Describe the main characteristics of the budgetary process (cycle, actors, instruments, etc.) in Latvia.
At the moment the budgetary process is as follows:
The yearly state budget is adopted in the form of a law by the Parliament upon the proposal of the government.
The Annual Budget and the Budgetary Framework are developed and approved in accordance with the Law on Budget and Financial Management (LBFM) and Law on Fiscal Discipline (LFD) . Both Annual Budget and Budgetary Framework are adopted by the Parliament in the ordinary procedure (two readings, simple majority vote). In case the budget is not approved, that is understood to be a non-confidence vote concerning the Government and the Government is considered to be dismissed. According to Article 16 LBFM the Minister for Finance is responsible for the development of the Draft Medium Term Budget Framework Law and the Draft Annual State Budget Law (package of budget bills).
Article 66 of the Constitution provides that the Parliament determines, before the beginning of the fiscal year, the State Revenues and Expenditures Budget and that the Cabinet of Ministers submits the draft budget law to the Parliament. At the end of the budgetary year, the Government submits an accounting of budgetary expenditures for Parliamentary approval. Budget laws are among those, which cannot be submitted to a national referendum (Article 73 Constitution).
The Cabinet of Ministers ensures the formulation and implementation of the State budget, as well as determines the procedure for financial activities of local governments and bodies non-financed by the budget (Art 2(2) LBFM). The State budget funds may be allocated or received only according to the appropriation provided for in the Annual State Budget Law (Art 5(3) LBFM). The State budget appropriations are determined by the Annual State Budget Law (Art 9(1) LBFM).
According to Article 16.1(1) LBFM, the Minister of Finance until 15 December of the current year submits a Draft Schedule for the Development and Submission of the Draft Medium Term Budget Framework Law and the Draft Annual State Budget Law for the next year to the Cabinet of Ministers. In accordance with Article 16.2(2) LBFM each year the Minister of Finance in co-operation with the Minister of Economics and in consultation with the Bank of Latvia up-dates the medium term macroeconomic development forecasts and develops the Draft Medium Term Budget Framework Law for the subsequent three financial years and submits it to the Cabinet in accordance with the Schedule for the Development and Submission of the Draft Medium Term Budget Framework Law and the Draft Annual State Budget Law.
When the Government decides on the Draft Medium Term Budget Framework Law or on amendments to the Medium Term Budget Framework Law, it has to take into account the opinion of the Chancellery of the President, the Supreme Court, the Constitutional Court, the Council of Justice, the State Audit Office, the National Electronic Mass Media Council, the Office of the Ombudsman, the Public Utilities Commission and the Office of the Prosecutor General regarding the maximum permissible total amount of State budget expenditure for the relevant institution (Article 16.2(8) LBFM). The norms of the previous Medium Term Budget Framework Law applying to the second and third year of operation become invalid by the coming into force of the next Medium Term Budget Framework Law (Article 16.2(9) LBFM). The Cabinet submits the Draft Medium Term Budget Framework Law for the subsequent three years to the Parliament before 30 April of the current year (Article 16.2(10) LBFM).
Ministries and other central State institutions shall develop and submit to the Ministry of Finance the State budgetary requests prepared in conformity with the basic principles for the development of the budgetary requests (Article 18(1) LBFM). In general, ministries and other central State institutions shall develop the State budgetary requests within the scope of the maximum permissible amount of the State budget expenditure specified in the Medium Term Budget Framework Law for the relevant year (Article 18(11) LBFM). The Minister for Finance has to develop the Draft Annual State Budget Law on the basis of the Medium Term Budget Framework Law and the submitted budgetary requests (Article 19(2) LBFM). All the ministries and other central State institutions, after they receive the Draft Annual State Budget Law (the package of budget bills), can within two weeks submit to the Minister for Finance reasoned objections concerning the Draft Law (Article 20(1) LBFM). Afterwards the Minister of Finance submits the Draft Law to the Cabinet of Ministers (Article 20(3) LBFM). Followingly, the Cabinet of Ministers decides on submission of the Draft Law to the Parliament (Article 20(5) LBFM).
The Cabinet of Ministers has to submit the Draft Annual State Budget Law for the next financial year to the Parliament by 1 October (Article 21(1) LBFM). In a year when the Parliament is elected the Draft Annual State Budget Law (a package of budget bills) has to be submitted to the Parliament not later than four months following the newly elected Parliament has given its vote of confidence to a new Government (Article 21(3) LBFM). Any amendments to the Annual State Budget Law also have to be submitted for to a vote in the Parliament (Article 21(4) LBFM).
The Parliament examines and approves the Draft Annual State Budget Law (the package of budget bills) submitted by the Cabinet in accordance with the legislative procedure (Article 22(1) LBFM). The Budget is approved in two readings and if in any of them the draft budget law is rejected, it is assumed that it is a “no-confidence” vote for the Government (Article 30 of the Parliament Rules of Procedure). Hence in such cases there is a need to establish and approve a new Government.
According to Article 9 LBFM the Minister of Finance can perform reallocations for a ministry or other central State institutions within the appropriation determined in the Annual State Budget Law among the programmes, sub-programmes and expenditure codes. This has to be done in conformity with economic categories and from the appropriation planned in a separate budget programme for undivided financing for implementation of the European Union policy instruments and other foreign financial assistance projects and measures to ministries and other central State institutions, as well as appropriations from ministries and other central State institutions for implementation of the European Union policy instruments. After informing the Parliament, the Minister of Finance can change the appropriations among ministries and other central State institutions for the use of foreign financial assistance funds granted to the State budget institutions and for the use of the surplus of foreign financial assistance funds at the beginning of a financial year. The Minister of Finance also has the right to reallocate the appropriations among ministries and other central State institutions, including in cases of function reallocation or structural reforms, if a Cabinet decision has been taken and the Parliament has agreed with such reallocation by a separate decision.
If prior to the beginning of a financial year, the Annual State Budget Law has not come into force, the Minister of Finance shall approve the State budget expenditure, loans and borrowings required for the activities of the State (Article 15 LBFM).
The Minister of Finance issues an opinion regarding draft laws providing for additional expenditure or changes in the revenues and which were not submitted to the Parliament by the Cabinet but by some other institution (Article 10(1) LBFM). If, following the coming into force of the State Budget Law, the Parliament adopts laws or the Cabinet takes decisions causing an increase in local government expenditure or a decrease in their revenues in the current financial year, the State budget funds from which the increase in the local government expenditure or the decrease in their revenue will be covered have to be specified in these laws or decisions (Article 10(2) LBFM).
To reduce general economic risks, to avoid socio-economic crises or to reduce their impact and to ensure the availability of financial resources in the case of an emergency situation, the Law on Long-Term Stabilisation Reserve determines the procedure for the establishment and use of the long-term stabilisation reserve (Article 8(1) LBFM).
The Constitutional Court has determined the limits of its own competences for when it is asked to decide on the compatibility of a state budget law with hierarchically higher legal norms (e.g. the Constitution). The court checks only whether in the preparation and approval of the state budget the Parliament and the Cabinet of Ministers have complied with the law. Therefore the Constitutional Court carries out more procedural rather than substantial checks.
How has the budgetary process changed since the beginning of the financial/Eurozone crisis?
Please see Questions VI.2, VI.7, VI.10, II.1 and III.8.
In general before the crisis the Budgetary Framework could easily be amended and was not binding. It was not adopted in the form of law by the Parliament (as it is now) but was adopted by a decision of the Cabinet of Ministers. Before the introduction of the Budgetary Framework in a form of law it was possible to update the framework twice a year and the ceilings for expenditure established by the framework were not binding upon the Government; therefore, no strict fiscal discipline was ensured. The necessity to improve this system was recognized and in the conception of the Law on Fiscal Discipline it was proposed to elevate the adoption of the framework to the Parliamentary level, make its character more binding, limit the possibility to amend it by allowing amendments only in a particularly bad economic situation. These changes were introduced by amending the Law on Budget and Financial Management (amendments of 25 April 2013) and by adopting the Law on Fiscal Discipline in 2013. When the medium-term budgetary framework law is prepared it has to be taken into account that general government debt at the end of the year cannot exceed 60% GDP in factual prices. The adjusted maximum allowed expenses for the appropriate year have to be determined by taking into account the balance and expenditure growth conditions.
It was also proposed to ensure that the possibility to amend the yearly budget is limited in order to ensure stable and deliberative fiscal policy. It was proposed that amendments in the state budget could be made only if they do not influence the expenditure of the following years and if the budgetary income is essentially lower for the one determined by the state budget law in order to ensure measures of fiscal consolidation. This was achieved by amending the Law on Budget and Financial Management.
Law on Fiscal Discipline
One of the greatest changes affecting the budgetary process was the adoption of the Law on Fiscal Discipline (LFD) in early 2013. The LFD determines the principles and conditions of fiscal policy in order to ensure a balanced budget within the economic cycle and in this way facilitates sustainable state development, macroeconomic stability and aims to reduce the negative influence of outside factors on the economy. The LFD intends to realise counter-cyclical fiscal policy.
As the main instrument for responsible and well-thought fiscal policy the Medium-term Budgetary Framework Law has been foreseen. This has to be prepared every year for the period of the next three years. The maximum budgetary expenditure for the first and second year will be inherited from the second and third year from the previous framework law. The medium-term budgetary framework draft law has to be supplemented by a declaration on fiscal risks, which determines the necessary measures for ensuring the stability of fiscal indicators. The general governance of fiscal risks is carried out by the Cabinet of Ministers.
The LFD ensured the fulfilment of Maastricht criteria and conditions of Stability and Growth Pact which establish that the state budgetary deficit within a year cannot exceed 3% GDP and the state debt to GDP ratio cannot exceed 60%.
Fiscal Discipline Council
The Fiscal Discipline Council has been established. For more information in this regard please refer to Question VII.5.
Law on Budget and Financial Management
The amendments to the Law on Budget and Financial Management (LBFM) established the process for adopting the medium-term budgetary framework. These amendments provided that a medium-term budgetary framework will be prepared every year for a three year period and it will include the main medium-term budgetary objectives and priorities as well as the main state macroeconomic and budgetary indicators. The amendments also determined the main inheritance principles of budgetary indicators and in this way created a legally binding framework for medium-term budgetary planning. The first medium-term budgetary framework law already has been adopted.
During the crisis the Constitutional Court considered the Budget Package and the way changes were made to the state budget to be problematic (Case No 2011-03-01, para. 18). In order to ensure consolidation of the state budget the Cabinet of Ministers repeatedly submitted the draft laws for introducing reforms in the budgetary process together with the annual budget law or its amendments. By doing this the Government achieved their adoption in shortened periods of time and the Government control over their content was maintained. The Constitutional Court in this regard argued that the draft annual budget law package can contain only issues which refer to the particular budgetary year and are closely connected with the use of state financial means.
In order to ensure medium-term budget planning changes have been introduced in the LBFM. The changes provide that in the future every year a Law on the Medium-term Budget Framework for three years will be prepared which will contain the main meiumd-term budget objectives and priorities, as well as the main state macroeconomic and budget indicators. This new approach is aimed at improving the budgetary planning and avoiding situations where the state suddenly finds itself in the midst of crisis. In addition, the law will provide the inheritance principles regulating the projected values of financial indicators by thus creating a legally binding medium-term basis for budgetary planning. At the time it was planned that the framework law for the first time will be prepared together with the 2013 budget and will be submitted to the Parliament until 1 October 2012. Starting with the period 2014-2016 the framework law will be prepared yearly until 20 April in accordance with the changes implemented in the Law on Fiscal Discipline.
On 1 October 2013 new amendments to the LBFM were submitted to the Parliament. The proposed amendments would amend Article 9 by stating that “The Minister of Finance has a right to increase the appropriation established in the yearly state budget law for state debt obligations and broaden the limits for Government action in case of unforeseen circumstances by informing the Cabinet of Ministers and the Budget and Finance (tax) Parliamentary Comission within five working days.” As well the Article 39 will provide: “The expenses for fufillment of the state debt obligations have to be carried out in accordance with the agreement provisions independently from the budgetary means allocated for this in the yearly state budget and the determined limits for Government action. If the Minister of Finance finds out that expenses for fulfilment of the state debt obligations exceed the appropriated means for this within the state budget, the Ministry of Finance increases the appropriation in the state budget and broadens the scope of allowed Government action in case of unforeseen circumstances.” This amendment has been included in the budgetary package for 2014 and will be approved together with the budget law for 2014.
In general it is complicated to differentiate between the changes implemented purely due to the crisis and changes due to the crisis measures adopted at the EU level. The changes to some extent can be seen as a response to both. Concerning the changes foreseen because of the Six-Pack please refer to Section VII.
What institutional changes are brought about by the changes in the budgetary process, e.g. relating to competences of parliament, government, the judiciary and independent advisory bodies?
The Fiscal Discipline Council has been established. Please see Question VII.5.
Bank of Latvia
The amendments to the Law on the Bank of Latvia specified the objectives and tasks of the Bank of Latvia, and specified the functional, institutional, personal and financial independence of the Bank of Latvia. The Law on the Bank of Latvia now provides that its main objective is to maintain price stability and, by not endangering this objective, the Bank of Latvia as well supports the general economic policy in the EU. The law provides that in accordance with the Statutes the Bank of Latvia takes part in the fulfilment of the ESCB tasks (the defining and exercising of the EU monetary policy, carrying out of the foreign currency operations, holding and management of the external reserves of the EU Member States, collecting of statistical data, preparation of statistics and its dissemination). The Law also provides the rights and instruments of the Bank of Latvia in order for it to be able to achieve its objectives and manage its tasks. In addition the amendments have removed the possibility to liquidate the central bank, since liquidation of the central bank would be a breach of the ECB Statute and TFEU. At the same time this still did not remove the possibility for the Parliament to liquidate the Bank of Latvia as an institution, if at the same time succession – establishment of a new central bank – is ensured.
The Parliament also has gained new competences. First, the Parliament now adopts the medium-term budgetary framework law which previously was approved by the Cabinet of Ministers (see also question II.1). Second, in case of the situation when the state has to borrow money from international lenders, if the loan exceeds 20% of the GDP, then the Parliament has to vote on this matter (see also Question X.4).
The rights of the independent institutions in the budgetary process have been specified. Now the Government when it approves the Framework Budgetary law has to hear the opinions of the independent institutions, record this information and submit it to the legislator by annexing the proposed draft budgetary framework law. Also in the process of approving the annual budget the Government has to hear these institutions and has to submit the information to the legislator. In this way it is ensured that the Parliament decides on the expenditure of independent institutions.
Reform management task force
During the crisis the international lenders encouraged public consultation in discussing the ‘crisis law’. In response the Government created a ‘reform management task force’. This body included officials from the Ministry of Finance, trade union representatives, the head of the Budget and Finance Commission, the representative of the Latvian Chamber of Commerce and Industry and the Latvian local governments associations.
Change of time-line
How has the time-line of the budgetary cycle changed as a result of the implementation of Euro-crisis law?
At the moment the deadline for submitting the draft Budgetary Framework law is 30 April which at the same time is the deadline for submitting the Convergence Programme of Latvia to the European Commission. Both Budgetary Framework Law and Convergence Programme are prepared on the basis of the same macroeconomic forecasts. However at the same time the framework is more detailed than the Convergence Programme and therefore for its drafting additional time is necessary. Therefore it was proposed together with the 2013 Budget package to introduce changes in Article 16.2(10) Law on Fiscal Discipline that the framework law has to be submitted to the Parliament before 15 May (instead of 30 April). Thus, it was ensured that the Budgetary Framework Law is based on the most topical evaluation of the macroeconomic situation and is compatible with the data incorporated in the Convergence Programme.
The Law on Budget and Financial Management was amended by providing that the Finance Minister submits the plan for preparing a new Budgetary Framework Draft Law and Budget Draft law before 15 December. Thus, there is a greater probability that the work concerning the annual state budget law adoption in the Parliament will be already finished.
What other information is relevant with regard to Latvia and changes to the budgetary process?