It is never so bad that it cannot get worse.
Farewell, "Calm" Life!
The "calm" life in Latvia is coming to an end – ahead, as economists predict, is a crisis. Some may say that we never really emerged from it. Everything is relative: it’s one thing when, for example, prices gradually rise and, along with them, incomes (salaries) also rise, albeit more slowly, and another thing when a real economic crisis rages – economic growth falls or even stops while inflation rises. However, economists do not yet predict such a dire prospect, but they have already revised the economic growth forecast – of course, downwards.
His Majesty the Crisis
If just recently, banking analysts "recklessly" predicted GDP growth this year around 3%, now the same experts say that growth is expected at the level of 2.5%, but if the unfortunate Hormuz Strait is not unblocked, GDP this year may grow by only 1.8%. I dare to suggest that things could be much worse...
Moreover, the situation is developing rapidly. Just in the middle of last week, the ruling party was "calmly sitting" and discussing that if any measures were to be taken – primarily to reduce the excise tax on diesel fuel – it would not be "tomorrow by lunchtime," but from April 1. Finance Minister Arvils Ašeradens explained on the Latvian TV show "Kas notiek Latvijā?" that this delay was due to the need to prepare not amendments, but a separate bill on reducing the excise tax.
It is planned to reduce the excise tax by 10%, 15%, and even 35% – depending on what the price of diesel fuel will be at that moment. The goal is to ensure that the price does not exceed 1.80 euros per liter. Analysts calculated that if the price is above this "maximum," negative consequences for business, for the economy as a whole, and for all residents begin, as this already leads to a significant rise in inflation.
Finance Minister Arvils Ašeradens suggested that this geopolitical crisis would last not a week, not three weeks, but for quite a long time.
Today it is already clear that, firstly, the finance minister is right – the geopolitical crisis will drag on, and secondly – merely reducing the excise tax will not be enough. Moreover, the excise tax should be reduced not in two weeks, but literally this week. Economist Edgars Volskis stated on Latvian Radio that it will be necessary – and the sooner, the better! – to "open the budget" and radically cut expenses. It is obvious that if expenses are to be cut, then administrative ones – expenses on purchases, business trips, bonuses, fuel... If we recall the crisis of 2008-2011, then initially Prime Minister Godmanis, and then his successor Dombrovskis, radically cut expenses and even froze salary growth in the public sector.
Will They Really Touch the Budget?
Interestingly, since the budget is already significantly in deficit and we have already "maxed out" on loans, there are few options for maneuvering – cutting expenses, reducing excises, and releasing fuel reserves into the market to stabilize fuel prices and thus prevent a sharp rise in inflation.
Finance Minister Arvils Ašeradens has already hastened to declare that revising the 2026 budget is not currently planned. One can understand the minister: there are six months left until the elections, and starting to cut back on officials – the loyal electorate of "New Unity" – is quite dangerous. Moreover, the situation in the coalition is such that it is not yet a fact that it will be possible to agree on "opening the budget" at all. However, "never say never" – if the situation in the global economy continues to deteriorate rapidly, then it will be necessary to open the budget and the state wallet as well.
What other tools does the government have in its arsenal besides reducing excises and cutting budget expenditures?
Remedies for Inflation
First – reducing the VAT rate. This could also lower fuel prices, but it would hit the budget's revenue side hard. When reducing the excise tax, VAT is the only lifeline for the government in fiscal policy. Most likely, the ruling party will not go for this.
Second – a tax on the excess profits of fuel suppliers. This is more of a tool for intimidation – if you even try to increase your margin compared to what it was before the crisis in the Persian Gulf, we will take all your profits above what it was before March 9 into the treasury! At the same time, part of the coalition will not be ready to support the introduction of such a tax in any case.
Third – subsidies for fuel, for example, to transport companies delivering food to shopping centers and logistics warehouses. This measure will help reduce inflationary pressure.
Fourth – assistance to the low-income and underprivileged. After all, real inflation for people with low incomes is almost twice as high as for other residents – the lion's share of all small incomes of the underprivileged goes precisely to food.
For example, a decision could be made to extend housing benefits to a wider circle of people until the end of this year. The question again is – where to get the money for this?
Will There Be Another Rain of Money?
Interestingly, in light of the current crisis, many recall the recent history – the pandemic of 2020-2021 and the geopolitical crisis following the start of the war in Ukraine in the spring-autumn of 2022, when energy resource prices also skyrocketed. During that period, the state helped both businesses and households – primarily in paying for energy resources, and during the pandemic, companies were compensated for losses due to downtime, while pensioners received a one-time allowance.
Yes, but again, firstly, at that time Latvia was just beginning to accumulate debt intensively, meaning there was still a reserve for living on borrowed money. Secondly, the European Union also stepped in, which created a recovery and development fund that allowed for receiving huge amounts of money without repayment. Can Brussels create an anti-crisis fund again – now due to the situation in the Persian Gulf? This is still unknown.
One way or another, tough times await us ahead...
