The budget deficit of the general government will reach 2.6% of the gross domestic product (GDP) in 2024, according to the FM.
The forecasted budget deficit is 0.3 percentage points lower than was forecast at the beginning of April this year, when developing the Stability Program for 2024-2028, and 0.2 percentage points lower than the permissible general government budget deficit stipulated in the Law “On the State Budget for 2024 and the budget framework for 2024, 2025 and 2026”.
On the other hand, in the medium term, the budget deficit of the general government will be higher than previously predicted – 2.9% of GDP in 2025, 2.7% of GDP in 2026, 2.4% of GDP in 2027 and 2.2 % of GDP in 2028. The FM explains that the higher deficit is mainly determined by lower tax revenues, with overall tax revenues growing by an average of 5% per year, higher state special budget expenditures and a more negative impact from the economic and financial activities of general government merchants than previously predicted.
The FM has updated the general government budget balances for the medium term, taking into account the State Treasury’s data on the execution of the consolidated general budget in the first half of this year. As well as updated forecasts of tax and non-tax revenues according to the renewed macro-scenario, the base expenses of the state basic budget and special budget for the medium term, updated budget forecasts of local governments, as well as forecasts submitted by general government merchants on the impact of the results of their economic and financial activities on the balance sheet.
The updated budget balances are based on the forecasts of macroeconomic indicators approved in June of this year, which predict that Latvia’s GDP in comparable prices will grow by 1.4% in 2024 and by 2.9% in 2025, while the increase in consumer prices in 2024 will be 1 .2% and in 2025 – 2.2%. In the next three years, economic growth will slow down slightly, falling to 2.3% by 2028, while the increase in consumer prices will stabilize at the level of 2.5%.
Compared to the approved budget, this year non-tax and own revenues are predicted to be higher than planned, while expenses for European Union (EU) fund projects are predicted to be lower, taking into account the end of the previous planning period and the slower start of the projects of the new Cohesion Policy and Recovery Fund planning period. Thus, the FM reduced the forecast of these expenses for 2024, planning them to be higher in 2025 and 2026.
Updating the state special budget expenditure forecasts, the Ministry of Welfare (MoW) corrected the forecast of the number of beneficiaries for old-age pensions, sickness and unemployment benefits, anticipating a higher level of the number of beneficiaries compared to the forecast in early spring.
At the same time, the LM predicts that in the medium term, the number of old-age pension recipients will increase in accordance with demographic forecasts, starting from 2026, when the retirement age will be raised in 2025. Likewise, the number of recipients of sickness benefits, taking into account a slower than predicted decrease in the number in the post-covid period, will remain at the level of 2023 in the medium term, while the number of recipients of unemployment benefits will decrease in the medium term as the unemployment rate decreases.
Based on the updated forecasts of macroeconomic and fiscal indicators at an unchanged policy, the FM also updated the calculation of the fiscal space. The calculation takes into account the new EU fiscal regulations that came into force, as well as the decision of the Cabinet of Ministers of April 30 of this year on increasing the permissible structural deficit. In compliance with the structural balance goals defined in accordance with the national and EU fiscal conditions, the fiscal space available for financing the new priorities has improved compared to the one calculated in the Stability Program for 2024-2028.
This year, taking into account the new fiscal regulations of the EU, the maximum allowable growth of state-financed net primary expenses in the medium term resulting from the fiscal conditions was determined – 4.2% in 2025, 3.8% in 2026, 3.1% in 2027 and 3.5% in 2028. In the sense of EU regulations, net primary expenses are expenses from which several items are excluded – interest expenses, discretionary revenue measures (government-approved changes in taxes, non-taxes, fee services and other own revenues), expenses for EU fund programs and state co-financing for EU fund programs, as also the cyclical elements of unemployment benefit spending.
According to the State Treasury’s assessment, the general government debt could be around 46% of GDP by the end of 2024 and 49% of GDP by the end of 2028, taking into account the overall financing need, including budget deficit forecasts, as well as the refinancing of assumed debt obligations in the next four years around 7.4 billion euros. Taking into account that since the beginning of 2022, euro interest rates have significantly increased and still remain at a high level, which directly affects borrowing costs, it is expected that debt service expenses will increase in the medium term.
2024-08-20 10:35:57