The overall impact of the COVID-19 crisis support measures on the government budget base has reached 4.7% of gross domestic product (GDP), reported the Fiscal Discipline Council (FDC) on May 18.
The FDC concluded in its third crisis monitoring report on the impact of COVID-19 on the country’s economy and fiscal situation that one of the risks is the unbalanced risk sharing between the government on the one hand and entrepreneurs and citizens on the other, which poses a significant risk of moral hazard.
Another potential risk to the budget, the FDC said, is a possible repeated outbreak of COVID-19, which would require additional financial resources, increasing public debt.
Similarly, increase of government debt can be driven by the rapid growth in the costs of servicing government debt over the medium term, paired with uncertainties about the effectiveness of the future of the European Central Bank’s (ECB) government bond buying program.
“The Council reiterates that the economic and social protection programs implemented by the government so far in the COVID-19 crisis are in line with the economic situation. However, we draw attention to the fact that in the long term, aid measures can lead to a significant increase in government debt and have an impact on the stability of public finances,” said Inna Šteinbuka, President of the FDC.
The European Commission’s forecasts show that the drop in GDP across Europe, including Latvia, will be much higher in Q2 than in Q1. The latest GDP figures suggest that the fall in Q1 could have been smaller than initially expected: 2.9% instead of the forecast 3.3%. In Q2, Latvia’s GDP is projected to fall by 10.9%.
FDC points out that business and entrepreneurs’ view towards the future is extremely pessimistic both in Latvia and trading partner countries. A relatively good situation has remained in the area of household consumption and lending, but increased unemployment and savings cuts may worsen the situation, says FDC.
The crisis monitoring report on the impact of COVID-19 on the state economy and the fiscal situation shall be prepared twice a month by the government and the FDC. It aims to help assess the nature of state aid measures and their impact on the state budget in the present and the future years.
Before the COVID-19 crisis, the country’s debt was around 40% of GDP. Due to the national crisis and support measures required, the public debt will rise to 51.7%, as forecast by the Ministry of Finance.