PUBLIC FINANCE SUSTAINABILITY IN LATVIA: ASSESSING LONG-TERM CHALLENGES AND POLICY OPTIONS

Sustainability of public finances in Latvia in the long-term is facing challenges. The main challenge is connected with depopulation, decrease of working age population and ageing populations. The projected changes in the demographic structure require to adjust policies now in order to ensure fiscal sustainability in the long run. The main objective of this article is to give a contribution into discussion on long-term challenges for fiscal sustainability and possible policy options dealing with challenges. In the first part of the article, the authors analyze the demographic development in Latvia and proposed policy options and reforms for increase of labour force participation. In the second part, age-related budget expenditure for pensions, health care, education etc. are being analyzed, here paying more attention on pension system and the impact of recent pension reform. Low social spending in Latvia reduces the sustainability risks but doesn't ensure adequate benefits for future pensioners. This challenging task for the government is being accompanied with the uncertainty about the number of taxpayers in upcoming years. The pension adequacy and the recent improvements in increase of benefits are being analyzed as well as proposals are made for further policies which might help ensuring fiscal sustainability. Sustainability of public finance is a very complicated issue with many components, thus the complex reform package is proposed including efficiency of spending, continuing reforms of pension system, tax reform together with continuing active labour market policy.