On 3 July 2026, the Council of the European Union adopted a recommendation setting out Latvia's economic, social, employment, structural and budgetary policies for the coming years. The recommendation requires Latvia to adhere to maximum net expenditure growth of 3.6% in 2026, 3.4% in 2027, and 3.3% in 2028, while also pursuing reforms to broaden the tax base, reduce the shadow economy, and boost R&D and social spending.
The fiscal path endorsed by the Council on 21 January 2025 had already set these ceilings, with cumulative net expenditure growth from the 2023 base year not exceeding 19.7% by 2026, 23.8% by 2027, and 27.9% by 2028. The recommendation formally reiterates these targets and links them to the broader policy framework. A national escape clause is activated for 2025-2028, allowing Latvia to deviate from the recommended growth rates to increase defence expenditure. Latvia's defence spending stood at 3.2% of GDP in 2025 and is projected to reach 4.1% of GDP in 2026.
The general government deficit was 2.5% of GDP in 2025 and is projected to rise to 3.3% in 2026 and 4.3% in 2027. Government debt was 46.9% of GDP at end-2025 and is forecast to reach 48.8% by end-2026 and 53.8% by end-2027. The Council highlights that tax revenue at 34.9% of GDP in 2024 remains below the EU average of 39.4%, and the shadow economy is estimated at 21.4% of GDP, requiring further efforts on digital tools and enforcement.
On structural reforms, the recommendation calls for improving company borrowing terms, developing capital markets, and boosting R&D expenditure, as private R&D remains low and patent applications are less than half the EU average. Low public spending on healthcare negatively affects accessibility, and pension adequacy is projected to remain very low over the medium to long term. Implementation of cohesion policy programmes (ERDF, JTF, ESF+, CF) is above the EU average pace, but new investments identified in the mid-term review must be deployed rapidly and effectively.
Stakeholder impact - Latvian government: Must balance fiscal consolidation with increased defence spending and social investments, facing a rising deficit and debt trajectory. - Latvian businesses: Could benefit from improved access to finance and capital market development, but may face higher tax compliance costs as the shadow economy is tackled. - Latvian citizens: May see improved healthcare access and pension adequacy if reforms are implemented, but could experience tax increases or reduced public services due to fiscal constraints. - EU institutions: The recommendation reinforces the EU's fiscal surveillance framework and cohesion policy objectives, with the Commission expected to monitor compliance.
The Council's recommendation is non-binding but forms part of the European Semester. Latvia is expected to report on progress in its next national reform programme. The European Commission will assess compliance and may issue further recommendations.