Latvia Faces Growing Budget Deficit as Tax Revenues Fall Short of Expectations

Latvian authorities’ optimistic economic projections for the 2025 budget are coming under pressure as tax revenues fail to meet targets, raising concerns over a widening budget deficit.

In the first five months of 2025, Latvia’s consolidated budget collected €5.6 billion in taxes—5.7% more than the same period last year. However, data from the Central Statistical Bureau reveals this amount is 1.4% below the planned target, according to Janis Hermanis, finance and tax expert at the Latvian Employers’ Confederation (LDDK).
If the deficit reaches 1% of GDP, it would amount to approximately €420 million; at 1.4%, the shortfall could total around €580 million. This contrasts sharply with the first five months of 2024, when Latvia recorded a budget surplus of €253 million, or 0.6% of GDP.
While the current figures are not alarming, they signal a troubling trend. Additional revenues are expected throughout the year, but ongoing expenditures suggest the government is unlikely to meet its fiscal goals. Hermanis noted that “in April, the deficit was close to 2% of GDP, but after European funds arrived in May, it narrowed to about 1%.”
The shortfall is largely attributed to overly optimistic assumptions during budget planning. Authorities forecasted economic growth exceeding 2%, nearing 3%, but current estimates suggest growth will be closer to 1%. “The budget execution is lagging behind expectations,” Hermanis said.
On a brighter note, corporate income tax revenues have outperformed projections by €100 million, and personal income tax collections remain strong. However, consumption taxes—including value-added tax (VAT) and excise duties—have stagnated at last year’s levels instead of rising by the anticipated 10%.
Hermanis explained, “When you combine these figures, it becomes evident that a deficit is inevitable. The Ministry of Finance recognizes that the situation will not unfold as planned.”
The expert also pointed to taxpayer frustration as a factor dampening motivation to pay taxes. “People see government spending on supporting Ukraine, airBaltic, Rail Baltica, high salaries for state company executives, and on the Society Integration Fund—which no longer effectively integrates people since those willing have already done so,” he concluded.