weak demand, but is also influenced by a number of challenges on the 
supply side. Small and medium-sized enterprises have found it particularly difficult to 
get credit. This is partly due to their higher credit risk, but also due to the high cost of 
credit  and  red  tape.  Furthermore,  poor  liquidity  of  the  assets  available  for  collateral 
makes  it  particularly  hard  to  get  credit  outside  of  the  Riga  region.  This  creates  a 
significant barrier both for mortgage lending and lending to businesses. 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 in the size of the shadow economy. Furthermore, improving the insolvency 

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process  to  achieve  a  high  rate  of  business  restructuring  and  possibly  higher  loan 
recovery rates would reduce banks’ perceived risks and  boost lending. Targeted loan 
and  guarantee  schemes  could  help  lower  the  liquidity  risks  faced  by  banks  when 
accepting  collateral  in  relatively  illiquid  markets.  Public  lending  schemes  for 
strategically  important  investment  areas  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  much  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 
has the potential to improve firms’ access to finance.  

(33)  Latvia has ensured its independence from Russian gas following parliament’s decision 
in  July 2022 to  stop  buying Russian natural  gas  from  1 January 2023.  Domestic gas 
suppliers have been able to find alternative sources of natural gas thanks to imports of 
liquified natural gas (LNG) from the Lithuanian Klaipeda LNG terminal and the new 
Finnish LNG terminal in Inkoo. The current situation has shown the need to speed up 
the  slow  roll-out  of  installations  for  electricity  generation  from  renewable  energy 
sources. Latvia has one of the highest shares of renewable energy in the EU, although 
this  share  stagnated  from  2020  to  2021.  Latvia  would  benefit  from  accelerating  its 
efforts in the uptake of wind and solar power, which is the most viable and long-term 
solution  to  increase  the  share  of  renewables.  Latvia’s  recovery  and  resilience  plan 
already includes measures to remove regulatory barriers to the deployment of onshore 
wind energy. However, further efforts could be made to speed up the deployment of 
renewable energy  for electricity  generation, heating and cooling. This  would involve 
modernising  the  electricity  grid,  promoting  decentralised  renewable  electricity 
generation,  flexibility  of  the  power  system  (demand  response  and  storage),  further 
improving  permit  granting  procedures  and  establishing  a  legal  framework  and 
incentives to promote energy communities. Completing Latvia’s synchronisation with 
the EU electricity grid would add transmission capacity so that an increasing share of 
offshore  and  onshore  renewables  could  be  integrated  into  the  grid.  The  Latvian 
electricity network, like  that of other Baltic Member States, remains exposed as  it is 
synchronised with the BRELL (Belarus, Russia, Estonia, Lithuania and Latvia) power 
grid.  The  regional  synchronisation  of  the  electricity  grid  with  the  rest  of  the  EU  is 
making  progress,  but  still  needs  to  be  completed.  To  that  end,  cooperation  with 
Estonia and Lithuania is necessary.  Latvia’s consumption of natural  gas has dropped 
by  30%  in  the  period  between  August  2022  and  March  2023,  compared  with  the 
average  gas  consumption  over  the  same  period  in  the  preceding  5  years,  beyond  the 
15%  reduction  target.  Latvia  could  keep  pursuing  efforts  to  temporarily  reduce  gas 
demand until 31 March 202426.  

(34)  Latvia  should  accelerate  its  efforts  to  scale  up  energy  efficiency  measures  to 
decarbonise its building stock as well as transport and industry and put in place new 
financing  and  support  measures  to  achieve  the  renovation  targets  of  its  long-term 
renovation strategy. 

(35)  Labour  and  skills  shortages  in  sectors  and  occupations  key  for  the  green  transition, 
including  manufacturing,  deployment  and  maintenance  of  net-zero  technologies,  are 
creating  bottlenecks  in  the  transition  to  a  net-zero  economy.  High-quality  education 

26 

Council Regulation (EU) 2022/1369 and Council Regulation (EU) 2023/706. 

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(36) 

(37) 

and  training  systems  that  respond  to  changing  labour  market  needs  and  targeted 
upskilling and reskilling measures are key to reducing skills shortages and promoting 
labour inclusion and reallocation.  To unlock untapped labour supply,  these measures 
need  to  be  accessible,  in  particular  for  individuals  and  in  sectors  and  regions  most 
affected by the green transition. In 2022, labour shortages were reported in 25 out of 
436  occupations  that  required  specific  skills  or  knowledge  for  the  green  transition, 
including  electricians  and  mechanical  engineers.  The  labour  shortages  were  reported 
as a factor that constrained production in industry and construction. 

In light of the Commission’s assessment, the Council has examined the 2022 Stability 
Programme and its opinion27 is reflected 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 euro area Member States take action, including 
through  their  recovery  and  resilience  plans,  to  (i)  preserve  debt  sustainability  and 
refrain  from  broad-based  support  to  aggregate  demand  in  2023,  better  target  fiscal 
measures taken to mitigate the impact of high energy prices and reflect on appropriate 
ways to wind down support as energy price pressures diminish; (ii) sustain high public 
investment and promote private investment to support the green and digital transition; 
(iii)  support  wage  developments  that  mitigate  the  loss  in  purchasing  power  while 
limiting  second-round  effects  on  inflation,  further  improve  active  labour  market 
policies  and  address  skills  shortages;  (iv)  improve  the  business  environment  and 
ensure that energy support to companies is cost-effective, temporary, targeted to viable 
firms  and  that  it  maintains  incentives  for  the  green  transition;  and  (v)  preserve 
macro-financial  stability  and  monitor  risks  while  continuing  to  work  on  completing 
the Banking Union. For Latvia, recommendations (1), (2), (3), and (4) contribute to the 
implementation of the first, second, third and fourth euro area recommendations.  

HEREBY RECOMMENDS that Latvia take action in 2023 and 2024 to:  

1. 

Wind  down  the  energy  support  measures  in  force  by  the  end  of  2023,  using  the 
related  savings  to  reduce  the  government  deficit.  Should  renewed  energy  price 
increases  necessitate  support  measures,  ensure  that  these  are  targeted  at  protecting 
vulnerable  households  and  firms,  fiscally  affordable,  and  preserve  incentives  for 
energy savings.  

Ensure  prudent  fiscal  policy,  in  particular  by  limiting  the  nominal  increase  in 
nationally financed net primary expenditure in 2024 to not more than 3.0%.  

Preserve nationally financed public investment and ensure the effective absorption of 
RRF  grants  and  other  EU  funds,  in  particular  to  foster  the  green  and  digital 
transitions.  

For  the  period  beyond  2024,  continue  to  pursue  a  medium-term  fiscal  strategy  of 
gradual  and  sustainable  consolidation,  combined  with  investments  and  reforms 
conducive  to  higher  sustainable  growth,  to  achieve  a  prudent  medium-term  fiscal 
position. 

Broaden taxation, including of property and capital, and strengthen the adequacy of 
healthcare and social protection.  

27 

Under Articles 5(2) and 9(2) of Council Regulation (EC) No 1466/97. 

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2. 

3. 

4. 

Continue  the  steady  implementation  of  its  recovery  and  resilience  plan  and  swiftly 
finalise the REPowerEU chapter with a view to  rapidly starting its implementation. 
Proceed  with  the  speedy  implementation  of  cohesion  policy  programmes,  in  close 
complementarity and synergy with the recovery and resilience plan. 

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  in  the  areas  of  the  green  transition  and  regional 
development. 

Reduce overall reliance on fossil fuels by accelerating the deployment of renewables, 
in  particular  onshore  and  offshore  wind  as  well  as  solar  energy,  and  strengthening 
energy  efficiency  measures,  e.g.  through  new  financing  and  support  measures  to 
meet  the  targets  of  the  long-term  renovation  strategy.  Ensure  sufficient  capacity  of 
interconnections to increase security of supply and continue synchronisation with the 
EU electricity grid. Step up policy efforts aimed at the provision and acquisition of 
the skills needed for the green transition. 

Done at Brussels, 

For the Council 
The President 

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