Riga, April 26 (LETA) - The development of the government debt in the coming years is on an upward trend, with the amount of interest payments on the government debt rising quite rapidly - from 0.8 percent of gross domestic product (GDP) in 2023 to 1.4 percent of GDP in 2027 and 2028, the Fiscal Discipline Council (FDP) said in its interim monitoring report on Latvia's Stability Program for 2024-2028.

Therefore, it is particularly necessary for the government to avoid increasing the debt level in the coming years, the council stresses.

A period of high uncertainty continues in the world, in the European Union (EU) and in Latvia, making the preparation and assessment of the Stability Program 2024-2028 more difficult. The FDP believes that the government should be prepared for adverse geopolitical scenarios that could further slow down the fragile growth projected in the baseline scenario of Latvia's Stability Program and worsen the country's financial situation.

"Latvia cannot afford to raise its public debt above 50 percent of GDP because it needs to maintain a safety cushion against a potential crisis that always comes unexpectedly. Unfortunately, in the current scenario, the public debt could be close to 50 percent already in 2028," said Inna Steinbuka, FDP Chairwoman.

The Stability Program's fiscal figures follow the macroeconomic forecasts approved at the FDP meeting on February 12, which have deteriorated in the light of economic stagnation in 2023. GDP growth is projected at 1.4 percent for this year, 2.9 percent for 2025, 2.5 percent for 2026 and 2.3 percent for 2027 and 2028. Overall, such a growth scenario would not only fail to reduce, but possibly further increase Latvia's gap with its neighbors, says the FDP.

The council also draws attention to the delays in investment by the private sector. Investment in competitive innovative projects and in human capital is vital to ensure the migration of labor from low-productivity to high value-added sectors, to increase productivity, to foster growth and to boost budget revenues, the FDP stresses. Exports, which along with investment are critical to the Latvian economy, have not yet resumed growth, the FDP points out.

Given the fall in inflation and low economic growth, the FDP stresses that it will not be easy to achieve the budget deficit of 2.8 percent and the structural deficit of 0.5 percent of GDP envisaged in this year's budget law.

The FDP calls on the government, in the event of a deterioration in the baseline scenario, to make savings as far as possible during the budget execution process in order to achieve the budget balance targets. The new EU economic framework, approved by the European Parliament on April 23, not only gives member states more flexibility in setting their spending trajectories, but also provides for more effective sanctions in case of non-achievement of the targets. Latvia must maintain its reputation for responsible fiscal policy and achieve its fiscal targets, the FDP said.

Regarding the government's priority to significantly increase defense spending, the FDP, while not questioning the objective of strengthening defense, is critical of the interpretation of such spending as one-off, with no impact on the structural balance. The FDP has repeatedly stressed and insists on the view that one-off measures for the internal and external security of the country should not be recognized as such.

With regard to the government's tax reform, the FDP considers that changes in the tax system will not radically improve the competitiveness of companies, economic growth or the financial situation of the country. The Council considers that the weakest links in economic development are low productivity, labor shortages and low levels of investment. In the area of taxation, there is a need to strengthen measures to reduce the shadow economy and to simplify the tax system and its administration, thereby improving the business environment and encouraging voluntary tax payments. The government faces a tough challenge to design and implement a tax reform that would reduce the tax burden on low wage earners and at the same time increase the mass of taxes collected to boost funding for defense, social and other spending.

Latvia's Stability Program is the medium-term policy document that guides Latvia's fiscal policy. It aims at pursuing a tight and sustainable fiscal policy and ensuring macroeconomic stability. Since February 2016, the macroeconomic forecasts developed by the Finance Ministry, which are used as a basis for medium-term national budget planning, are submitted to the FDP for assessment and approval.