Economic Sustainability
#16Key Findings
Latvia falls into the sample’s middle ranks (rank 16) with regard to economic sustainability.
A circular economy action plan is in place, but Latvia’s raw materials consumption is increasing. A government roadmap for updating and protecting critical infrastructure was passed in 2021. A Ministry of Climate and Energy was created in 2023 to focus on decarbonization and renewable energy. Renewable energy use is rising.
The unemployment rate has shown a steady decline. An extensive training network addresses both current labor market needs and future demands. Social insurance, including unemployment and pensions, is funded through social tax contributions. Tax disincentives to returning to work are above average.
The tax-to-GDP ratio is low. The shadow economy is substantial. Income taxation is progressive, but low-wage earners pay a higher proportion of taxes than medium- or high-income earners. Public debt levels are low by OECD standards. Despite deficits, budgetary policy is deemed sustainable. R&D is not a strong government focus.
A circular economy action plan is in place, but Latvia’s raw materials consumption is increasing. A government roadmap for updating and protecting critical infrastructure was passed in 2021. A Ministry of Climate and Energy was created in 2023 to focus on decarbonization and renewable energy. Renewable energy use is rising.
The unemployment rate has shown a steady decline. An extensive training network addresses both current labor market needs and future demands. Social insurance, including unemployment and pensions, is funded through social tax contributions. Tax disincentives to returning to work are above average.
The tax-to-GDP ratio is low. The shadow economy is substantial. Income taxation is progressive, but low-wage earners pay a higher proportion of taxes than medium- or high-income earners. Public debt levels are low by OECD standards. Despite deficits, budgetary policy is deemed sustainable. R&D is not a strong government focus.
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Graph View
How committed is the government to driving the transition toward a circular economy?
10
9
9
The government is clearly committed to transitioning to a circular economy.
8
7
6
7
6
The government is largely committed to transitioning to a circular economy.
5
4
3
4
3
The government is somewhat committed to transitioning to a circular economy.
2
1
1
The government is not at all committed to transitioning to a circular economy.
According to Eurostat, Latvia’s material footprint, or raw material consumption, is increasing, reaching 20.03 metric tons per capita, above the EU27 average. Meanwhile, the circular material use rate was about 5.4% in 2022 and has been relatively stable over the last three years. The recycling rate of all waste is reported to be around 70% in 2020 and has substantially increased since 2018.
Latvia adopted the Action Plan for Transition Towards Circular Economy 2020 – 2027 in 2020. The Action Plan has clearly defined goals and serves as a medium-term planning document for Latvia. The Action Plan is structured around seven measures: (1) transition to resource management; (2) resource productivity; (3) reuse of goods; (4) transition to services instead of goods; (5) improved management of materials and processes; (6) strengthened municipalities; and (7) an informed and engaged population.
The intermediate results on implementation progress have yet to be reported. Even though the Action Plan is comprehensive and linked with planning documents in other sectors (e.g., waste management, industrial policy), it requires the involvement of numerous public agencies, which could pose a risk for incomplete implementation or poor coordination. To ensure local-level implementation, the government has allocated grants for municipalities. The Action Plan includes specific indicators for measuring progress in 2027 – resource productivity, material use rate and public engagement reported and measured by Eurostat.
In addition to the Action Plan, several other initiatives support circular economy policy efforts, such as a tax on natural resources designed to minimize their use. In green public procurement and producer accountability schemes, participants are exempted from this tax.
Citations:
European Environment Agency. 2022. “Circular Economy Country Profile – Latvia.” ETC CE Report 2022/5 – Latvia. https://www.eionet.europa.eu/etcs/etc-ce/products/etc-ce-products/etc-ce-report-5-2022-country-profiles-on-circular-economy/latvia-ce-country-profile-2022_for-publication.pdf
2. Eurostat. 2023. “Material Footprints – Main Indicators.” https://ec.europa.eu/eurostat/databrowser/view/env_ac_rme/default/table?lang=en
Eurostat Circular material use rate. 2023. https://ec.europa.eu/eurostat/databrowser/view/env_ac_cur/default/table?lang=en
Eurostat. 2023. “Recycling Rate of All Waste, Excluding Major Mineral Waste.” https://ec.europa.eu/eurostat/databrowser/view/cei_wm010/default/table?lang=en
Par Rīcības plānu pārejai uz aprites ekonomiku 2020.-2027. Gadam. https://likumi.lv/ta/id/317168-par-ricibas-planu-parejai-uz-aprites-ekonomiku-20202027-gadam
Latvia adopted the Action Plan for Transition Towards Circular Economy 2020 – 2027 in 2020. The Action Plan has clearly defined goals and serves as a medium-term planning document for Latvia. The Action Plan is structured around seven measures: (1) transition to resource management; (2) resource productivity; (3) reuse of goods; (4) transition to services instead of goods; (5) improved management of materials and processes; (6) strengthened municipalities; and (7) an informed and engaged population.
The intermediate results on implementation progress have yet to be reported. Even though the Action Plan is comprehensive and linked with planning documents in other sectors (e.g., waste management, industrial policy), it requires the involvement of numerous public agencies, which could pose a risk for incomplete implementation or poor coordination. To ensure local-level implementation, the government has allocated grants for municipalities. The Action Plan includes specific indicators for measuring progress in 2027 – resource productivity, material use rate and public engagement reported and measured by Eurostat.
In addition to the Action Plan, several other initiatives support circular economy policy efforts, such as a tax on natural resources designed to minimize their use. In green public procurement and producer accountability schemes, participants are exempted from this tax.
Citations:
European Environment Agency. 2022. “Circular Economy Country Profile – Latvia.” ETC CE Report 2022/5 – Latvia. https://www.eionet.europa.eu/etcs/etc-ce/products/etc-ce-products/etc-ce-report-5-2022-country-profiles-on-circular-economy/latvia-ce-country-profile-2022_for-publication.pdf
2. Eurostat. 2023. “Material Footprints – Main Indicators.” https://ec.europa.eu/eurostat/databrowser/view/env_ac_rme/default/table?lang=en
Eurostat Circular material use rate. 2023. https://ec.europa.eu/eurostat/databrowser/view/env_ac_cur/default/table?lang=en
Eurostat. 2023. “Recycling Rate of All Waste, Excluding Major Mineral Waste.” https://ec.europa.eu/eurostat/databrowser/view/cei_wm010/default/table?lang=en
Par Rīcības plānu pārejai uz aprites ekonomiku 2020.-2027. Gadam. https://likumi.lv/ta/id/317168-par-ricibas-planu-parejai-uz-aprites-ekonomiku-20202027-gadam
Graph View
How committed is the government to updating and protecting critical infrastructure?
10
9
9
The government is clearly committed to updating basic technical infrastructure.
8
7
6
7
6
The government is largely committed to updating basic technical infrastructure.
5
4
3
4
3
The government is somewhat committed to updating basic technical infrastructure.
2
1
1
The government is not at all committed to updating basic technical infrastructure.
There is a 2021 government regulation on viable critical infrastructure to ensure future business continuity. It serves as a roadmap for updating and protecting critical infrastructure. Based on this regulation, all viable critical infrastructure is divided into three groups, considering several factors: impact on the economy, number of hazards, and general impact on the public. These factors are also crucial for designing business continuity plans.
The Ministry of Internal Affairs is the lead unit in monitoring implementation progress. The ministry reports to the government and European Commission at least once a year. At the municipal level, all municipalities have designed and approved plans for civil protection in case of crises and disasters, according to the Law on Civil Protection and Disaster Management adopted in 2016. The law established the comprehensive civil protection and disaster management framework, including protecting viable critical infrastructure.
Largely due to demographic shifts in Latvia, the use of trains and buses for inland passenger transport is decreasing significantly, from 19.3% in 2015 to 11.3% in 2021, as reflected in Eurostat data. This data also shows that Latvia is improving its high-speed internet coverage, reaching 90.7% in 2021. In the Global Cybersecurity Index (2020), Latvia is ranked 15th with a score of 97.28.
The Rail Baltica connection from Tallinn to Berlin is significant for ensuring quick connections to Western Europe and for increasing the resilience of critical infrastructure. However, due to different track gauges, the rest of the Latvian railway system still needs to be integrated into the Western railway system.
Citations:
Eurostat. Share of buses and trains in inland passenger transport. https://ec.europa.eu/eurostat/databrowser/view/sdg_09_50/default/table?lang=en
2. Eurostat. “High-speed internet coverage by type of area.” https://ec.europa.eu/eurostat/databrowser/view/sdg_17_60/default/table?lang=en
Global Cybersecurity Index 2020. https://www.itu.int/epublications/publication/D-STR-GCI.01-2021-HTM-E
Procedures for Surveying Critical Infrastructure, Including European Critical Infrastructure, and Planning and Implementation of Security Measures and Continuity of Operation. 2021. Government Regulation No. 508, 06.07.2021. https://likumi.lv/ta/en/en/id/324689-procedures-for-surveying-critical-infrastructure-including-european-critical-infrastructure-and-for-planning-and-implementation-of-security-measures-and-continuity-of-operation
Civil Protection and Disaster Management Law. https://likumi.lv/ta/en/en/id/282333-civil-protection-and-disaster-management-law
Ministru kabinets. 2020. “Par konceptuālo ziņojumu ‘Par Rail Baltica publiskās lietošanas dzelzceļa infrastruktūras pārvaldību’” https://likumi.lv/ta/id/317018-par-konceptualo-zinojumu-par-irail-balticai-publiskas-lietosanas-dzelzcela-infrastrukturas-parvaldibu
The Ministry of Internal Affairs is the lead unit in monitoring implementation progress. The ministry reports to the government and European Commission at least once a year. At the municipal level, all municipalities have designed and approved plans for civil protection in case of crises and disasters, according to the Law on Civil Protection and Disaster Management adopted in 2016. The law established the comprehensive civil protection and disaster management framework, including protecting viable critical infrastructure.
Largely due to demographic shifts in Latvia, the use of trains and buses for inland passenger transport is decreasing significantly, from 19.3% in 2015 to 11.3% in 2021, as reflected in Eurostat data. This data also shows that Latvia is improving its high-speed internet coverage, reaching 90.7% in 2021. In the Global Cybersecurity Index (2020), Latvia is ranked 15th with a score of 97.28.
The Rail Baltica connection from Tallinn to Berlin is significant for ensuring quick connections to Western Europe and for increasing the resilience of critical infrastructure. However, due to different track gauges, the rest of the Latvian railway system still needs to be integrated into the Western railway system.
Citations:
Eurostat. Share of buses and trains in inland passenger transport. https://ec.europa.eu/eurostat/databrowser/view/sdg_09_50/default/table?lang=en
2. Eurostat. “High-speed internet coverage by type of area.” https://ec.europa.eu/eurostat/databrowser/view/sdg_17_60/default/table?lang=en
Global Cybersecurity Index 2020. https://www.itu.int/epublications/publication/D-STR-GCI.01-2021-HTM-E
Procedures for Surveying Critical Infrastructure, Including European Critical Infrastructure, and Planning and Implementation of Security Measures and Continuity of Operation. 2021. Government Regulation No. 508, 06.07.2021. https://likumi.lv/ta/en/en/id/324689-procedures-for-surveying-critical-infrastructure-including-european-critical-infrastructure-and-for-planning-and-implementation-of-security-measures-and-continuity-of-operation
Civil Protection and Disaster Management Law. https://likumi.lv/ta/en/en/id/282333-civil-protection-and-disaster-management-law
Ministru kabinets. 2020. “Par konceptuālo ziņojumu ‘Par Rail Baltica publiskās lietošanas dzelzceļa infrastruktūras pārvaldību’” https://likumi.lv/ta/id/317018-par-konceptualo-zinojumu-par-irail-balticai-publiskas-lietosanas-dzelzcela-infrastrukturas-parvaldibu
Graph View
How committed is the government to fully decarbonizing the energy system by 2050?
10
9
9
The government is clearly committed to transitioning to a decarbonized energy system.
8
7
6
7
6
The government is largely committed to transitioning to a decarbonized energy system.
5
4
3
4
3
The government is somewhat committed to transitioning to a decarbonized energy system.
2
1
1
The government is not at all committed to transitioning to a decarbonized energy system.
Latvia designated and adopted a “Strategy for a Decarbonized Economy by 2050” in 2018. Several medium-term white papers and government regulations support the strategy. Overall, the legal framework and strategic vision are clearly elaborated. The strategy is divided into sector-specific plans for the medium term, with government regulations for the transport sector, construction, forestry, and the energy sector, including electricity, heating, and renewables.
High energy costs in the winter of 2022 – 2023 pushed the government to make several strategic decisions – to provide financial support for residents as a short-term solution and to support renewable energy in the long term. According to Eurostat, in 2021, the share of energy from renewable sources was 42.10%. The trend shows that the share of renewable energy is increasing while the share of fossil fuels is decreasing. About 48.4% of Latvia’s territory is covered by forests, a significant natural resource. Thus, timber is widely used for heat.
The Ministry of Climate and Energy was established in January 2023 to prioritize climate change, decarbonize the economy, and promote renewable energy. Because Latvia has a well-established policy-planning system, implementation progress is monitored annually through various tools, including public and government progress reports.
Citations:
Informatīvais ziņojums “Stratēģija Latvijas oglekļa mazietilpīgai attīstībai līdz 2050. Gadam” (in Latvia). https://www.varam.gov.lv/sites/varam/files/varaminf_110718_omastrategija2050_majaslapa.pdf
Eurostat. 2023. “Share of Energy from Renewable Sources.” https://ec.europa.eu/eurostat/databrowser/view/nrg_ind_ren/default/table?lang=en
Central Statistical Bureau. 2023. “Statistics in Brief. Latvia 2023.” https://stat.gov.lv/en/statistics-themes/economy/national-accounts/publications-and-infographics/15176-latvia-statistics
High energy costs in the winter of 2022 – 2023 pushed the government to make several strategic decisions – to provide financial support for residents as a short-term solution and to support renewable energy in the long term. According to Eurostat, in 2021, the share of energy from renewable sources was 42.10%. The trend shows that the share of renewable energy is increasing while the share of fossil fuels is decreasing. About 48.4% of Latvia’s territory is covered by forests, a significant natural resource. Thus, timber is widely used for heat.
The Ministry of Climate and Energy was established in January 2023 to prioritize climate change, decarbonize the economy, and promote renewable energy. Because Latvia has a well-established policy-planning system, implementation progress is monitored annually through various tools, including public and government progress reports.
Citations:
Informatīvais ziņojums “Stratēģija Latvijas oglekļa mazietilpīgai attīstībai līdz 2050. Gadam” (in Latvia). https://www.varam.gov.lv/sites/varam/files/varaminf_110718_omastrategija2050_majaslapa.pdf
Eurostat. 2023. “Share of Energy from Renewable Sources.” https://ec.europa.eu/eurostat/databrowser/view/nrg_ind_ren/default/table?lang=en
Central Statistical Bureau. 2023. “Statistics in Brief. Latvia 2023.” https://stat.gov.lv/en/statistics-themes/economy/national-accounts/publications-and-infographics/15176-latvia-statistics
Graph View
To what extent do existing labor market institutions support or hinder the transition to an adaptive labor market?
10
9
9
Labor market institutions are fully aligned with the goal of an adaptable labor market.
8
7
6
7
6
Labor market institutions are largely aligned with the goal of an adaptable labor market.
5
4
3
4
3
Labor market institutions are only somewhat aligned with the goal of an adaptable labor market.
2
1
1
Labor market institutions are not at all aligned with the goal of an adaptable labor market.
In 2022, 61.8% of the population was of working age. The unemployment rate was 6.9% and has been steadily decreasing since 2015, when it was 9.9%. At the same time, the labor force is continuously aging and concentrating in urban areas. Sixty-eight percent of the population lives in urban areas where economic activity is concentrated and access to public services is better. Of the 1.3 million residents in the labor market, 55.4% are employees; the rest hold other labor statuses, such as employers, self-employed individuals, and part-time workers.
The government has prioritized the adaptability of the labor market and increased productivity. The “Growth and Employment” primary planning documents for the investment of EU funds include issues related to labor market adaptability. Latvia has developed a vast network of training courses for re-qualifying labor staff, supported by EU funding of €45 million. Between 2017 and 2023, it was expected to provide training for about 68,000 people over the age of 17 with no upper age limit, ensuring their integration into the labor market. This intensive and comprehensive training program complements the State Unemployment Agency’s regular training for unemployed individuals. The extensive training network addresses both current labor market needs and future demands, such as digital skills and ICT skills. However, no ex post evaluation has been conducted yet to assess the effectiveness of the training.
Citations:
Central Statistical Bureau. 2023. “Statistics in Brief. Latvia 2023.” https://stat.gov.lv/en/statistics-themes/economy/national-accounts/publications-and-infographics/15176-latvia-statistics
Labklājības ministrija. 2021. Socialās aizsardzības un darba tirgus politikas pamatnostādnes 2021.-2027.gadam. http://polsis.mk.gov.lv/documents/7177
Valsts izglītības attīstības aģentūra. 2023. “Mācības pieaugušajiem.” https://www.macibaspieaugusajiem.lv/
Ministru kabineta noteikumi Nr. 474. 2016. “Darbības programmas ‘Izaugsme un nodarbinātība’ 8.4.1. specifiskā atbalsta mērķa ‘Pilnveidot nodarbināto personu profesionālo kompetenci’ īstenošanas noteikumi.” https://likumi.lv/ta/id/283669-darbibas-programmas-izaugsme-un-nodarbinatiba-8-4-1-specifiska-atbalsta-merka-pilnveidot-nodarbinato-personu-profesionalo
Ministry of Finance. 2014. “Operational Programme ‘Growth and Employment’.” https://www.esfondi.lv/en/regulatory-enactments-and-documents/2014-2020-planning-period/operational-programme-growth-and-employment
The government has prioritized the adaptability of the labor market and increased productivity. The “Growth and Employment” primary planning documents for the investment of EU funds include issues related to labor market adaptability. Latvia has developed a vast network of training courses for re-qualifying labor staff, supported by EU funding of €45 million. Between 2017 and 2023, it was expected to provide training for about 68,000 people over the age of 17 with no upper age limit, ensuring their integration into the labor market. This intensive and comprehensive training program complements the State Unemployment Agency’s regular training for unemployed individuals. The extensive training network addresses both current labor market needs and future demands, such as digital skills and ICT skills. However, no ex post evaluation has been conducted yet to assess the effectiveness of the training.
Citations:
Central Statistical Bureau. 2023. “Statistics in Brief. Latvia 2023.” https://stat.gov.lv/en/statistics-themes/economy/national-accounts/publications-and-infographics/15176-latvia-statistics
Labklājības ministrija. 2021. Socialās aizsardzības un darba tirgus politikas pamatnostādnes 2021.-2027.gadam. http://polsis.mk.gov.lv/documents/7177
Valsts izglītības attīstības aģentūra. 2023. “Mācības pieaugušajiem.” https://www.macibaspieaugusajiem.lv/
Ministru kabineta noteikumi Nr. 474. 2016. “Darbības programmas ‘Izaugsme un nodarbinātība’ 8.4.1. specifiskā atbalsta mērķa ‘Pilnveidot nodarbināto personu profesionālo kompetenci’ īstenošanas noteikumi.” https://likumi.lv/ta/id/283669-darbibas-programmas-izaugsme-un-nodarbinatiba-8-4-1-specifiska-atbalsta-merka-pilnveidot-nodarbinato-personu-profesionalo
Ministry of Finance. 2014. “Operational Programme ‘Growth and Employment’.” https://www.esfondi.lv/en/regulatory-enactments-and-documents/2014-2020-planning-period/operational-programme-growth-and-employment
To what extent do existing labor market institutions support or hinder the transition to an inclusive labor market?
10
9
9
Labor market institutions are fully aligned with the goal of an inclusive labor market.
8
7
6
7
6
Labor market institutions are largely aligned with the goal of an inclusive labor market.
5
4
3
4
3
Labor market institutions are only somewhat aligned with the goal of an inclusive labor market.
2
1
1
Labor market institutions are not at all aligned with the goal of an inclusive labor market.
Using a structured policy development approach, Latvia has created white papers for medium-term planning purposes. “The White Paper of Social Protection and Labor Market 2021–2027” addresses social protection for all employees, regardless of their labor status. Since 2021, the government has implemented changes to tax laws, including the introduction of a minimum amount of social contributions for employees, applicable regardless of their wages or the number of hours worked. This change negatively affected part-time employees, such as students, mothers with small children, retirees seeking additional earnings, and skilled employees in part-time employment.
Additionally, the tax burden on micro-enterprises has been substantially increased, the patent payment regime for self-employed persons has been abolished, and the tax regime for creative industries (royalty fees) has been revised to include increased social tax contributions. These tax-related amendments limit the inclusive potential of the labor market.
Social enterprises continue to develop and spread across various industries, including health, education, food processing, and technology, reaching 215 enterprises by early 2023. According to the Social Enterprise Law, established social enterprises play a crucial role in integrating labor markets.
The prevalence of remote work has accelerated following the COVID-19 pandemic. Maintaining a work-life balance largely depends on employees’ time management skills and company-level policies, as no national policies govern this area. According to national statistics, 10.5% of employees still work remotely in 2023, with remote work remaining popular in the IT, financial services, and research industries.
Citations:
Labklājības ministrija. 2021. “Socialās aizsardzības un darba tirgus politikas pamatnostādnes 2021.-2027.gadam.” http://polsis.mk.gov.lv/documents/7177
Kesnere, R. 2021. “Atvieglojumu būs mazāk.” https://www.diena.lv/raksts/latvija/zinas/atvieglojumu-bus-mazak-14254534
Asere, A. 2023. “Interesting Social Enterprises in Latvia.” https://labsoflatvia.com/en/news/interesting-social-enterprises-in-latvia
LSM. 2023. “Attālinātais darbs arvien populārs; visvairāk ārpus biroja strādā vecākie speciālisti un vadītāji” https://www.lsm.lv/raksts/zinas/ekonomika/15.08.2023-attalinatais-darbs-arvien-populars-visvairak-arpus-biroja-strada-vecakie-specialisti-un-vaditaji.a520207/?utm_source=lsm&utm_medium=theme&utm_campaign=theme
Additionally, the tax burden on micro-enterprises has been substantially increased, the patent payment regime for self-employed persons has been abolished, and the tax regime for creative industries (royalty fees) has been revised to include increased social tax contributions. These tax-related amendments limit the inclusive potential of the labor market.
Social enterprises continue to develop and spread across various industries, including health, education, food processing, and technology, reaching 215 enterprises by early 2023. According to the Social Enterprise Law, established social enterprises play a crucial role in integrating labor markets.
The prevalence of remote work has accelerated following the COVID-19 pandemic. Maintaining a work-life balance largely depends on employees’ time management skills and company-level policies, as no national policies govern this area. According to national statistics, 10.5% of employees still work remotely in 2023, with remote work remaining popular in the IT, financial services, and research industries.
Citations:
Labklājības ministrija. 2021. “Socialās aizsardzības un darba tirgus politikas pamatnostādnes 2021.-2027.gadam.” http://polsis.mk.gov.lv/documents/7177
Kesnere, R. 2021. “Atvieglojumu būs mazāk.” https://www.diena.lv/raksts/latvija/zinas/atvieglojumu-bus-mazak-14254534
Asere, A. 2023. “Interesting Social Enterprises in Latvia.” https://labsoflatvia.com/en/news/interesting-social-enterprises-in-latvia
LSM. 2023. “Attālinātais darbs arvien populārs; visvairāk ārpus biroja strādā vecākie speciālisti un vadītāji” https://www.lsm.lv/raksts/zinas/ekonomika/15.08.2023-attalinatais-darbs-arvien-populars-visvairak-arpus-biroja-strada-vecakie-specialisti-un-vaditaji.a520207/?utm_source=lsm&utm_medium=theme&utm_campaign=theme
To what extent do existing labor market institutions support or hinder the mitigation of labor market risks?
10
9
9
Labor market institutions are fully aligned with the goal of protecting individuals against labor market risks.
8
7
6
7
6
Labor market institutions are largely aligned with the goal of protecting individuals against labor market risks.
5
4
3
4
3
Labor market institutions are only somewhat aligned with the goal of protecting individuals against labor market risks.
2
1
1
Labor market institutions are not at all aligned with the goal of protecting individuals against labor market risks.
According to OECD (2023) data, Latvia has higher-than-average financial disincentives to return to work, providing 82.5% of earnings when a formerly unemployed person returns to employment.
Unemployment benefits in Latvia are tied to social contributions and the duration of time spent in the labor market. The higher the social tax paid, the higher the unemployment benefit received. This link between social contributions and benefit amounts is crucial for addressing labor market risks, particularly given the low unionization rate.
However, the law caps unemployment benefits at eight months, with a regressive element where benefits decrease every two months. Additionally, there is no benefit for the ninth month of unemployment, encouraging a prompt return to the labor market. Once registered as unemployed, individuals must attend training courses and requalification opportunities provided by the State Unemployment Agency. However, under-reported wages in the labor market negatively affect long-term pensions, training opportunities, and social protection.
Social insurance, including unemployment and pensions, is funded through social tax contributions. Residents can also contribute to private pension schemes, such as third-level schemes operated by banks. These private schemes depend on stock market fluctuations, while contributions to state pension schemes directly rely on social tax payments.
The State Unemployment Agency employs a platform and analytical tools for forecasting labor market changes. Short-term forecasts help plan and deliver training for unemployed individuals, while mid-term forecasts assist in policy design.
Citations:
OECD. 2023. “Financial Disincentive to Return to Work (Indicator).” doi:10.1787/3ef6e9d7-en
Law On State Social Insurance. 1997. https://likumi.lv/ta/en/en/id/45466-on-state-social-insurance
NVA. 2023. “Darba tirgus prognozes (in Latvian).” https://www.nva.gov.lv/lv/darba-tirgus-prognozes?utm_source=https%3A%2F%2Fwww.google.com%2F
OECD. 2022. OECD Economic Surveys: Latvia 2022. https://www.oecd.org/latvia/oecd-economic-surveys-latvia-25222988.htm
Unemployment benefits in Latvia are tied to social contributions and the duration of time spent in the labor market. The higher the social tax paid, the higher the unemployment benefit received. This link between social contributions and benefit amounts is crucial for addressing labor market risks, particularly given the low unionization rate.
However, the law caps unemployment benefits at eight months, with a regressive element where benefits decrease every two months. Additionally, there is no benefit for the ninth month of unemployment, encouraging a prompt return to the labor market. Once registered as unemployed, individuals must attend training courses and requalification opportunities provided by the State Unemployment Agency. However, under-reported wages in the labor market negatively affect long-term pensions, training opportunities, and social protection.
Social insurance, including unemployment and pensions, is funded through social tax contributions. Residents can also contribute to private pension schemes, such as third-level schemes operated by banks. These private schemes depend on stock market fluctuations, while contributions to state pension schemes directly rely on social tax payments.
The State Unemployment Agency employs a platform and analytical tools for forecasting labor market changes. Short-term forecasts help plan and deliver training for unemployed individuals, while mid-term forecasts assist in policy design.
Citations:
OECD. 2023. “Financial Disincentive to Return to Work (Indicator).” doi:10.1787/3ef6e9d7-en
Law On State Social Insurance. 1997. https://likumi.lv/ta/en/en/id/45466-on-state-social-insurance
NVA. 2023. “Darba tirgus prognozes (in Latvian).” https://www.nva.gov.lv/lv/darba-tirgus-prognozes?utm_source=https%3A%2F%2Fwww.google.com%2F
OECD. 2022. OECD Economic Surveys: Latvia 2022. https://www.oecd.org/latvia/oecd-economic-surveys-latvia-25222988.htm
Graph View
To what extent do existing tax institutions and procedures support or hinder adequate tax revenue flows?
10
9
9
The tax system is fully aligned with the goals of ensuring adequate tax revenues.
8
7
6
7
6
The tax system is largely aligned with the goals of ensuring adequate tax revenues.
5
4
3
4
3
The tax system is only somewhat aligned with the goals of ensuring adequate tax revenues.
2
1
1
The tax system is not at all aligned with the goals of ensuring adequate tax revenues.
Latvia ranks second in the International Tax Competitiveness Index 2023 and has some of the lowest tax rates in the EU. Its corporate tax rank (first in 2023) and individual tax rank (third) demonstrate a practical approach to taxation management.
Latvia’s corporate tax system ranks 16th out of 64 countries measured in 2022 with an indicator of 0.33. This demonstrates that Latvia’s corporate tax is simple and competitive, as it allows loss carryovers.
Meanwhile, the tax-to-GDP ratio was 30.2% in 2022, compared to 29.0% in 2000 (OECD, 2023). In addition, Latvia ranks 38th in the tax-to-GDP ratio among the 38 OECD countries (OECD, 2023). With a relatively low tax-to-GDP rate and a high shadow economy, Latvia has room for improvement in tax collection, which could positively affect the business environment by minimizing the shadow economy.
The shadow economy in Latvia remains significant, with a substantial proportion of non-reported wages, or “envelope wages” – 46.7% of the shadow economy in 2022 – while undeclared income represented about 29%. The prevalence of envelope wages and undeclared income demonstrates the restricted administrative capacity to collect taxes and combat the shadow economy.
Each year, during the state budget development process, the government changes the tax laws – mostly in personal income tax and value-added tax laws – to ensure budgetary income. However, industries have criticized the government for amending the personal income tax too often and have requested that the government simplify income tax calculations for individuals. The law on personal income tax was adopted in 1993 and has been amended yearly since.
In 2023, the government approved “The Road Map for Designing the National Tax Policy White Paper 2024 – 2027” to outline new national policy guidelines by early 2024. The government foresees actions to minimize the shadow economy and relieve the tax burden for low-wage earners. The Latvian tax system currently includes 14 taxes, and the government plans to change some tax rates but not introduce comprehensive reforms in taxation.
Citations:
Tax Foundation. 2023. “International Tax Competitiveness Index 2023.” https://taxfoundation.org/research/all/global/2023-international-tax-competitiveness-index/
2. Tax Complexity Index 2022. https://www.taxcomplexity.org/
OECD. 2022. OECD Economic Surveys: Latvia 2022. https://www.oecd.org/latvia/oecd-economic-surveys-latvia-25222988.htm
Sauka, A., and T. Putninš. 2023. “Shadow Economy Index for the Baltic Countries.” https://www.sseriga.edu/shadow-economy-index-baltic-countries
Liepiņa, I. 2023. “Nodokļu reformas ēnā.” Bilance 11 (503): 2023.
Finanšu ministrija. 2023. “Par Valsts nodokļu politikas pamatnostādņu 2024.-2027. gadam izstrādes virzību.” https://tapportals.mk.gov.lv/legal_acts/14378840-4469-4c8f-8d4d-4c513c891d76
OECD. 2023. “Revenue Statistics 2023 – Latvia.” https://www.oecd.org/tax/tax-policy/revenue-statistics-latvia.pdf
Latvia’s corporate tax system ranks 16th out of 64 countries measured in 2022 with an indicator of 0.33. This demonstrates that Latvia’s corporate tax is simple and competitive, as it allows loss carryovers.
Meanwhile, the tax-to-GDP ratio was 30.2% in 2022, compared to 29.0% in 2000 (OECD, 2023). In addition, Latvia ranks 38th in the tax-to-GDP ratio among the 38 OECD countries (OECD, 2023). With a relatively low tax-to-GDP rate and a high shadow economy, Latvia has room for improvement in tax collection, which could positively affect the business environment by minimizing the shadow economy.
The shadow economy in Latvia remains significant, with a substantial proportion of non-reported wages, or “envelope wages” – 46.7% of the shadow economy in 2022 – while undeclared income represented about 29%. The prevalence of envelope wages and undeclared income demonstrates the restricted administrative capacity to collect taxes and combat the shadow economy.
Each year, during the state budget development process, the government changes the tax laws – mostly in personal income tax and value-added tax laws – to ensure budgetary income. However, industries have criticized the government for amending the personal income tax too often and have requested that the government simplify income tax calculations for individuals. The law on personal income tax was adopted in 1993 and has been amended yearly since.
In 2023, the government approved “The Road Map for Designing the National Tax Policy White Paper 2024 – 2027” to outline new national policy guidelines by early 2024. The government foresees actions to minimize the shadow economy and relieve the tax burden for low-wage earners. The Latvian tax system currently includes 14 taxes, and the government plans to change some tax rates but not introduce comprehensive reforms in taxation.
Citations:
Tax Foundation. 2023. “International Tax Competitiveness Index 2023.” https://taxfoundation.org/research/all/global/2023-international-tax-competitiveness-index/
2. Tax Complexity Index 2022. https://www.taxcomplexity.org/
OECD. 2022. OECD Economic Surveys: Latvia 2022. https://www.oecd.org/latvia/oecd-economic-surveys-latvia-25222988.htm
Sauka, A., and T. Putninš. 2023. “Shadow Economy Index for the Baltic Countries.” https://www.sseriga.edu/shadow-economy-index-baltic-countries
Liepiņa, I. 2023. “Nodokļu reformas ēnā.” Bilance 11 (503): 2023.
Finanšu ministrija. 2023. “Par Valsts nodokļu politikas pamatnostādņu 2024.-2027. gadam izstrādes virzību.” https://tapportals.mk.gov.lv/legal_acts/14378840-4469-4c8f-8d4d-4c513c891d76
OECD. 2023. “Revenue Statistics 2023 – Latvia.” https://www.oecd.org/tax/tax-policy/revenue-statistics-latvia.pdf
To what extent do existing tax institutions and procedures consider equity aspects?
10
9
9
The tax system is fully aligned with the goal of ensuring equity.
8
7
6
7
6
The tax system is largely aligned with the goal of ensuring equity.
5
4
3
4
3
The tax system is only somewhat aligned with the goal of ensuring equity.
2
1
1
The tax system is not at all aligned with the goal of ensuring equity.
The tax burden is unequal, with low-wage earners paying a higher proportion of taxes than medium- and high-income earners, despite progressive income taxation. Additionally, adverse demographic trends will impact further development and exacerbate the already unequal distribution of incomes. The European Commission has recognized that Latvia’s tax and benefit income distribution system is ineffective; thus, inequality and poverty will remain challenges in the coming decade.
Each year, the government has been increasing the minimum wage (€500 in 2022, €620 in 2023, €700 in 2024), while the non-taxable minimum income has remained unchanged at €500 for both 2023 and 2024. Thus, the government is expected to invest efforts to reduce poverty among the elderly and low-wage earners.
A micro-enterprise tax was created in 2010 as a simplified tax for small businesses and startups. Since then, the tax has undergone many changes, primarily aimed at limiting its applicability and encouraging all businesses to transition to a unified corporate tax regime. Starting in 2024, the government will implement a flat rate of 25% on turnover for the micro-enterprise tax.
Meanwhile, reacting to the high profits of banks in 2023, the government introduced a special corporate tax regime for banks and non-bank creditors, determining 20% of the previous year’s profit.
Citations:
Koņuševskis, R., Leitāne, L., Rozīte, K., and Bule, L. 2019. “Nodokļu reforma neapliekamā minimuma, atvieglojumu un attaisnoto izdevumu piemērošanas problēmu, efektivitātes un risinājumu izvērtējumā.” https://www.tiesibsargs.lv/wp-content/uploads/migrate_2022/content/kopsavilkums_1551263741.pdf
Finanšu ministrija. 2023. “Valsts budžets 2024.gadam.” https://www.fm.gov.lv/lv/valsts-budzets
European Commission. 2023. “Country Report – Latvia.” Institutional Paper 238, June 2023. https://economy-finance.ec.europa.eu/publications/2023-country-report-latvia_en
Each year, the government has been increasing the minimum wage (€500 in 2022, €620 in 2023, €700 in 2024), while the non-taxable minimum income has remained unchanged at €500 for both 2023 and 2024. Thus, the government is expected to invest efforts to reduce poverty among the elderly and low-wage earners.
A micro-enterprise tax was created in 2010 as a simplified tax for small businesses and startups. Since then, the tax has undergone many changes, primarily aimed at limiting its applicability and encouraging all businesses to transition to a unified corporate tax regime. Starting in 2024, the government will implement a flat rate of 25% on turnover for the micro-enterprise tax.
Meanwhile, reacting to the high profits of banks in 2023, the government introduced a special corporate tax regime for banks and non-bank creditors, determining 20% of the previous year’s profit.
Citations:
Koņuševskis, R., Leitāne, L., Rozīte, K., and Bule, L. 2019. “Nodokļu reforma neapliekamā minimuma, atvieglojumu un attaisnoto izdevumu piemērošanas problēmu, efektivitātes un risinājumu izvērtējumā.” https://www.tiesibsargs.lv/wp-content/uploads/migrate_2022/content/kopsavilkums_1551263741.pdf
Finanšu ministrija. 2023. “Valsts budžets 2024.gadam.” https://www.fm.gov.lv/lv/valsts-budzets
European Commission. 2023. “Country Report – Latvia.” Institutional Paper 238, June 2023. https://economy-finance.ec.europa.eu/publications/2023-country-report-latvia_en
To what extent do existing tax institutions and procedures minimize compliance and collection costs?
10
9
9
The tax system is fully aligned with the goal of minimizing compliance and collection costs.
8
7
6
7
6
The tax system is largely aligned with the goal of minimizing compliance and collection costs.
5
4
3
4
3
The tax system is only somewhat aligned with the goal of minimizing compliance and collection costs.
2
1
1
The tax system is not at all aligned with the goal of minimizing compliance and collection costs.
Latvia has a sizable shadow economy, and its tax revenues as a share of GDP are below the EU average. The European Commission has noted that Latvia collects less tax from capital and property compared to the EU average. Therefore, there is significant room to improve tax compliance.
All laws, including tax laws, are available online for free. However, due to frequent amendments, taxpayers need to stay updated, especially on regulations related to COVID-19 restrictions and relief.
The tax administration has an electronic system (EDS) for tax calculations and payments to simplify communication between the tax administration and taxpayers.
Since July 1, 2023, the government has introduced a licensing system for accountants who deliver their services as outsourced. The decision aims to increase the quality of accountancy but has created additional compliance costs, especially for small businesses.
Citations:
European Commission. 2023. Country report – Latvia. Institutional paper 238, June 2023. https://economy-finance.ec.europa.eu/publications/2023-country-report-latvia_en
All laws, including tax laws, are available online for free. However, due to frequent amendments, taxpayers need to stay updated, especially on regulations related to COVID-19 restrictions and relief.
The tax administration has an electronic system (EDS) for tax calculations and payments to simplify communication between the tax administration and taxpayers.
Since July 1, 2023, the government has introduced a licensing system for accountants who deliver their services as outsourced. The decision aims to increase the quality of accountancy but has created additional compliance costs, especially for small businesses.
Citations:
European Commission. 2023. Country report – Latvia. Institutional paper 238, June 2023. https://economy-finance.ec.europa.eu/publications/2023-country-report-latvia_en
To what extent do existing tax institutions and procedures internalize negative and positive externalities?
10
9
9
The tax system is fully aligned with the goal of internalizing externalities.
8
7
6
7
6
The tax system is largely aligned with the goal of internalizing externalities.
5
4
3
4
3
The tax system is only somewhat aligned with the goal of internalizing externalities.
2
1
1
The tax system is not at all aligned with the goal of internalizing externalities.
Latvia imposes several taxes on environmentally harmful activities, including a natural resources tax and an excise tax on fossil fuel, both with varying rates. The transport tax also varies based on CO2 emissions. Since 2022, Latvia has introduced subsidies to encourage the use of electric cars – €4,500 per new car and €2,250 per secondhand car. However, electric cars have not been widely adopted due to inadequate charging infrastructure.
The parliament passed a law in December 2023 to provide additional support for mortgage holders facing difficulties with increased mortgage payments. The financial sector opposed the legislation, arguing that it would have detrimental effects on the banking industry and signaling the government’s intent to interfere in the market. The ECB also warned of potential negative impacts on future investments in Latvia.
Citations:
European Central Bank. 2023. “Key ECB Interest Rates.” https://www.ecb.europa.eu/stats/policy_and_exchange_rates/key_ecb_interest_rates/html/index.en.html
LSM. 2023. “ECB flags ‘potential negative consequences’ of Latvia’s mortgage relief law.” https://eng.lsm.lv/article/economy/banks/18.12.2023-ecb-flags-potential-negative-consequences-of-latvias-mortgage-relief-law.a535809/
3. Baltijā restartējas atbalsts elektromobiļiem: kādi ir subsīdiju modeļi? https://uzladets.lv/baltija-restartejas-atbalsts-elektromobiliem-kadi-ir-subsidiju-modeli/
The parliament passed a law in December 2023 to provide additional support for mortgage holders facing difficulties with increased mortgage payments. The financial sector opposed the legislation, arguing that it would have detrimental effects on the banking industry and signaling the government’s intent to interfere in the market. The ECB also warned of potential negative impacts on future investments in Latvia.
Citations:
European Central Bank. 2023. “Key ECB Interest Rates.” https://www.ecb.europa.eu/stats/policy_and_exchange_rates/key_ecb_interest_rates/html/index.en.html
LSM. 2023. “ECB flags ‘potential negative consequences’ of Latvia’s mortgage relief law.” https://eng.lsm.lv/article/economy/banks/18.12.2023-ecb-flags-potential-negative-consequences-of-latvias-mortgage-relief-law.a535809/
3. Baltijā restartējas atbalsts elektromobiļiem: kādi ir subsīdiju modeļi? https://uzladets.lv/baltija-restartejas-atbalsts-elektromobiliem-kadi-ir-subsidiju-modeli/
Graph View
To what extent do existing budgetary institutions and procedures support or hinder sustainable budgeting?
10
9
9
Budgetary institutions and policies are fully aligned with the goals of sustainable budgeting.
8
7
6
7
6
Budgetary institutions and policies are largely aligned with the goals of sustainable budgeting.
5
4
3
4
3
Budgetary institutions and policies are only somewhat aligned with the goals of sustainable budgeting.
2
1
1
Budgetary institutions and policies are not at all aligned with the goals of sustainable budgeting.
As a result of long-term efforts, Latvia has achieved a sustainable budgetary policy, maintaining public debt at 40.8% of GDP in 2022, which translates to €8,500 per capita (Eurostat 2023). Latvia also has a balanced budget surplus of -4.4% of GDP in 2022, according to Eurostat data, enabling it to maintain the lowest public debt in the EU. However, the IMF, OECD, and EU recommend that Latvia address its high inflation rate and its negative consequences by investing more in increasing productivity.
Latvia’s fiscal policy framework includes a Stability Programme approved by the EU and a national law on a three-year medium-term budgetary framework. The Stability Programme contains forecasts of macroeconomic indicators, fiscal projections, and general government budget balance objectives, and it is a critical element of the annual budgetary cycle. The state budget law is a significant instrument for maintaining fiscal discipline, and the Fiscal Discipline Law sets budgetary policy principles and conditions to ensure a balanced state budget over the economic cycle.
The independent Fiscal Discipline Council provides regular monitoring. In its most recent report, the Council noted that the government demonstrates realism and prudence in its budgetary and fiscal policy but only partially reflects its ambitions for economic transformation.
National priorities are widely discussed publicly during the annual budgetary process and are regulated by the state budget law and the Fiscal Discipline Law. The priorities for 2024 are healthcare, education, and internal and external security, with 62% of the budget allocated to these areas.
The Stability Programme 2023–2026 and the state budget prioritize medium-term public investment. At the same time, the principles outlined in the Fiscal Discipline Law allow the government to accumulate financial reserves for crises, such as providing public support for high energy prices in the winter of 2022–2023, or to prepare for a green transition.
Citations:
OECD. 2022. OECD Economic Surveys: Latvia 2022. https://www.oecd.org/latvia/oecd-economic-surveys-latvia-25222988.htm
Eurostat. 2023. “Government Deficit/Surplus, Debt and Associated Data.” https://ec.europa.eu/eurostat/databrowser/view/gov_10dd_edpt1/default/table?lang=en
Fiskālās disciplinas padome. 2023. Monitoringa ziņojums Nr. 21. Periods 14.04.2023-12.07.2023.
Finanašu ministrija. 2023. Latvijas Stabilitātes programma 2023.-2026. Gadam. https://commission.europa.eu/system/files/2023-04/latvia-stability-programme-2023_lv.pdf
Finanašu ministrija. 2023. “Budžets2024.” https://www.fm.gov.lv/lv/budzets2024
Latvia’s fiscal policy framework includes a Stability Programme approved by the EU and a national law on a three-year medium-term budgetary framework. The Stability Programme contains forecasts of macroeconomic indicators, fiscal projections, and general government budget balance objectives, and it is a critical element of the annual budgetary cycle. The state budget law is a significant instrument for maintaining fiscal discipline, and the Fiscal Discipline Law sets budgetary policy principles and conditions to ensure a balanced state budget over the economic cycle.
The independent Fiscal Discipline Council provides regular monitoring. In its most recent report, the Council noted that the government demonstrates realism and prudence in its budgetary and fiscal policy but only partially reflects its ambitions for economic transformation.
National priorities are widely discussed publicly during the annual budgetary process and are regulated by the state budget law and the Fiscal Discipline Law. The priorities for 2024 are healthcare, education, and internal and external security, with 62% of the budget allocated to these areas.
The Stability Programme 2023–2026 and the state budget prioritize medium-term public investment. At the same time, the principles outlined in the Fiscal Discipline Law allow the government to accumulate financial reserves for crises, such as providing public support for high energy prices in the winter of 2022–2023, or to prepare for a green transition.
Citations:
OECD. 2022. OECD Economic Surveys: Latvia 2022. https://www.oecd.org/latvia/oecd-economic-surveys-latvia-25222988.htm
Eurostat. 2023. “Government Deficit/Surplus, Debt and Associated Data.” https://ec.europa.eu/eurostat/databrowser/view/gov_10dd_edpt1/default/table?lang=en
Fiskālās disciplinas padome. 2023. Monitoringa ziņojums Nr. 21. Periods 14.04.2023-12.07.2023.
Finanašu ministrija. 2023. Latvijas Stabilitātes programma 2023.-2026. Gadam. https://commission.europa.eu/system/files/2023-04/latvia-stability-programme-2023_lv.pdf
Finanašu ministrija. 2023. “Budžets2024.” https://www.fm.gov.lv/lv/budzets2024
Graph View
How committed is the government to utilizing research and innovation as drivers for the transition to a sustainable economy and society?
10
9
9
The government is clearly committed to utilizing research and innovation as drivers for the transition to a sustainable economy and society.
8
7
6
7
6
The government is largely committed to utilizing research and innovation as drivers for the transition toward a sustainable economy and society.
5
4
3
4
3
The government is somewhat committed to utilizing research and innovation as drivers for the transition toward a sustainable economy and society.
2
1
1
The government is not at all committed to utilizing research and innovation as drivers for the transition toward a sustainable economy and society.
In the European Innovation Scoreboard 2023, Latvia is ranked as an “emerging innovator” with a relative performance level of 52.5 compared to the EU. This performance reflects the average investment in R&D, as Latvia allocated 0.24% of GDP in 2022, or €49.6 per inhabitant. Among EU countries, Latvia is one of those that allocated the smallest portion of its income to R&D, indicating that innovation is a low priority for national development. This lack of prioritization is evident in public debates, budgetary processes, and even strategic discussions about the country’s future. R&D investments in the Latvian business sector also remain low.
In 2023, the OECD assessed the innovation framework in Latvia as weak due to minimal government and business investments in R&D relative to GDP. Additionally, the OECD highlighted that low-quality higher education needs to produce more PhD holders to boost innovation. Overall, the government needs to enhance financial incentives for business R&D.
Meanwhile, the State Chancellery has launched the “Innovation Lab” initiative, selecting 15 projects for 2023 – 2025. The aim is to improve the working practices of public administration by introducing an innovation ecosystem and a culture of experimentation.
In the 2022 Eco-Innovation Scoreboard, Latvia is among a group of average performers. This indicates that while Latvia excels in eco-innovation academic publications, it remains weak in eco-innovation-related patents and R&D. Meanwhile, venture capital funding is a new phenomenon in Latvia, with government agencies and other institutional investors currently providing the venture capital. Although the Global Startup Ecosystem Index 2023 ranks Latvia 39th in the world, there is potential for startups to become an economic driver.
The government has approved the National Strategy for Science, Technology Development, and Innovation 2021 – 2027 (approved in 2021). The National Strategy outlines specific goals and actions designed to boost innovation and activate R&D. However, maintaining the same GDP allocation as in 2022 risks implementation failures for the strategy.
The innovation policy is a shared responsibility involving several Latvian ministries, including the Ministry of Education and Science, the Ministry of Economy, and the State Chancellery. However, interministerial policy coordination is hindered by the formal boundaries within the scope of each ministry, which substantially slows down the process.
Citations:
European Commission. 2023. “European Innovation Scoreboard 2023.” https://research-and-innovation.ec.europa.eu/statistics/performance-indicators/european-innovation-scoreboard_en
European Commission. 2023. “European Innovation Scoreboard 2023. Country Profile: Latvia.” https://ec.europa.eu/assets/rtd/eis/2023/ec_rtd_eis-country-profile-lv.pdf
Eurostat. 2023. “Government budget allocations for R&D.” https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Government_budget_allocations_for_R%26D_(GBARD)&oldid=573250
OECD. 2023. Economic Policy Reforms 2023: Going for Growth. Latvia: OECD iLibrary. https://www.oecd-ilibrary.org/sites/8719ecd7-en/index.html?itemId=/content/component/8719ecd7-en
Ministru kabineta noteikumi Nr. 543. 2023. Eiropas Savienības kohēzijas politikas programmas 2021.–2027. gadam 1.3.1. specifiskā atbalsta mērķa “Izmantot digitalizācijas priekšrocības iedzīvotājiem, uzņēmumiem, pētniecības organizācijām un publiskajām iestādēm” 1.3.1.2. pasākuma “Inovācijas laboratorija digitalizācijas priekšrocību izmantošanai” īstenošanas noteikumi. https://www.vestnesis.lv/op/2023/188.5
Zinātnes, tehnoloģijas attīstības un inovācijas pamatnostādnes 2021.-2027.gadam. Approved in 14.04.2021. https://www.izm.gov.lv/lv/media/11501/download?attachment (accessed 20.12.2023)
European Commission. 2023. “Eco-Innovation at the Heart of European Policies.” https://green-business.ec.europa.eu/eco-innovation_en
Gorghiu, R., and I. Štrāla. 2022. “Eco-Innovation Country Profile 2022: Latvia.” https://circabc.europa.eu/ui/group/96ccdecd-11b4-4a35-a046-30e01459ea9e/library/6cb579d0-bf62-4243-a1ea-74bfa59fd1f7/details
Altum. 2023. “Venture Capital and Private Equity.” https://www.altum.lv/en/services/enterprises/venture-capital-and-private-equity/
Startupblink. 2023. “Startup Ecosystem Report 2023.” https://www.startupblink.com/startup-ecosystem/latvia
In 2023, the OECD assessed the innovation framework in Latvia as weak due to minimal government and business investments in R&D relative to GDP. Additionally, the OECD highlighted that low-quality higher education needs to produce more PhD holders to boost innovation. Overall, the government needs to enhance financial incentives for business R&D.
Meanwhile, the State Chancellery has launched the “Innovation Lab” initiative, selecting 15 projects for 2023 – 2025. The aim is to improve the working practices of public administration by introducing an innovation ecosystem and a culture of experimentation.
In the 2022 Eco-Innovation Scoreboard, Latvia is among a group of average performers. This indicates that while Latvia excels in eco-innovation academic publications, it remains weak in eco-innovation-related patents and R&D. Meanwhile, venture capital funding is a new phenomenon in Latvia, with government agencies and other institutional investors currently providing the venture capital. Although the Global Startup Ecosystem Index 2023 ranks Latvia 39th in the world, there is potential for startups to become an economic driver.
The government has approved the National Strategy for Science, Technology Development, and Innovation 2021 – 2027 (approved in 2021). The National Strategy outlines specific goals and actions designed to boost innovation and activate R&D. However, maintaining the same GDP allocation as in 2022 risks implementation failures for the strategy.
The innovation policy is a shared responsibility involving several Latvian ministries, including the Ministry of Education and Science, the Ministry of Economy, and the State Chancellery. However, interministerial policy coordination is hindered by the formal boundaries within the scope of each ministry, which substantially slows down the process.
Citations:
European Commission. 2023. “European Innovation Scoreboard 2023.” https://research-and-innovation.ec.europa.eu/statistics/performance-indicators/european-innovation-scoreboard_en
European Commission. 2023. “European Innovation Scoreboard 2023. Country Profile: Latvia.” https://ec.europa.eu/assets/rtd/eis/2023/ec_rtd_eis-country-profile-lv.pdf
Eurostat. 2023. “Government budget allocations for R&D.” https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Government_budget_allocations_for_R%26D_(GBARD)&oldid=573250
OECD. 2023. Economic Policy Reforms 2023: Going for Growth. Latvia: OECD iLibrary. https://www.oecd-ilibrary.org/sites/8719ecd7-en/index.html?itemId=/content/component/8719ecd7-en
Ministru kabineta noteikumi Nr. 543. 2023. Eiropas Savienības kohēzijas politikas programmas 2021.–2027. gadam 1.3.1. specifiskā atbalsta mērķa “Izmantot digitalizācijas priekšrocības iedzīvotājiem, uzņēmumiem, pētniecības organizācijām un publiskajām iestādēm” 1.3.1.2. pasākuma “Inovācijas laboratorija digitalizācijas priekšrocību izmantošanai” īstenošanas noteikumi. https://www.vestnesis.lv/op/2023/188.5
Zinātnes, tehnoloģijas attīstības un inovācijas pamatnostādnes 2021.-2027.gadam. Approved in 14.04.2021. https://www.izm.gov.lv/lv/media/11501/download?attachment (accessed 20.12.2023)
European Commission. 2023. “Eco-Innovation at the Heart of European Policies.” https://green-business.ec.europa.eu/eco-innovation_en
Gorghiu, R., and I. Štrāla. 2022. “Eco-Innovation Country Profile 2022: Latvia.” https://circabc.europa.eu/ui/group/96ccdecd-11b4-4a35-a046-30e01459ea9e/library/6cb579d0-bf62-4243-a1ea-74bfa59fd1f7/details
Altum. 2023. “Venture Capital and Private Equity.” https://www.altum.lv/en/services/enterprises/venture-capital-and-private-equity/
Startupblink. 2023. “Startup Ecosystem Report 2023.” https://www.startupblink.com/startup-ecosystem/latvia
Graph View
How committed and credible is the government in its activities to guide the effective regulation and supervision of the international financial architecture?
10
9
9
The government is clearly committed to ensuring the stability of the global financial system.
8
7
6
7
6
The government is largely committed to ensuring the stability of the global financial system.
5
4
3
4
3
The government is somewhat committed to ensuring the stability of the global financial system.
2
1
1
The government is not at all committed to ensuring the stability of the global financial system.
According to World Bank data, Latvia’s nonperforming loans to total gross loans ratio stands at 1.76%. This relatively low percentage indicates a healthy banking sector with a manageable level of credit risk. The balance of deposits attracted from foreign customers continues to decline. In March 2023, their share of total deposits shrank to 12.2%.
Data on cross-border payments and foreign trade for customers of Latvian credit institutions, along with reports of increased suspicious transactions and sanctions violations, indicate a rising risk of these institutions being implicated in sanctions breaches or money laundering. In 2022, Latvian credit institutions halted payments to and from Russian and Belarusian credit institutions. This action and the enforcement of sanctions led to a marked reduction in customer payment volumes in these countries. There was also a corresponding decrease in imports from Russia and Belarus. However, there was a significant surge in the volume of cross-border payments from customers of Latvian credit institutions to those in certain CIS countries – namely Armenia, Azerbaijan, Kazakhstan, Kyrgyzstan, and Moldova – and others like Georgia, the United Arab Emirates, Serbia, and Turkey. Trade volumes with Armenia, Kazakhstan, and Kyrgyzstan also substantially increased.
Starting January 1, 2023, the Financial and Capital Markets Commission was integrated into the Bank of Latvia. The functions of the Bank of Latvia now include supervision, resolution, and other tasks of financial and capital market participants that were previously the responsibility of the Financial and Capital Markets Commission. This integration also encompasses the responsibility for setting macro-prudential instruments.
Latvia intends to apply to host the headquarters of the European Authority for Combating Money Laundering and the Financing of Terrorism (AMLA), competing against other EU member states such as France, Italy, and Germany. The move aims to strengthen Latvia’s position as a hub for a sustainable economy and secure investments, leveraging its expertise in combating financial crimes.
The measures targeting borrowers in Latvia have remained unchanged. With the rise in interest rates and inflation, these measures – particularly the Debt Service-to-Income ratio – have significantly mitigated risks and are increasingly restrictive regarding available credit volume. There are plans to evaluate the need for adjustments in the regulations of these borrower-focused measures. For example, clarifying the requirements’ scope could avoid overlapping with similar requirements in foreign countries when Latvian credit institutions issue loans abroad. Additionally, there is an intention to increase flexibility in issuing credit to acquire real estate for rent (buy-to-let) or other income-generating real estate activities. Another consideration is incorporating motivating aspects to encourage a structural shift toward a more energy-efficient housing stock.
Citations:
World Bank. 2022. “Bank Nonperforming Loans to Total Gross Loans (%) – Latvia.” https://data.worldbank.org/indicator/FB.AST.NPER.ZS?view=map&locations=LV
Latvijas Banka. 2023. Finanšu stabilitātes pārskats. https://datnes.latvijasbanka.lv/fsp/FSP_2023_LV.pdf
Latvijas Banka. 2023. “Finanšu stabilitātes pārskats.” https://datnes.latvijasbanka.lv/fsp/FSP_2023_LV.pdf
Helmane, I. 2023. “Latvija pretendēs uz AMLA aģentūras mītnes vietu.” https://lvportals.lv/norises/356510-latvija-pretendes-uz-amla-agenturas-mitnes-vietu-2023
Data on cross-border payments and foreign trade for customers of Latvian credit institutions, along with reports of increased suspicious transactions and sanctions violations, indicate a rising risk of these institutions being implicated in sanctions breaches or money laundering. In 2022, Latvian credit institutions halted payments to and from Russian and Belarusian credit institutions. This action and the enforcement of sanctions led to a marked reduction in customer payment volumes in these countries. There was also a corresponding decrease in imports from Russia and Belarus. However, there was a significant surge in the volume of cross-border payments from customers of Latvian credit institutions to those in certain CIS countries – namely Armenia, Azerbaijan, Kazakhstan, Kyrgyzstan, and Moldova – and others like Georgia, the United Arab Emirates, Serbia, and Turkey. Trade volumes with Armenia, Kazakhstan, and Kyrgyzstan also substantially increased.
Starting January 1, 2023, the Financial and Capital Markets Commission was integrated into the Bank of Latvia. The functions of the Bank of Latvia now include supervision, resolution, and other tasks of financial and capital market participants that were previously the responsibility of the Financial and Capital Markets Commission. This integration also encompasses the responsibility for setting macro-prudential instruments.
Latvia intends to apply to host the headquarters of the European Authority for Combating Money Laundering and the Financing of Terrorism (AMLA), competing against other EU member states such as France, Italy, and Germany. The move aims to strengthen Latvia’s position as a hub for a sustainable economy and secure investments, leveraging its expertise in combating financial crimes.
The measures targeting borrowers in Latvia have remained unchanged. With the rise in interest rates and inflation, these measures – particularly the Debt Service-to-Income ratio – have significantly mitigated risks and are increasingly restrictive regarding available credit volume. There are plans to evaluate the need for adjustments in the regulations of these borrower-focused measures. For example, clarifying the requirements’ scope could avoid overlapping with similar requirements in foreign countries when Latvian credit institutions issue loans abroad. Additionally, there is an intention to increase flexibility in issuing credit to acquire real estate for rent (buy-to-let) or other income-generating real estate activities. Another consideration is incorporating motivating aspects to encourage a structural shift toward a more energy-efficient housing stock.
Citations:
World Bank. 2022. “Bank Nonperforming Loans to Total Gross Loans (%) – Latvia.” https://data.worldbank.org/indicator/FB.AST.NPER.ZS?view=map&locations=LV
Latvijas Banka. 2023. Finanšu stabilitātes pārskats. https://datnes.latvijasbanka.lv/fsp/FSP_2023_LV.pdf
Latvijas Banka. 2023. “Finanšu stabilitātes pārskats.” https://datnes.latvijasbanka.lv/fsp/FSP_2023_LV.pdf
Helmane, I. 2023. “Latvija pretendēs uz AMLA aģentūras mītnes vietu.” https://lvportals.lv/norises/356510-latvija-pretendes-uz-amla-agenturas-mitnes-vietu-2023