Latvia is currently able to sustain a higher budget deficit due to the demand for increased defense spending, according to Jānis Priede, Chair of the Fiskālās disciplīnas padome (Fiscal Discipline Council, FDP) and Professor at Latvijas Universitāte. Priede, who also serves as Dean of the Faculty of Economics and Social Sciences at the university, shared his assessment in a recent interview with LETA.
Yet, this situation is considered temporary. The European Union’s exception clause, which allows for deviation from standard deficit norms, is currently in effect but will expire in 2028. Long-term financial stability, Priede explained, will depend on Latvia’s ability to reassess public expenditures and increase revenues through a more productive economy.
The FDP currently assesses that the Latvian budget complies with established requirements, but has also voiced concerns about the sustainability of financing needs through borrowing. These needs, Priede confirmed, are primarily related to defense, a topic on which there is currently no political disagreement.
Looking ahead, the FDP is already considering the financial landscape beyond 2028. This includes evaluating the future budget structure, expenditure priorities and strategies for generating increased revenue.
Priede indicated that the EU’s exception clause has potentially delayed difficult decisions regarding areas like public administration spending, tax reforms, and structural changes. The FDP has expressed support for calls from business organizations urging the government to more aggressively review expenditures.
Priede, as a professor, emphasized the importance of distinguishing between essential and targeted expenditures. Core functions of the state – defense, education, healthcare, and security – are distinct from investments in future development, such as human capital and new technologies.
While acknowledging discussions around expenditure cuts, such as the €800 million proposed by business organizations, Priede cautioned against simply reducing funding across the board. He warned that maintaining existing functions with less funding could lead to diminished service quality, which he considers the “greatest danger.”
A more constructive approach, Priede suggested, involves reassessing the state’s overall role and identifying areas where functions could be discontinued or transferred to the private sector. He stressed the importance of efficiency and avoiding poorly funded services.
Priede concluded by stating that expenditure reductions should be evaluated based on their substantive value, drawing a parallel between investing in education for future earnings and the potential drawbacks of borrowing for non-productive purposes.
Frequently Asked Questions
What is the current situation regarding Latvia’s budget deficit?
Latvia can currently afford a higher budget deficit due to the need for increased defense spending, but this is considered a temporary solution tied to the EU’s exception clause, which is in force until 2028.
What are the FDP’s concerns regarding Latvia’s financial future?
The FDP has concerns about the sustainability of financing current needs through borrowing and is already considering the financial implications beyond 2028, when the EU’s exception clause expires.
What approach does Jānis Priede suggest for addressing potential budget challenges?
Priede suggests a fundamental reassessment of the functions provided by the state, seeking efficiency gains, and identifying areas where spending can be reduced, while distinguishing between essential and targeted expenditures.
How will Latvia balance the need for increased defense spending with long-term financial stability?
