Economist: Latvia may face tax hikes over defence funding needs

Gundars Bērziņš, rector of the University of Latvia and an economist, said on TV24's programme "Naudas cena" that in the coming years Latvia will need to find ways to secure necessary defence funding while keeping its fiscal space relatively limited.

According to Bērziņš, one possible but publicly unpopular solution could be raising taxes. Such a step would become relevant if the state fails to sufficiently cut its expenditures. He noted that politicians typically find it difficult to discuss tax increases ahead of elections, since such decisions tend to be unpopular with the public.

Defence spending target: 5% of GDP

The economist emphasized that a major challenge is the requirement to allocate 5% of gross domestic product to defence. This significantly narrows Latvia's fiscal space, and the country will need to sustain this level of funding in the years ahead as well.

Bērziņš explained that defence funds cannot simply be redirected to any project of choice. NATO has set specific criteria determining which expenditures qualify as defence spending and which do not, meaning the state cannot classify expenses as defence-related purely at its own discretion. He added that oversight and audits regularly assess whether spending meets these criteria.

Potential to grow local industry

While such controls make using the funding more complex, Bērziņš said this also creates room for creative solutions. He specifically highlighted the development of a domestic military industry in Latvia — if defence funding were channeled toward building up the local sector and securing orders for Latvian companies, this could also generate economic returns.

However, limitations remain here too, since developing a military industry requires organizing procurement processes and following tender procedures. A political decision alone is therefore not enough to automatically direct defence funds to Latvian companies.