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Title page 1

Contents 5

Foreword 4

Basic statistics of Latvia, 2025 8

Executive summary 9

1. Strengthening fiscal sustainability and economic growth 16

1.1. The economy is gaining momentum, but structural challenges remain 17

1.1.1. Rising domestic demand will lead the recovery 20

1.1.2. Structural reforms are key to support economic growth and reduce inequality 22

1.2. Addressing financial vulnerabilities and improving access to finance 25

1.2.1. Financial market risks remain contained 25

1.2.2. Improving access to finance for firms 27

1.3. Strengthening public finances 31

1.3.1. Addressing rising spending pressures is key to ensure debt sustainability 31

1.3.2. There is some room to further raise tax revenue and make the tax system more efficient 34

1.3.3. Improving the fiscal framework and raising spending efficiency 37

1.3.4. Reducing old-age poverty 39

1.3.5. Fighting tax evasion, corruption and money laundering 41

References 47

2. Strengthening climate change mitigation and adaption policies 51

2.1. Stronger efforts are needed to reach climate policy targets 52

2.2. Expanding renewables and continuing to modernise the electricity grid 54

2.3. Raising the attractiveness of public transport and accelerating electrification 56

2.4. Reducing carbon emissions in the building sector 57

2.5. Reducing GHG emissions in the LULUCF and the agricultural sector 59

2.6. Protecting social cohesion and helping workers move jobs during the green transition 61

2.7. Improving climate adaptation policies 64

References 68

3. Improving health outcomes 71

3.1. Health outcomes remain weak despite improvements 72

3.2. Improving financing and access to healthcare 72

3.3. Increasing spending efficiency in the healthcare system 76

3.4. Strengthening preventive measures to improve health outcomes 79

References 83

4. Improving public administration capacity to support fiscal sustainability and economic growth 85

4.1. Modernising the public administration and continuing to reduce the administrative burden 86

4.2. Improving the organisation of the public sector to strengthen administrative capacity and raise spending efficiency 87

4.2.1. Improving employment policies in the public administration 90

4.2.2. Improving the governance of state-owned enterprises 94

4.3. Leveraging digitalisation to reduce the administrative burden, strengthen policy impact evaluation and improve spending efficiency 96

4.3.1. Raising the quality of regulations through better ex-ante impact assessment 100

4.3.2. Improving regulatory enforcement 102

4.3.3. Strengthening ex-post regulatory impact assessment 103

4.4. Improving public procurement and infrastructure planning procedures 105

4.4.1. Improving public investment management 111

4.5. Improving the administrative and financial capacity of local governments 114

4.5.1. Improving administrative capacities at the local level 115

4.5.2. Improving the public finances of municipalities 117

References 124

Tables 6

Table 1. Rising domestic demand will lead the recovery 11

Table 1.1. Macroeconomic indicators and projections 21

Table 1.2. Low probability events that could lead to major changes in the outlook 22

Table 1.3. Structural reforms are key to raise productivity growth 23

Table 1.4. The fiscal deficit will further increase 32

Table 1.5. Table on fiscal effects of recommendations 34

Table 1.6. Past recommendations and actions taken 45

Table 1.7. Policy recommendations 46

Table 2.1. Past recommendations and actions taken on environmental and labour market policies 66

Table 2.2. Policy recommendations 67

Table 3.1. Past recommendations and actions taken on health policies 81

Table 3.2. Policy recommendations 82

Table 4.1. Different procurement regulations apply according to contract values 107

Table 4.2. Past recommendations and actions taken on policies to improve the capacity of the public administration 122

Table 4.3. Policy recommendations 123

Figures 6

Figure 1. The pace of economic convergence has slowed 10

Figure 2. Better health outcomes would allow more experienced workers to work longer 12

Figure 3. There is room to improve spending efficiency in the public administration 13

Figure 1.1. Energy prices and inflation have declined until recently, and nominal wages have grown strongly 17

Figure 1.2. Country risk premia have declined 18

Figure 1.3. EU countries are the major destination of Latvian exports 19

Figure 1.4. Population ageing and decline will further exacerbate labour shortages 20

Figure 1.5. Unit labour costs have increased, weighing on export performance 20

Figure 1.6. The pace of economic convergence has slowed 23

Figure 1.7. Inequality and poverty remain high 24

Figure 1.8. The gender wage gap remains high 25

Figure 1.9. Vulnerabilities related to corporate debt remain contained and banks are profitable 26

Figure 1.10. Housing market-related risks have increased 27

Figure 1.11. Bank lending remains weak despite rising deposits 28

Figure 1.12. Non-bank sources of corporate finance are limited 30

Figure 1.13. Fiscal adjustments and structural reforms are key for debt sustainability 33

Figure 1.14. The tax structure is skewed towards labour and consumption taxes 35

Figure 1.15. The labour tax wedge is high compared to other countries, particularly for low-wage earners 36

Figure 1.16. There is room to raise revenues from corporate income taxes 37

Figure 1.17. Fiscal Discipline Council's analytical capacity and communications impact are weak 38

Figure 1.18. Old age poverty is high and future pension replacement rates are low 40

Figure 1.19. The fight against corruption and money laundering has been strengthened 44

Figure 2.1. Greenhouse gas (GHG) emission reductions need to accelerate 52

Figure 2.2. There is scope to further strengthen carbon pricing 54

Figure 2.3. The share of wind and solar in electricity generation has increased 55

Figure 2.4. The use of public transport has declined 57

Figure 2.5. Housing investment has been much lower than in peer countries 58

Figure 2.6. The LULUCF sector has become a large GHG net emitter 60

Figure 2.7. Distributional effects of different climate policy scenarios reaching EU Fit For 55 targets 62

Figure 2.8. More ambitious emission reduction would lead to a reallocation of labour across economic sectors 64

Figure 2.9. Spending for active labour market policies is low 64

Figure 2.10. Exposure to risk of river flooding is high 65

Figure 3.1. Health outcomes are weak 72

Figure 3.2. Public spending on health remains low 73

Figure 3.3. Out-of-pocket payments constitute a large share of health expenditure 74

Figure 3.4. Inequalities in health outcomes are large 74

Figure 3.5. The number of practicing doctors and nurses is very low 75

Figure 3.6. There is scope to raise efficiency in the health system 76

Figure 3.7. Spending on outpatient care and medical goods is relatively high 77

Figure 3.8. The share of generic drugs is relatively high 79

Figure 3.9. Mortality due to preventable diseases is very high 80

Figure 3.10. Alcohol consumption is very high 80

Figure 4.1. Strengthening the effectiveness of the public sector remains a key challenge 86

Figure 4.2. EU-funded investments represent a significant share of public investments 87

Figure 4.3. The cost of delivering public goods and services is relatively high 88

Figure 4.4. Public sector wages are relatively low for skilled professionals and managers 91

Figure 4.5. The public sector wage premium between comparable jobs is negative for higher pay grades 92

Figure 4.6. Share of bonuses and allowances in total wage strongly varies across ministries 93

Figure 4.7. Digital public services delivery could better anticipate user needs 96

Figure 4.8. The administrative burden for businesses could be reduced further 97

Figure 4.9. The coverage and methodology of regulatory impact assessments remain weak 101

Figure 4.10. Methodologies for ex-post evaluation of laws and regulations remain weak 104

Figure 4.11. Public procurement spending is significant 105

Figure 4.12. The E-procurement system could be further strengthened 108

Figure 4.13. Centralised purchasing remains limited, particularly for smaller procurements 109

Figure 4.14. Governance of infrastructure needs to improve 111

Figure 4.15. The absorption of EU cohesion policy funds should improve 114

Figure 4.16. Municipalities employ most of the public workforce but offer lower wages 115

Figure 4.17. State transfers help reduce disparities in fiscal capacity of municipalities 118

Figure 4.18. Revenue from recurrent taxes in immovable property is low 121

Boxes 7

Box 2.1. Simulating the economic and distributional effects of different climate policy scenarios for Latvia 63

Box 4.1. Realising efficiency gains by horizontal integration of public service delivery 89

Box 4.2. The remuneration structure of the public administration 92

Box 4.3. Data sharing systems in Lithuania, Estonia, Spain and Japan 99

Box 4.4. Public procurement regulation in Latvia 107

Box 4.5. Rail Baltica: Cost overruns, delays and shifts in the delivery model 113

Box 4.6. The 2021 administrative-territorial reform 115

Box 4.7. Intergovernmental fiscal relations 120