Article 11 Fiscal Discipline Law describes the fiscal correction mechanism. This law norm determines the correction of the minimum budget balance allowed by the general government in the medium-term budget plan in order to ensure that the actual deviation from the structural balance condition does not slow down the formation of a balanced budget for the following years. The result of the previous year is evaluated in the current year.
In 2020, the accumulated actual deviations from the balance sheet condition starting from 2013 reached -4.2% of GDP. This amount triggers the correction mechanism that would ensure a balanced budget in the coming years.
However, in 2020 and 2021, the Latvian economy faced a sharp decline in GDP caused by the Covid-19 pandemic. The Ministry of Finance forecasts that the economic capacity in 2021 and the following years will be below its potential with a negative output gap.
Therefore, considering the Article 11 of the FDL and the reality of the economic situation during the Covid-19 crisis in 2020-2021, as well as the macroeconomic projections for the coming years, the Governing Council admits that the adjustment mechanism is not applicable when the economy is operating below potential with a negative output gap.
At the same time, the Council notes that the correction mechanism is already in place and should be activated when the output gap reaches a positive level.
A link to the publication with the report is available here.