Latvia’s Fiscal Discipline Council (FDP) urges the government to consider multiple fiscal risks generated during COVID-19 pandemic, including the unbalanced distribution of risks between the government and businessmen, as noted by the council in the third crisis monitoring report on COVID-19 risks for state economy and fiscal situation.
According to the council’s estimates, the total effect of COVID-19 support measures on the state budget base reaches 4.7% of Latvia’s GDP.
FDP mentions the unbalanced distribution of risks between the government on one side and businessmen and residents on the other, which creates the risk of considerable moral damages. According to FDP, one example for this unbalance is the long-term 25-year guarantees for support of businesses currently in the process of discussions in the government.
One other potential risks for the state budget, according to FDP, is the possible repeated COVID-19 outbreak, which may require additional finances and may further increase state debt.
On top of that, the state debt may be affected by a rapid climb of medium-term state debt maintenance costs, which is related to the confusion about European Central Bank’s bond procurement programme’s continued efficiency.
«The council stresses that the government’s national economy and social protection programme during COVID-19 crisis meets requirements of the economic situation. However, we would like to point out that in long-term the support measures could cause a considerable increase of the state debt burden and may affect the country’s financial stability,» stresses FDP manager Inna Šteinbuka.
Forecasts from the European Commission state that GDP decline in Europe and Latvia will be much larger in Q2 of 2020 than it was in Q1. However, when compared to the previous quarter, the latest GDP-related data shows GDP decline in Q1 may have been smaller than initially predicted – 2.9% instead of 3.3%. In Q2 Latvia’s GDP is expected to be 10.9% at the moment.
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At the same time, FDP notes the general mood of businessmen for the future remains very pessimistic in Latvia and its partner countries. «Analysis of available statistical indexes shows that the economic situation continues getting worse. At the same time, the situation remains good for household consumption and crediting sectors. However, the growing unemployment and savings reduction may yet worsen the situation here,» the council says.
FDP adds tax revenue remains relative good and this causes no real worry. At the same time, the council stresses there is a reason why they do not correlate with indexes of economic activity decline, and this is a matter that requires an in-depth analysis.
Crisis monitoring report on the influence of COVID-19 on the state economy and fiscal situation is prepared for the government and the Saeima twice a month. Its goal is helping to assess how well state support measures are performed during COVID-19 crisis and to assess their effect on the state budget now and the coming years.
