This week’s municipal elections mark the first practical step that for many Latvian residents will draw the new administrative borders. At the same time, analysis of economic data suggests that the administrative territorial reform will not be a "silver bullet" that will solve almost all long-term problems. Ageing and outflow of residents, low economic activity and wages, resulting in low tax revenue were, are and will be the main problems that should be solved within the existing and new municipal borders.

Without any huge surprises, Riga and the region will remain Latvia’s main driving force. The region has the highest population density with a growing trend and the highest economic activity. At the same time, there are also some other significant development centers forming - first of all, Liepaja, Ventspils, Valmiera. Experts say that apart from the traditionally large cities, attention should also be paid to, for example, Dobele, Smiltene, Cesis, Kuldiga that are forming into regional economic activity centers with good opportunities to attract residents and businesses.

A number of municipalities will have to solve the future development dilemma also after the reform - mostly in Latgale and eastern Vidzeme. Gloomy demographic development forecast is the main obstacle for economic activity and growing income.

Residents are migrating

Even though the demographic situation in Latvia is not positive, and the number of Latvian residents is declining, as well as ageing is noticeable, the regional situation is not one-sided. Latest data by the Central Statistical Bureau about population changes last year suggest that more than half or 52 percent of Latvian residents live in Riga and Pieriga region. In 2020, the number of residents increased only in Pieriga - by 0.9 percent or 3,400. The largest drop in the number of population was registered in Latgale - by 1.8 percent or 4,500, in Vidzeme it was by 1.1 percent or 2,100, in Kurzeme - by 1.1 percent or 2,600, in Zemgale - by 0.9 percent or 2,100, and in Riga - by 1 percent or 6,500. In the past ten years Latgale has lost 17 percent of its residents or 52,000 people, while Pieriga has seen the number of its population rise by 2 percent or 7,000 people.

No significant changes can be expected in the coming ten years. Forecasts in the number of population in the new municipalities by 2030 drawn by Karsu Izdevnieciba Jana Seta predicts increase in the number of population just in five Pieriga counties. The steepest rise is predicted in the new Marupe county that will merge the present Marupe and Babite counties - by 33 percent.

Meanwhile, other municipalities will see a larger or smaller drop in the number of residents with two eastern Vidzeme regions - Valka and Aluksne, and two Latgale regions - Augsdaugava and Kraslava seeing the biggest drops. These regions can expect the number of their population decline by more than one fourth in the coming ten years.

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The situation with residents’ age is not positive, either. In a number of new Latgale counties, Valka county, Daugavpils and Ventspils, the number of people in retirement age account for almost one fourth of all residents.

Janis Hermanis, financial and tax expert at the Latvian Employers Confederation, presenting a study on the economic profiles of Latvia’s counties, said that the change of generations in the job market is irregular, and, as a result, competition for employees among counties will increase.

Economic activity focuses around Riga

Viewing the number of residents in the new municipalities against the number of economically active companies in 2019, which is the last year before the Covid-19 crisis and can be viewed as an ‘ordinary business year’, the economic activity is highest in Riga and the nearby Marupe county. Also, the activity is high in the new South Kurzeme region, Kuldiga and Cesis counties.

There is even bigger difference in the average gross wage across the new municipalities. The wage in several Latgale counties is lower by almost half compared to Riga and Pieriga.

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Janis Hermanis says in his study that the so-called "richer" counties have specialization in more profitable sectors - information and communication technologies, financial services, pharmacy, trade, aviation. Meanwhile, people in "poorer" counties most often work in health and social care institutions, public utilities with local customers.

In order to prevent outflow of residents, Hermanis suggests that local leaders should promote economic activity, growth of companies, especially in sectors where it is possible to sell goods and services outside the municipal borders.

Differences in municipal budgets

The main goal of the administrative regional reform is to form larger and financially stronger counties that would replace many "micromunicipalities".

Still, economic activities, average wages and difference in the number of population create unequal situation also in the budgets of the future municipalities. If the Treasury data for 2019 tax revenue in municipal basic budgets, mostly consisting of personal income tax and real estate tax revenues, are placed on the map of new municipalities, the richer municipalities are Riga, Jurmala, Ogre county, Liepaja, Daugavpils, Marupe and Valmiera counties, while the smallest budget can be expected in four counties that have not been affected by the regional reform - Valka, Livani, Ventspils and Aluksne counties.

The picture is not much different if municipal tax revenue per capita is placed on the map within the new municipal borders. The new Marupe county, Jurmala, Riga, Adazi, Kekava counties, Ventspils and Saulkrasti county report over EUR 1,000 per capita, while the lowest revenue is reported in a number of counties in Latgale.

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Bank of Latvia economist Linda Olina in a study on municipal budgets said that at present the largest share of resources are spent on current expenses, covering everyday functions - wages, payments for goods and services, and social benefits.

In the past ten years, investments have accounted for a stable one fifth of municipal expenses. The economist reminded about the conclusions drawn by the State Audit Office, that local governments mostly practice the approach that they take what is given in relation to loans for investment projects, but rarely assess profitability and efficiency of the investments. As a result, investments are usually larger than predicted, and maintenance of the infrastructure objects is more expensive than predicted.

Therefore, the administrative territorial reform that merges municipalities in larger administrative territories can at least partly solve the situation, using the resources more efficiently and planning the investments more rationally, the Bank of Latvia said.