State support for Covid-19 crisis seems politically rather than economically justified - Fiscal Discipline Council

RIGA - State support for the Covid-19 pandemic crisis appears to be politically rather than economically justified, the Fiscal Discipline Council (FDP) states in its regular crisis monitoring report on the impact of Covid-19 on the national economy and fiscal situation.

According to the Council, the impact of the planned and conceptually approved support measures on the state budget for 2021 is growing rapidly, which by 1.4 billion euros already exceeds the impact of support measures when compared to the 2020 budget, ie 1.1 billion euros.

The FDP stated that, according to the Ministry of Finance, the impact of the support measures on this year's budget could reach 1.7-2 billion euros, which could increase the level of public debt to 50.8 percent of gross domestic product (GDP) by the end of 2021 and a budget deficit of around 9.4 percent of GDP.

"The government is moving from too little support to the other extreme - too much spending. The Council is concerned about the growth rate and magnitude of planned budget spending, with this support increasingly looking politically rather than economically justified. Further spending growth is very risky," the FDP stresses.

From a budgetary point of view, the Council estimates that the level of aid is likely to already exceed the negative output gap in the economy caused by the Covid-19 crisis. The question is also whether such a sharp increase in spending will not create a political temptation to increase spending in a number of areas.

"The country risks inflation and an unjustified increase in the debt level. The Covid-19 crisis is not over yet, and there are concerns about unemployment and insolvency after the end of support measures. Therefore, it would not be right to use up national reserves," the Council points out.