RIGA, July 9 (LETA) - The Ministry of Finance has lowered Latvia's gross domestic product (GDP) growth forecast for 2026 and 2027 to 2 percent, LETA was told at the ministry.

The Ministry of Finance has updated its indicative medium-term macroeconomic and fiscal forecasts, taking into account the latest economic trends and the geopolitical situation. The forecasts indicate slower economic growth and higher inflation than projected in February of this year, while also outlining the potential scope of fiscal space for the coming years.

The macroeconomic forecasts are based on GDP data for the first quarter of 2026 and short-term macroeconomic indicators available as of early June. Given the sharp rise in oil and other energy prices following the escalation of the conflict in the Persian Gulf, disruptions in supply chains, and growing uncertainty, Latvia's economic growth forecast for this year has been lowered by 0.6 percentage points to 2 percent, and for 2027 by 0.7 percentage points to 2 percent, compared to the February 2026 forecast.

By the end of the forecast period, economic growth rates will return to the previously projected level of 2.5 percent, according to the Ministry of Finance.

The inflation forecast for this year and next has been raised by 0.7 percentage points to 3.6 percent and 3.3 percent, respectively, while inflation is expected to stabilize at 2.3 percent by the end of the forecast period.

Forecasts for employment and unemployment are primarily influenced by the demographic situation, and there are no significant changes in this area compared to the February 2026 forecast, according to the Ministry of Finance. Unemployment is projected to be 6.6 percent in 2026, with a further decline in the coming years, while the number of employed persons will remain stable, with a slight downward trend.

The rate of wage growth has been adjusted to account for a sharper-than-expected slowdown in wage growth during the first quarter of this year. Overall, according to the Ministry of Finance's projections, the average monthly gross wage could increase by 5.5 percent to EUR 1,915 in 2026, and a similar rate of wage growth is also projected for the medium term, as it continues to converge with the rate of productivity growth.

The general government deficit in 2026 is projected to be slightly lower than estimated in early April of this year while drawing up the 2026 progress report on Latvia's Fiscal Structural Plan for 2025-2028, namely 2.9 percent of GDP.

The Ministry of Finance explains that the improvement in the balance is primarily driven by a higher forecast for non-tax revenues, including dividend payments, based on actual performance data. At the same time, lower-than-expected tax revenues and higher special budget expenditures, based on the updated macroeconomic development scenario, are having a negative impact on the budget balance.

In the medium term, under a no-policy-change scenario, the deficit is projected to be higher than forecast in April of this year, at 4.2 percent of GDP in 2027, 5.4 percent of GDP in 2028, 4.3 percent of GDP in 2029, and 3.5 percent of GDP in 2030, according to the Ministry of Finance.

This is primarily due to a reduced tax revenue forecast resulting from weaker economic growth, which is expected to lead to slower growth in consumption and the wage bill, explains the Ministry of Finance. At the same time, the spending forecast for social benefits, primarily old-age pensions, has also been increased. This was influenced both by the automatic pension recalculation carried out on April 1, 2026, for 141,000 retirees, which increased budget expenditures, and a higher indexation coefficient based on a higher inflation forecast. The projections include defense spending in line with NATO's requirement - at 5 percent of GDP starting in 2027, adjusted in line with nominal GDP forecasts.

Following the expiration of temporary tax measures, including the abolition of the bank solidarity levy in 2028 and the return of the state social insurance contribution rate for the second pension pillar to 6 percent in 2029, the general government revenue-to-GDP ratio will decline from 43.6 percent of GDP in 2025 to 37.9 percent of GDP in 2030, according to the Ministry of Finance.

In contrast, under a no-policy-change scenario, the share of total expenditures in GDP will not decline as rapidly as revenues - from 46.1 percent of GDP in 2025 to 41.4 percent of GDP in 2030 - driven primarily by spending on social benefits, capital investment, and defense provisions.

Compared with the 2026 progress report, the general government debt-to-GDP ratio has increased in the medium term, based on nominal GDP projections. According to the Treasury's estimate, general government debt is projected to be close to 48 percent of GDP at the end of 2026, and 54 percent of GDP at the end of 2030 under a no-policy-change scenario.

According to current projections, fiscal space will be negative in the medium term, at EUR 28 million in 2027, EUR 279.1 million in 2028, EUR 237.8 million in 2029, and at EUR 936.2 million in 2030.

The projections were prepared in fulfillment of the tasks set out in the declaration of the government led by Prime Minister Andris Kulbergs (United List). They also include an estimate of fiscal space in accordance with fiscal rules.

The Ministry of Finance will update its forecasts for macroeconomic and fiscal indicators, refine the budget balance targets, and adjust the calculation of fiscal space this fall in accordance with the timetable for drafting Latvia's 2027 budget and the budget framework for 2027, 2028, 2029, and 2030.

At the same time, the Ministry of Finance notes that it is already becoming apparent that decisions will be needed on measures to reduce expenditures and increase revenues to ensure that fiscal indicators remain consistent with EU and national fiscal rules.