Government approves draft budget for 2026 with EUR 16 billion revenue and EUR 18 billion expenditure

RIGA - The government on Tuesday approved Latvia's 2026 draft budget, with consolidated state budget revenue planned at EUR 16.064 billion and expenditure at EUR 17.945 billion.

Compared to the 2025 budget, the increase in state budget revenue in 2026 exceeds the increase in expenditure. Budget revenue is projected to increase by EUR 944.6 million year-on-year, while expenditure is projected to grow by EUR 804.3 million.

The government basic budget is planned to raise EUR 10.9 billion in revenue, while expenditure in the basic budget is projected at EUR 13.2 billion. The special budget, on the other hand, is planned to receive EUR 5.5 billion in revenue, while expenditure in the special budget is planned at EUR 5.1 billion.

Latvia's gross domestic product (GDP) next year is forecast at EUR 43.953 billion, so the budget deficit will be 3.3 percent of GDP and public debt will not exceed 55 percent of GDP.

General government spending will fall to 47 percent of GDP next year, down from 47.5 percent this year. At the same time, defense spending will increase whereas total spending will decrease.

Overall, public spending is cut by EUR 171 million next year. EUR 693.5 million have been earmarked for prioritized needs, including EUR 448.3 million for defense and security.

The Finance Ministry notes that the 2026 state budget and the medium-term budgetary framework for 2026-2028 have been prepared in line with European Union (EU) and national fiscal rules.

Next year's budget includes additional investment in national security, support for families with children and quality education. The budget also provides for more than EUR 1 billion in EU funds, as well as a EUR 151.4 million increase in local government revenues, strengthening the resilience of the state and society, the Finance Ministry notes.

The Finance Ministry explains that the 2026 budget is based on cautious macroeconomic forecasts developed in June this year. They foresee moderate economic growth and a gradual easing of inflation over the medium term. The Finance Ministry expects the construction, manufacturing and trade sectors to be the main drivers of economic growth this year. After several years of stagnation, lending to businesses has started to grow again, with the corporate loan portfolio growing by 16 percent in August 2025 compared to August 2024.

Economic growth this year is forecast at 1.1 percent, while next year's budget projects growth of 2.1 percent, rising to 2.2 percent in the following years.

Latvia's inflation forecast for 2025 has been raised to 3.5 percent, mainly due to climbing food prices and heating tariffs. Inflation is projected to gradually decline in the coming years, to 2.3 percent in 2026 and 2.2 percent thereafter.

The general government deficit is projected at 2.9 percent of GDP in 2025, rising to 3.3 percent in 2026 and remaining around 3.6 percent in the medium term. The Finance Ministry says that the increase in the deficit is due to growing funding for national defense and security. This expenditure is made under the flexibility mechanism of the EU's fiscal rules - the national defense exemption clause - which allows member states to temporarily exceed the limits on deficit and expenditure growth if additional funds are earmarked specifically for defense.

Overall, spending has been cut by EUR 171 million next year. Priority measures are being allocated EUR 693.5 million, including EUR 448.3 million for defense and security.

The Ministry of Finance informed LETA that in 2027 it is planned to allocate EUR 507.7 million to defense, while in 2028 - EUR 720.5 million. On September 23 this year, the government decided to allocate an additional EUR 128 million to strengthen defense capabilities, with the funding earmarked under a national exception clause. Under its terms, Member States can temporarily exceed the deficit and expenditure growth thresholds, subject to limits, if the excess is linked to defense investment.

The funding for defense and internal security will allow defense spending to reach 4.9 percent of GDP next year, 5 percent in 2027 and 4.9 percent in 2028. According to the Finance Ministry, these funds will ensure the strengthening of the National Armed Forces' combat capabilities, including the acquisition of equipment and machinery, training of soldiers and conscripts, as well as the upgrading of capabilities in line with modern defense requirements. Such solutions meet the conditions of the exception clause and are essential to strengthen the national defense capabilities.

The priorities identified by the government for next year's state budget are security, support for families with children and education. To ensure funding for these, state budget expenditure has been reduced, with additional funding of EUR 233 million for 2026.

The Finance Ministry points out that the review of public spending has enabled a reduction of more than EUR 800 million in public spending over the medium term to 2028. It should also be noted that the labor tax reform implemented from January 1 this year, aimed at reducing the tax burden, as well as other tax simplification measures, reduced state budget revenue by EUR 1.3 billion in the medium term.

Of the total additional funding of EUR 693.5 million for priority measures in 2026, EUR 45 million is earmarked for education, including the introduction of the Program School funding model and an increase in support staff.

Support for families with children will receive EUR 94.8 million in the coming year, including to improve material support for families with children, children in out-of-family care, maternal and child health, access to health services and medicines for children.

In addition, other priority measures will receive EUR 105.4 million in 2026 to ensure palliative care services and strengthen access to medicines, the MoF said. In 2026, the state budget will continue to support farmers, and the value added tax rate will be reduced for key food products - bread, milk, eggs and fresh poultry meat.

EU funds and the Recovery Fund (RF) will continue to be one of the most important drivers of Latvia's economic growth in 2026, underlines the MoF. As this year, the volume of EU and RF investments in 2026 will be at its highest ever level in Latvia, exceeding EUR 1 billion, almost twice as much as in previous periods.

The Finance Ministry notes that these funds will continue to be invested in strengthening security, regional development, infrastructure, productivity, boosting exports and promoting the competitiveness of human capital.

A package of legislation related to Latvia's 2026 budget is expected to include nearly 50 bills. Finance Minister Arvils Aseradens (New Unity) is due to deliver the draft budget to the Saeima this Wednesday, October 15.