Riga, Latvia, February 13, 2026 — Latvia has room to increase its budget deficit in the short term to fund a rapid buildup of its defenses, but a reckoning is coming. That’s the assessment from Jānis Priede, chair of the Fiscal Discipline Council (FDP), professor at the University of Latvia, and Dean of its Faculty of Economics and Social Sciences.
Defense Spending Buys Breathing Room, But Long-Term Fiscal Health Is Key
Latvia can absorb increased borrowing now, but must reassess public spending and boost economic productivity to avoid future trouble.
- The EU’s exception clause allowing for higher deficits is temporary, lasting only until 2028.
- By 2028, Latvia is projected to spend 5% of its GDP on defense, raising questions about long-term affordability.
- A fundamental reassessment of state functions and a focus on economic productivity are crucial for sustainable finances.
- Simply cutting budgets across the board without strategic review could diminish the quality of essential services.
Can Latvia afford to borrow more to bolster its security? The answer, according to Priede, is a qualified yes—for now. The current geopolitical climate justifies increased defense spending, and the European Union’s rules offer some flexibility.
A: “The greatest danger is to continue doing everything we are currently doing, just with less funding—meaning all functions remain, but are performed worse.” – Jānis Priede
However, this leeway is not indefinite. The EU’s exception clause, which allows a budget deficit to deviate from the norm by 1.5%, expires in 2028. Priede emphasized the need to plan for a future where borrowing can’t simply cover current needs. “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,” he said.
Balancing Security Needs with Fiscal Prudence
Priede doesn’t anticipate immediate negative consequences from international rating agencies. He noted that Latvia can “provide a sound justification for the urgent and objective needs in defense and outline potential trajectories for economic development.” The FDP regularly communicates with these agencies to maintain confidence.
But the council is already looking beyond 2028, considering what the budget will look like, what expenditures will be prioritized, and how the country will generate higher revenues. A key question is whether Latvia is prepared to objectively reassess its spending priorities.
The EU’s security exception, Priede suggested, may have inadvertently delayed difficult decisions in other areas, such as reducing public administration costs, reforming taxes, or implementing structural changes. The FDP has voiced support for calls from business organizations urging the government to be more ambitious in reviewing expenditures now.
Rethinking the Role of the State
Priede, as a professor of economics, stressed the importance of distinguishing between essential and discretionary spending. “There are objective needs — defense, education, healthcare, security — these are the core functions of the state,” he explained. “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.”
He cautioned against across-the-board cuts, arguing that simply reducing funding for all programs would diminish the quality of vital services. Business organizations have proposed €800 million in expenditure cuts, a figure Priede believes could be justified to balance the budget, but only if implemented strategically.
A more productive approach, Priede argued, is to fundamentally reassess the functions provided by the state. Some functions could be discontinued altogether, or even transferred to the private sector, freeing up resources for essential services. “It would make little sense to continue doing everything as before, only worse, since a poorly funded service provides little value,” he said.
Priede drew an analogy to personal finance: borrowing to invest in education is a sound strategy, while borrowing for frivolous purchases is not. “Expenditure reduction must always be assessed substantively,” he concluded.
