Latvia’s GDP may decline by 7% this year, but if a second wave of COVID-19 comes, the country’s GDP may drop by 9%, as detailed in Finance Ministry’s macro-economic development scenario.
The macro-economic scenario will be used as foundation for the state budget of 2021 and medium-term budget content in 2021-2023.
The base scenario details GDP decline in comparable prices is expected to reach 7% this year as private consumption, exports and investments decline under COVID-19 crisis. In 2021, the ministry predicts recovery of economic growth at a level of 5.1%, whereas in 2022 and 2023 GDP increase is estimated at 3.1%.
At the same time, Finance Ministry notes the medium term macro-economic development scenario was developed in June based on conservative estimates the data for GDP in Q1 and macro-economic information available by June, as well as the government’s confirmed support measures to reduce the consequences for the national economy caused by COVID-19 crisis.
To continue preparation of the budget, Finance Ministry presented to the government the topical general government budget balance for 2021-2023 at an unchanged government policy, considering macro-economic index predictions, tax revenue, additional expenditures until July 26 to finance support measures and other clarifications.
In 2020, the general government budget deficit is expected at 7.6% of GDP, which is considerably larger than what was planned in the Law on Medium-term Budget Plan for 2020, 2021 and 2022 before the COVID-19 crisis. At the same time, deficit is lower when compared to what was presented in spring in the Stability program 2020-2023 because of improvements to the actual situation with tax revenue and expenses on illness benefits.
The general government budget deficit at an unchanged government policy scenario is predicted at 3.9% of GDP in 2021, 2.8% of GDP in 2022 and 1.7% of GDP in 2023.
“Considering the predicted GDP, budget balance and considerable loan volume increase to finance support measures, the general government debt at an unchanged government policy is expected at 4% of GDP in 2021-2022 and 47% of GDP in 2023,” the ministry notes.
In addition to the base scenario, Finance Ministry has developed a scenario for a second wave of COVID-19, if negative risks from the base macro-economic development scenario and limitation of the coronavirus stays for too long or a new wave of outbreaks is observed, which could result in a more rapid decline of GDP and employment indexes.
Compared to the base scenario, the “second wave” scenario provides for a more rapid GDP decline this year along with slower economic recovery in the coming years. In 2021 GDP increase is expected at 2%, in 2022 it is expected at 4.6% and in 2023 at 3.2%.
“Under slower growth in the coming years, budget, when compared to the base scenario, would reduce and the general government budget balance in 2021 would reduce to 6% of GDP, in 2022 it would reduce to 4.2% of GDP and in 2023 it would reduce to 2.9% of GDP,” the ministry reports.
At the same time, the ministry adds COVID-19 pandemic has introduced changes to Latvia’s state fiscal policy. In 2020, the general exemption clause of the European Union’s Stability and Growth Pact became active. This clause allows increasing the general government budget deficit to reduce the economic damages caused by the pandemic. Thereby the Law on the Suppression of Consequences of the Spread of COVID-19 Infection provides deviations from fiscal discipline requirements only in 2020 and 2021.
Finance Ministry explains that 2022 onward, in accordance with Fiscal Discipline Law, it will be necessary to maintain structural deficit goals outlined therein.
Accurate general government budget balance objectives will be established by submitting the legislative draft on medium-term budget content for 2021, 2022 and 2023 to the Saeima. The objectives will be based on approved decisions in regards to expenses and revenue. (BNN/Business World Magazine)