Latvia's economic model losing steam, needs policy adjustments: Bank of Latvia official

Latvia's economic model is increasingly losing its "steam and potential," warned Uldis Rutkaste, head of the Monetary Policy Department at the Bank of Latvia. He stated that while not everything in the economy is negative, future prospects require a reevaluation of the current approach.

Rutkaste proposed that instead of raising taxes or implementing uniform spending cuts across ministries, now is an opportune moment to review state expenditures and reduce the number of public administration employees. He argued that with a declining population, Latvia cannot afford to maintain the state administration at its current scale in the long term.

Assessing Latvia's economic situation, Rutkaste acknowledged positive trends such as persistently low unemployment and rising average wages in recent years, even if neighboring countries fare better. However, he stressed that for stable long-term growth, policy adjustments are essential. He noted that balancing the budget will be a significant challenge in the coming years, with decisions that will be unpopular in the short term.

Rutkaste also referenced a previous Bank of Latvia forecast report, which concluded that tax increases and linear budget reductions negatively impact the economy. He recalled historical instances where, lacking agreement on reforms, politicians opted for equal spending cuts across all ministries.