The Latvian Economy - July 2015
General government spending – how much and on what?
  • Without political decisions to significantly raise tax revenues as % of GDP, there is no room for major spending increases
  • To spend more on prioritised areas, need to cut elsewhere (as % of GDP)
  • Government spending should focus more on growth-friendly policies

 

Without political decisions to significantly raise tax revenues as a percent of GDP, there is no room for major spending increases
Latvian tax revenues are at 28% of GDP, one of the lowest in the EU28 (39% on average). Without policy changes, tax revenues as a percent of GDP will be almost flat in the coming years. Thus, the ability to spend will also remain relatively low compared with the EU28 (36-37% of GDP in Latvia vs. 48-49% in the EU28).

To spend more on prioritised areas, there is a need to cut elsewhere (as percent of GDP)
There are calls to increase spending on social issues (e.g., to reduce income inequality, support birth rates, and raise pensions), defence (to fulfil NATO requirements), education (to raise teachers’ salaries), etc. It is not possible to spend more in all areas, and priorities should be chosen wisely. Latvia already now spends on economic affairs (including transport), housing and community amenities, recreation and culture, and education more as a percent of GDP than the EU28 on average. At the same time, Latvian spending on general public services, defence, health, and social protection is lower than the EU average. Latvian spending on growth-friendly policies overall is way below its peers.

Government spending should focus more on growth-friendly policies
We believe that one of the priorities for the government should be growth-boosting policies to support productivity growth and innovations, e.g., education and research and development. Growth-friendly policies would support revenue flows (and thus opportunity for higher spending) in the future and also reduce the risks of the middle-income trap. More efficient spending can free up resources as well – “internal reserves” can possibly be found in most ministries. In turn, the size of social protection spending (including pensions) should be discussed openly, since how large a welfare state Latvian society is willing and ready to pay for is a fundamental question.

PDF The Latvian Economy - July 2015


For more information please contact Ms. Lija Strašuna, +371 6744 5875, lija.strasuna@swedbank.lv

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