The Latvian Government Must Urgently Cut Spending – Hard Times Are Coming 0 14

The Situation Will Deteriorate Due to Military Spending

In 2025, Latvia's economy returned to moderate growth, the budget situation was better than planned, and the country still maintains an investment credit rating and a relatively moderate level of debt. However, as emphasized by the Council, fiscal policy will be conducted under challenging conditions in the coming years due to rising economic and fiscal risks.

Without changes in policy, the fiscal space may become negative starting in 2028, and worsen further in 2029 — influenced by the transfer of 1 percentage point in the pension system from the first level to the second level, as well as increased defense spending, which will increase the budget deficit and public debt.

Interest on Public Debt Will Rise to 900 Million Euros Per Year

As noted by the Council, according to forecasts from the Ministry of Finance, Latvia's public debt will continue to grow and reach approximately 52–53% of gross domestic product.

Current forecasts are based on assumptions of faster economic growth; however, they do not take into account a number of risks, including rising energy resource prices and additional expenses for projects and sectors such as Rail Baltica, airBaltic, healthcare, and education.

At the same time, under the current debt forecast, servicing costs will amount to 1.3% of GDP in 2026 and will rise to 1.6% in 2029–2030 (from 606 million euros in 2026 to 901 million euros in 2030). Furthermore, if the European Central Bank raises interest rates, debt servicing costs will also increase.

Funds May Be Needed for Benefits

The Council points out that current inflation data for 2026 do not yet reflect the impact of the recent rise in oil prices related to the escalation of the conflict in the Middle East. The Council notes that with rising pressure from energy prices, there may be a need for additional support for households during the heating season; however, this creates additional fiscal challenges.

The Council consistently emphasizes that in such conditions, priority should be given to targeted support rather than general fiscal measures to avoid contributing to the growth of public debt.

The Budget is Going into the Red

As noted by the Council, in the medium term, the fiscal situation is becoming significantly more complicated — the budget deficit remains high (approximately 3–5% of GDP) and is increasing mainly due to defense spending, which should be at least 5% of GDP starting in 2027.

At the same time, fiscal space is rapidly shrinking — if it is still positive in 2027, it will become negative starting in 2028 without changes in policy and will worsen in subsequent years. The situation is further complicated by already approved measures, such as in healthcare and education, for which funding has not been secured.