The Fiscal Discipline Council (FDP) has concluded that additional funding for Latvia’s defence in next year’s state budget has been secured mainly by increasing public debt, rather than by reducing expenditures. The Council made this assessment after reviewing the Ministry of Finance’s draft state budget for 2026 and the medium-term budget framework for 2026–2028.
According to the FDP, both EU and national fiscal requirements are formally met in the draft budget. However, the government has chosen “the easiest path” — to boost defence spending by borrowing more.
In its supervisory report, the FDP urges the government to set more ambitious targets for reducing expenditure and to find structural, sustainable solutions for financing defence spending so that it does not rely on growing debt.
The Council notes that the budget is being prepared at a time when geopolitical tensions in the region are increasing, and spending on national security and defence has become an absolute priority. In July 2025, the EU Council activated the Stability and Growth Pact’s general escape clause, allowing member states — including Latvia — to temporarily deviate from fiscal discipline rules in order to increase defence spending.
However,
the FDP warns about the growing public debt and rising interest payments,
which could reduce budget flexibility and threaten fiscal stability after 2029, especially if economic growth slows compared to projections.
For this reason, the FDP stresses the need to develop a structural and sustainable mechanism for financing defence expenditures. Otherwise, it will be impossible to both reduce or maintain debt at a sustainable level and meet commitments on defence spending while continuing to fund other key sectors such as healthcare and education.
The FDP points out that Latvia’s general government debt is projected at 49% of GDP in 2025, and — without policy changes or faster growth — will rise to 51% in 2026 and 55% in 2027–2028. Interest payment forecasts indicate that debt servicing costs will increase sharply, reducing fiscal space for other national priorities. Although Latvia currently remains below the EU’s 60% of GDP debt threshold, the Council warns that the growing debt burden will require tighter control of spending and improved tax collection.
FDP Chair Inna Šteinbuka emphasized that during future growth periods, Latvia must gradually reduce its debt and shift budget priorities toward economic competitiveness, including higher investment in research and development.
The FDP notes that the budget framework is based on the approved macroeconomic forecasts,
which project GDP growth of 1.1% in 2025 and 2.1% in 2026. Consolidated budget tax revenues in 2026 are planned at 15.2 billion euros, a 5.4% increase compared to 2025. The FDP’s own forecasts are similar.
In 2024, tax revenues grew faster than nominal GDP — by 5.8% in the first half of the year, compared to nominal GDP growth of 4.4%, which the Council says may reflect improved efficiency at the State Revenue Service.
Under the government’s public sector efficiency plan, total expenditure for 2026 has been reduced by 171.1 million euros, of which 58.7 million euros relates to adjustments in municipal tax reform compensation. The FDP notes that this is not a structural reduction, meaning that the actual expenditure cut amounts to only 112.4 million euros.
Given the limited fiscal space in the coming years,
the FDP calls on the government to set more ambitious expenditure reduction targets to curb debt growth
and rising debt servicing costs.
The Council also points out that defence spending is being financed under the EU’s general escape clause, including 971.5 million euros from the SAFE instrument between 2026 and 2028. The total amount may increase due to budget reallocations.
Priority funding is set at 693.5 million euros in 2026, with 65% allocated to defence and internal security, 724.8 million euros in 2027 (70% for defence), and 935.9 million euros in 2028 (77% for defence). While this flexibility temporarily eases fiscal constraints, the FDP warns it will impact the overall budget balance and debt in the long term and stresses the need for structural measures to ensure fiscal sustainability.
The Council also calls for broader implementation of performance-based budgeting to increase efficiency in public spending.
At the same time,
the FDP warns of significant medium-term risks to growth and fiscal stability,
including geopolitical tensions, the continuing effects of Russia’s war in Ukraine, changes in U.S. trade policy and new tariffs, potential state enterprise liabilities, the costs of the Rail Baltica project, and rising debt servicing expenses. These factors, the Council says, could limit the government’s ability to manage the deficit and fund other national priorities.
The Cabinet of Ministers is scheduled to review the 2026 general government budget plan prepared by the Ministry of Finance on Tuesday, before submitting it to the European Commission for approval. The 2026 budget draft package will be submitted to the Saeima on Wednesday, the 15th of October.
The Fiscal Discipline Council is an independent collegial institution tasked with overseeing compliance with Latvia’s fiscal rules. The Saeima has appointed as Council members: Professor Inna Šteinbuka (University of Latvia), Andrej Jakobson (Riga Business School, RTU), Ülo Kaasik (Vice-President, Bank of Estonia), economist Ivars Golsts, and Professor Jānis Priede (Dean, Faculty of Economics and Social Sciences, University of Latvia).
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