Financing high defence spending, improvements in health care and reductions in old-age poverty while containing the fiscal deficit will require raising spending efficiency, reallocating spending and increasing tax revenue, including from income, property and environmental taxes and by strengthening tax enforcement.
Accelerating the green transition will require strengthening carbon pricing and facilitating the expansion of renewable energy supply, while supporting vulnerable households and workers that need to move jobs and adapt to changing skill requirements.
Improving health outcomes will require investing more in public healthcare, raising spending efficiency by accelerating the digitalisation of healthcare services, and strengthening preventive measures, including through higher excise tax rates on alcohol, tobacco and sweetened beverages.
Reducing the administrative burden and raising spending efficiency will require further simplifying and digitalising administrative procedures and improving data sharing and policy impact evaluation across the public administration.
OECD Economic Surveys: Latvia 2026
The economy has started to recover from the consequences of the energy crisis following Russia’s war of aggression against Ukraine. However, weak private investment and innovation, and a shrinking working age population continue to weigh on potential economic growth.
The economy will continue to recover due to rising domestic demand. Rising wages will support private consumption, while higher energy prices due to the conflict in the Middle East mitigate the rise in real incomes. Business investment will continue to improve due to strong public investment growth. Exports will recover gradually due to stronger growth of the EU economy. Inflation will remain high due to higher energy prices and strong wage growth. Downside risks are related to an escalation of geopolitical tensions or the conflict in the Middle East, mainly through higher oil and gas prices and weaker export demand from EU countries.
Financial market risks remain contained but there is room to strengthen competition and deepen capital markets to improve access to finance. The banking system is well capitalised and highly profitable. However, lending remains subdued despite rising deposits and significant improvements in the insolvency and anti-money-laundering framework. Reducing fees for refinancing business loans could help raise competition and reduce lending rates. Listing larger state-owned firms could help attract institutional investors and should be combined with raising investment and concentration limits for private pension funds, while ensuring appropriate risk management, to deepen capital markets.
Convergence to OECD average living standards has slowed since the global financial crisis. Besides low access to finance, a high administrative burden, regulatory barriers to competition and informality have hampered business dynamism, investment and innovation. Many high-skilled young adults have left to work abroad, which has exacerbated skilled labour shortages.
Structural reforms are key to raise productivity and living standards, and help finance rising defence spending. Strengthening the capacity of the public administration, including through digitalisation and better resource management, and simplifying regulations and administrative procedures is key to support investment, innovation and economic growth. This should be combined with strengthening competition enforcement and the fight against informality and corruption. Improving weak health outcomes to allow older and more experienced workers to work longer, while strengthening incentives for women with children to raise labour supply, would help address labour shortages. Accelerating the green transition would raise energy security and lower energy prices but should be combined with expanding active labour market policies and improving training quality to support workers who need to move jobs.
Gap in GDP per capita (in constant 2020 PPPs) against the OECD average, %
Source: OECD National Accounts database.
Source: OECD Economic Outlook 119 database.
Financing high defence spending, improvements in healthcare and reductions in old-age poverty while containing the fiscal deficit will require raising tax revenue and spending efficiency and reallocating spending. The tax burden should be shifted from labour to other income, property, and environmental taxes.
Public finances should be strengthened to stabilise public debt, which increased to 47% of GDP in 2025. Defence spending will be raised to 4.7% of GDP in 2026 to address national security concerns related to the war in Ukraine. Improving health outcomes and reducing old-age poverty will require further spending. Addressing these needs while stabilising public debt will require raising spending efficiency, reallocating spending and increasing tax revenue, including from income, property and environmental taxes, and by strengthening tax enforcement.
Improving performance and multi-annual budgeting would help raise spending efficiency. Performance‑informed budgeting exists, but performance data is only weakly related to budget allocations, and accountability could improve. Annual budgets should align better with multi-annual expenditure ceilings.
The tax and benefit system reduces incentives to formalise work. Although the shadow economy has decreased since 2022, it remains above 21% of GDP. This is mainly due to the practice of envelope wages, where workers earn the minimum wage and receive top-up payments in cash. Reducing the labour tax wedge for lower incomes and withdrawal rates of social benefits would help reduce informality.
Further strengthening tax enforcement and the fight against corruption and money laundering can do much to broaden the tax base. Making the filing of a personal income tax declaration and e-invoicing mandatory, while further broadening the electronic payment of wages, would help reduce tax evasion. Moreover, raising trust in institutions is key to improve the tax morale. Complementing the lobbying register with a legislative and regulatory footprint would help raise transparency and trust.
Greenhouse gas emission (GHG) reductions have slowed since 2005. To reinvigorate the green transition, a more rapid expansion of renewable energy supply should be combined with measures to reduce net emissions in transport, buildings, agriculture and land use, land use change and forestry (LULUCF) sectors.
Low effective carbon prices reduce incentives for GHG emission reductions. Gradually phasing out tax expenditures and subsidies for fossil fuels would help reduce emissions. As poorer households would be most affected by higher fuel prices, they should be compensated through targeted transfers. In addition, active labour market policies and training should be improved to support workers that need to move jobs during the green transition.
Expanding renewable energy supply is key for reducing exposure to global oil and gas price increases. Limited grid capacity has hampered the development of onshore wind and electricity storage parks. Raising investments in the grid to improve integration into the EU electricity market should be combined with strengthening price signals and raising awareness among consumers to better balance demand and supply. Better sharing the benefits of renewables with local communities could raise public acceptance.
Stronger efforts are needed to reduce transport and building emissions. Implementing plans to establish a metropolitan transit authority in the Greater Riga area would improve coordination across municipalities and public transport quality, reducing emissions from private commuting. Supporting modular renovation solutions could help reduce costs and facilitate renovations of multi-apartment buildings.
Emissions from agriculture and LULUCF have strongly increased since 2005. Drained organic soils and peat extraction have contributed to rising net emissions. Initiating rewetting of drained peatlands where feasible, while fostering the wet cultivation of crops, should be a key priority. Improving forest management and the decaying drainage infrastructure would help reduce emissions and improve adaptation to climate risks.
Weak health outcomes weigh on well-being and labour supply. Investing more in public healthcare, raising spending efficiency and strengthening preventive measures are needed to improve health outcomes.
Limited capacity in the public healthcare system restricts access to healthcare for households who cannot afford private healthcare. This contributes to high treatable mortality rates. Raising public spending on healthcare, which is among the lowest across the OECD, would help reduce waiting times in the public system and expand the coverage of services and reimbursed medicines.
Accelerating the digitalisation of healthcare would help raise spending efficiency. Despite good progress, coverage of patient records in the e-health system is still incomplete. Raising coverage, including by better enforcing the requirement for care providers to submit information for private patients, would help allocate public funds according to needs and improve treatment quality. Strengthening competition by abolishing restrictions on the location and number of pharmacies and fostering joint procurement of hospitals would help reduce prices for medicines and other medical supplies.
Preventable mortality is high due to high consumption of alcohol and tobacco, unhealthy diets and lack of exercise. Continuing to raise excise tax rates on alcohol, tobacco and sweetened beverages, introducing a tax on added sugar, and supporting physical activity and nutrition counselling would help improve health outcomes.
Healthy life years at birth, 2023 or latest year available
Source: Eurostat.
Despite recent progress, the perceived effectiveness of the public administration remains low. Further simplifying and digitalising administrative procedures and improving data sharing and policy impact evaluation can do much to reduce the administrative burden and raise spending efficiency.
Overlapping functions and weak coordination across the public administration, and skill shortages reduce government efficiency and increase the administrative burden. Conducting thematic and cross-sectoral functional audits with a view to consolidate public bodies would help identify overlaps and reduce the public wage bill. To reduce operational costs and improve service quality, the planned shared service centre should be implemented and its use should be made mandatory. Improving compensation for mid‑level managers and professionals and expanding training opportunities would help attract and retain talent and adapt to changing skill needs.
The digitalisation of many public services has reduced the administrative burden, but room for improvement remains. Data sharing across the public administration remains limited, complicating the implementation of one-stop shops for administrative procedures. The use of data for impact evaluation of policies should be strengthened to raise the effectiveness and efficiency of public spending. Accelerating the implementation of the central data exchange platform and facilitating the use of data for policy analysis are key for reducing the administrative burden and raising spending efficiency. Better use of data could also help make inspections and reporting requirements more risk based. Improving stakeholder engagement to review, simplify and reduce the existing stock of regulations is also crucial.
Improving public procurement and infrastructure planning and implementation is essential for raising spending efficiency. Consolidating purchasing bodies and strengthening centralised procurement should be combined with measures to reduce the administrative burden, raise transparency and foster competition. Using cost-benefit analysis for all major infrastructure projects and improving risk management in infrastructure procurement would support the cost-efficient planning and implementation of large infrastructure projects.
Despite the 2021 territorial reform, capacity constraints persist in sparsely populated and remote municipalities. Improving cooperation across municipalities and transferring administrative tasks that require less local counselling to the central government, while using market values to raise revenue from property taxes, would help strengthen administrative capacities.
General government production cost, % of GDP, 2024 or latest available year
Source: OECD Government at a Glance 2025.