The budget-2026, which is being considered by parliament this week in its final reading with its draconian cuts, has not been criticized only by the lazy.
The Ministry of Finance took the floor last week to defend itself – at the Saeima Committee on Long-Term Development, the agency led by Arvils Ašeradens ("New Unity") explained how state expenditures will be directed towards investments and will affect economic growth.
Baltic Outsider
According to the Ministry of Finance, GDP growth is achieved through the management of public finances, which, in turn, are directed towards providing public services, stabilizing economic cycles, and increasing the potential of the economy.
In terms of productivity per worker employed in the Latvian economy, we are currently not in the best situation compared to, say, 2021, when it jumped by more than 8%. But it is also not like in 2020 – with a decline of 2%. The years 2025-26 are marked by moderate growth of over 2%, and this is also forecasted until 2028.
What is concerning is that compared to other Baltic states, the productivity of the Latvian worker is the lowest. Although this trend has been present since 2005, Lithuania and Estonia have been pulling ahead of us, competing with each other, so to speak, nose to nose.
"In 2025, growth resumed," states the Ministry of Finance, "with a significant contribution from investments, including government investments... providing a multiplicative effect on the growth of private investments as well." In 2025, private consumption will account for the largest share of the gross domestic product, about 55%. Public consumption will make up about 20%. Private investments will account for 16.7%, and government gross capital formation will account for 6.3%.
The latter exceeded 2.5 billion euros this year, reaching the highest level in two decades. In the next couple of years, it will grow further, surpassing the 3-billion mark in 2027. Approximately three-quarters of these amounts are provided by the central government, with the rest coming from municipalities.
Merging Defense and Economy
Defending the state from the enemy in 2026 will cost the budget 2.216 billion euros, and defense potential has been declared a top priority. However, a closer look at the financial documents for the coming year reveals that the Ministry of Defense ranks only fourth among departmental programs. A disproportionately larger share of the budget is occupied by social protection with its 6.109 billion. This is followed by expenditures on general government services – 2.436 billion, and economic activity – 2.537 billion. Among the billion-dollar sectors, education stands out with 1.335 billion and public order and safety with 1.059 billion.
Of course, military spending has become the champion in absolute growth – plus 28.9%. However, Latvian officials have not been left behind either – expenditures on general government services increased by 14.3%. Meanwhile, management in territories and housing will receive 27% less, and economic activity will receive 15.3% less.
Nevertheless, the Ministry of Finance believes that starting in 2026, defense spending will begin to contribute to GDP by creating a military-industrial sector, with investments initially equaling current military expenditures and then exceeding them. As a result, in the medium term (2027-28), we can expect 3% of GDP to be generated by the defense industry.
Year of Capital Investments
The strategy of the Ministry of Finance for 2026 is to continue increasing investments while simultaneously reducing everyday expenses.
Thus, 1.086 billion euros (+13.3%) will be spent on creating fixed capital, and 1.299 billion (+16.3%) on capital expenditures. The total remuneration in the public sector will slightly increase to 1.995 billion (+1.4%). At the same time, the amount for purchased goods and services will decrease to 1.24 billion (-3.7%).
The leader in investments in 2026 among civilian sectors is expected to be infrastructure – 353.3 million euros will be spent on it (30.7 million or 9.5% more than in 2025). Of this, 200.2 million is earmarked for continuing Rail Baltica (see p. 6). Another 142.7 million is for maintaining and developing state roads. They promise to reduce logistics costs, which will increase the competitiveness of other sectors...
However, before Brussels, any amount in this sector can be justified by its dual purpose in the context of so-called defense mobility.
Overall, if we return to the military-industrial complex, national defense enterprises are allocated no less than 30% in large procurements, which should increase demand for local services and production. In particular, the driver of growth will be the equipment of the NATO training ground "Celia," as well as investments in cybersecurity.
Small but Positive
Overall, assessing the impact of budget investments on GDP growth, the Ministry of Finance promises to "create a small but positive fiscal impulse to the economy of about 0.3% of GDP."
"The budget profile is clearly aimed at development," believe the officials of A. Ašeradens' agency, "at investments, focusing on strengthening defensive capabilities, transport infrastructure, and digitalization, rather than on consumption projects. Digital transformation will occur horizontally, covering many agencies and public sector systems."
Chairman of the Long-Term Development Committee Uģis Mitrevics noted that in all their budget votes, deputies are now bound by commitments to the climate agenda, the "green course." "We ourselves in the committee have considered biodiversity, preserving water quality... In the social sphere, we can do not so much."
– The picture here is bleak, – stated the representative of the National Alliance regarding the situation with "human capital," or demographics. "How can we then promise an economic breakthrough to our residents?" the politician posed a rhetorical question…
