Rutkaste: Latvia's Economic Model is Losing Steam and Needs Adjustments, Not Tax Hikes

Uldis Rutkaste, head of the Monetary Policy Department at the Bank of Latvia, stated in the programme “Why” that while unemployment remains low and wages continue to rise, the country's economic model is increasingly losing its dynamism and potential. He stressed that for long-term stable growth, policy corrections are necessary.

Instead of raising taxes or applying uniform budget cuts across ministries, Rutkaste recommends reviewing state expenditures and reducing the number of public sector employees. Due to the declining population, maintaining the current size of the public administration is unsustainable in the long run.

Rutkaste noted that budget balancing will become a hot topic in the coming years, and the decisions will be unpleasant. A previous Bank of Latvia forecast concluded that both tax increases and linear budget cuts negatively affect the economy. Therefore, he urged policymakers to focus on structural reforms rather than short-term measures.