Latvia can afford a higher budget deficit in the coming years, as the security situation requires a rapid increase in defense spending, Jānis Priede, Chair of the Fiskālās disciplīnas padome (Fiscal Discipline Council, FDP), Professor at Latvijas Universitāte and Dean of its Faculty of Economics and Social Sciences, told LETA in an interview.
At the same time, he stressed that this is only a temporary solution — the European Union’s (EU) exception clause is in force until 2028. Priede explained that in the long term, the stability of public finances will depend on whether the country is able to review expenditures, including reassessing the basket of public services provided by the state, while simultaneously increasing revenues by fostering a more productive economy and higher added value.
Priede said that, in the FDP’s assessment, the budget still complies with all established requirements. At the same time, the FDP has indicated the trajectory toward which developments are heading. “We have therefore also pointed out concerns about how sustainable it is to finance current needs through borrowing in reedbdy. There is no doubt about those needs — they are related to defense. It is good that there is no political debate at all about this issue,” Priede said.
Regarding the long-term trajectory, however, the FDP has concerns, since the exception clause allowing the budget deficit to deviate from the norm by 1.5% is valid only until 2028. Priede explained that by then Latvia will have reached 5% of GDP in defense spending, but it is necessary to understand the long-term perspective — how all of this will be paid for.
Asked how long Latvia can afford to live with a deficit above 3% without risking the confidence of financial markets and an increase in borrowing costs, Priede said he would not dramatize the situation. He emphasized that the exception clause provides an opportunity to cope with current challenges, primarily defense expenditures, which are the main reason for Latvia’s borrowing.
“We do not see immediate negative consequences from international rating agencies. We meet and speak with them regularly. As a country, we are able to provide a sound justification for the urgent and objective needs in defense and outline potential trajectories for economic development,” Priede said.
He expressed the view that everything should remain under control at least until 2028,
but the FDP is already thinking about what will happen afterward — what the budget will look like, what will be in the expenditure section, whether the country is ready to objectively reassess its spending, and how it will generate higher revenues in the future.
Asked whether the EU’s security exception clause has effectively allowed difficult decisions in other areas — such as reducing public administration spending, tax changes, or structural reforms — to be postponed, Priede said that the FDP has officially expressed its opinion, to some extent supporting business organizations that have called on the government to be more ambitious in reviewing its expenditures already now.
“My view as a professor is that it is important to understand what kind of expenditures we are talking about. There are objective needs — defense, education, healthcare, security — these are the core functions of the state. Then there are targeted expenditures that are aimed at the country’s future development, such as building human capital or policy initiatives related to investment and future technologies,” Priede explained.
He acknowledged that public discussions about reducing spending are often focused mainly on figures. For example, business organizations have called for €800 million in expenditure cuts. In Priede’s view, this may be a justified number to balance the budget, but the key question is how to achieve it.
“In my opinion, one dangerous approach to reducing spending is to continue doing everything we are currently doing, just with less funding — meaning all functions remain, but are performed worse. I believe that is the greatest danger,” Priede said.
At the same time, he noted that a positive development is the increasing willingness to discuss the state’s basket of public services — what the state actually does. Priede suggested that there may be areas that could be discontinued or removed from the basket, allowing resources to be properly invested in what remains.
For example, certain functions could be transferred to the private sector. Priede emphasized that it would make little sense to continue doing everything as before, only worse, since a poorly funded service provides little value.
Therefore, Priede stressed that the necessary direction is to fundamentally reassess the functions provided by the state and, in this way, seek efficiency gains and identify where spending can be reduced.
“I believe that expenditure reduction must always be assessed substantively. If we look at an individual — a person borrows money to buy a car for private use. That may bring pleasant emotions until the payments and repairs begin. But if someone borrows money to invest in their education, it provides an opportunity to earn more in the future,” Priede said.
Read also: Norway sees increased Russian intelligence activity in Arctic