24.4.2007   

EN

Official Journal of the European Union

C 89/15

(1)

On 27 March 2007 the Council examined the updated convergence programme of Latvia, which covers the period 2006 to 2009 (2). On 6 March 2007, the Latvian government announced a plan aiming at combating inflation. This includes a revision of the budgetary targets, with a balanced budget in 2007 and 2008 and a surplus from 2009 onwards. However, this Council opinion is based on the convergence programme.

(2)

The macroeconomic scenario underlying the programme envisages a soft-landing of the economy, with real GDP growth slowing from 11,5 % in 2006 to 8,0 % on average over the rest of the programme period. Assessed against currently available information, this scenario appears to be based on plausible growth assumptions. Nevertheless, there are significant risks of less favourable macroeconomic developments in view of large external imbalances, high inflation and increasing signs of overheating of the Latvian economy. The programme's projections for inflation appear to be slightly optimistic.

(3)

For 2006, the Commission services' autumn 2006 forecast estimated the general government deficit at 1,0 % of GDP, against a target of 1,5 % of GDP set in the previous update of the convergence programme. The updated programme presents a deficit estimate of 0,4 % of GDP, which is plausible in view of the higher than expected revenues and despite the impact of budgetary amendments adopted in October 2006, which increased expenditures by an estimated 1,5 % of GDP.

(4)

(5)

(6)

The risks to the budgetary projections in the programme appear broadly balanced for 2007, but the budgetary outcomes could be worse than projected in the programme from 2008, due to risks to the macroeconomic scenario. The budgetary strategy relies on an increase in the revenue-to-GDP ratio and on declines in the ratios to GDP of social transfers and ‘other expenditure ’(which in the programme includes part of consumption expenditure), which could have been better substantiated, taking into account that according to the update a formal medium-term framework for the planning and control of public finances is planned to be introduced from 2008 onwards.

(7)

In view of this risk assessment, the budgetary stance in the programme may not be sufficient to ensure that the MTO is achieved by 2008, as envisaged in the programme. However, it seems to provide a sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal macroeconomic fluctuations throughout the programme period. Except for 2007, the pace of the adjustment towards the MTO implied by the programme is broadly in line with the Stability and Growth Pact, which specifies that the adjustment should be higher in good economic times and could be lower in bad economic times. Nevertheless, 2007 is clearly a year of moving away from the MTO in economic good times, which is not in line with the Stability and Growth Pact. A stronger structural adjustment path frontloaded during the programme period would be appropriate to support a stable macroeconomic convergence process and the mitigation of risks of imbalanced economic growth.

(8)

(9)

Government gross debt is estimated to have reached 10,7 % of GDP in 2006, well below the 60 % of GDP Treaty reference value. The programme projects the debt ratio to decline by 1,3 percentage points over the programme period to reach 9,4 % of GDP by 2009.

(10)

The long-term budgetary impact of ageing in Latvia is lower than the EU average, with age-related expenditure projected to fall as a share of GDP over the coming decades, influenced by the expenditure-reducing impact of the reform of the pension system. The current level of gross debt is very low in Latvia and improving the structural budgetary position as planned in the convergence programme update would contribute to contain the risks to the long-term sustainability of public finances. Overall, Latvia appears to be at low risk with regard to the sustainability of public finances.

(11)

The convergence programme contains a qualitative assessment of the overall impact of the October 2006 implementation report of the national reform programme within the medium-term fiscal strategy. In addition, it provides some information on the direct budgetary costs or savings of the main reforms envisaged in the national reform programme and its budgetary projections explicitly take into account the public finance implications of the actions outlined in the national reform programme. The measures in the area of public finances envisaged in the convergence programme seem consistent with those foreseen in the national reform programme. In particular, both programmes envisage significant increase in public investment and the convergence programme further expands on measures to be implemented in order to improve the institutional features of the public finances, including the introduction of the multi-annual budgetary framework.

(12)

The budgetary strategy in the programme is only partly consistent with the broad economic policy guidelines included in the integrated guidelines for the period 2005-2008. In particular, the projected fiscal stance does not contribute adequately to promoting greater sustainability of the external account.

(13)

As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme provides all required and most of the optional data (3). However, some inconsistencies exist with regards to standard Table 2.

(i)

reduce the risks of macroeconomic instability by implementing vigorously measures to achieve a significantly better budgetary target for 2007 than foreseen in the programme, as part of a broader reform strategy. Building further on this, measures to enhance consolidation beyond the MTO in subsequent years should also be implemented as soon as possible;

(ii)

establish a clearer and more binding medium-term framework for the planning and control of public finances.