Russia’s war of aggression against Ukraine has led to higher energy prices and disruptions in trade and supply chains, weighing on economic growth. Economic convergence had already slowed down before the pandemic, calling for accelerating structural reforms. Rising spending pressures related to defence, internal security, health and old age poverty need to be addressed by raising spending efficiency and tax revenue, while the tax burden should be shifted from labour towards other income, property, and environmental taxes. Continuing to improve the capacity of the public sector, fostering investment and innovation and addressing skilled labour shortages are key for raising potential growth. Low credit supply is a main factor for weak investment and should be tackled by fostering competition and deepening capital markets. High informality, which hinders access to finance and distorts the level playing field, should be addressed by reducing labour taxes for low-wage earners, improving tax enforcement and continuing to fight corruption. Strengthening the power of the Competition Council to enforce competitive neutrality of state-owned enterprises and challenge regulation that restricts competition would help to foster business dynamism and innovation. Addressing skilled labour shortages will require facilitating skilled migration and investing more in human capital.
SPECIAL FEATURE: RAISING INVESTMENT TO SUPPORT GROWTH
Authors
- Published in
- Paris
Table of Contents
- Foreword 5
- Basic statistics of Latvia, 2023 11
- Executive Summary 12
- Slowing economic convergence and the effects of the war in Ukraine call for accelerating structural reforms 12
- Strengthening public finances and the quality of public services to improve living standards 13
- Raising investment to boost growth 15
- 1 Key policy insights 18
- Slowing convergence in living standards and the effects of the war in Ukraine call for accelerating structural reforms 19
- A strong recovery from the pandemic was under way when the war started 22
- The economy will recover on the back of rising private consumption and EU-funded investment 26
- Financial market risks have risen but remain contained 28
- Strengthening public finances and the quality of public services 30
- Addressing rising spending pressures is key to ensure debt sustainability 30
- A comprehensive tax reform is needed 36
- Improving intergovernmental fiscal relations 40
- Improving the capacity of the public administration and raising spending efficiency 43
- Continuing to improve public employment policies is key for raising public sector capacity 43
- Continuing the digitalisation of the public sector to improve policy impact assessment and raise spending efficiency 46
- Improving public procurement and investment planning 49
- Improving the governance of state-owned enterprises 51
- Fighting tax evasion, corruption and money laundering 55
- Further improving tax enforcement and reducing informality 55
- Continuing the fight against corruption and money laundering 57
- Improving investment in human capital and raising migration to address skilled labour shortages 60
- Accelerating the green transition 66
- Carbon pricing should be strengthened to reduce emissions 68
- The attractiveness of public transport needs to improve 68
- Emission reduction in the building sector needs to accelerate 69
- Expanding wind and solar is key for greening the energy mix and raising energy security 70
- References 74
- 2 Raising investment to support growth 82
- Weak investment has held back growth 83
- Improving access to credit to boost investment 84
- Improving bank credit provision 90
- Increasing competition in the banking sector to reduce the cost of credit 96
- Improving anti-money laundering (AML) risk management to preserve financial inclusion 101
- Improving the governance of financial regulation and supervision 102
- Deepening capital markets to create alternative sources of financing 103
- Developing stock markets to improve access to finance 104
- Developing corporate bond markets as an alternative source of financing 106
- Attracting institutional investors to deepen capital markets 108
- Facilitating leasing and start-up financing opportunities 112
- Continuing to improve contract enforcement and reduce the administrative burden for investors 114
- Assessing the role of subsidised loans and loan guarantees in addressing market failures 116
- Improving the business environment to raise investment demand 117
- Promoting efficient resource allocation to increase investment demand 120
- Fostering innovation and digital adoption 124
- Improving competition enforcement 129
- References 134
