The climate-fiscal timebomb: Latvia

08 March 2026

Fiscal outlook

Latvia recorded a 1.8% deficit and a debt-to-GDP ratio of 46.6% in 2024.

Deficit measures the level of borrowing in a given year. Debt-to-GDP compares the total public debt to the size of the economy. Both are currently used to determine how much borrowing a member state is allowed to undertake. However, neither measure in itself determines a government’s capacity to sustain higher levels of public investment. Fiscal sustainability depends on growth, the multiplier effects of investment, interest rates, inflation, the structure of the economy and external risks such as climate change. NEF advocates moving away from strict numerical debt targets.

Rising climate costs

In August 2025, the Latvian government declared a state of emergency in agriculture, in response to damage caused by persistent rainfall, frost, and flooding. Under fiscal constraints, this enabled the government to provide the sector with financial assistance quickly. In July 2024, Latvia experienced a major storm, resulting in power outages for around 30,000 households and causing extensive damage across the country. Almost 69% of the Latvian coast is highly vulnerable to coastal erosion and enhancing the danger of flooding and impacting the fishing industry. Likewise, forests, which have historically been one of Latvia’s most important economic resources, are under stress, with pests and diseases becoming widespread.

What NEF’s modelling shows

Organisation for Economic Co-operation and Development (OECD) projections show Latvia’s GDP declining by 10% by 2050 and 15% by 2070 under current policies. Our modelling shows the following:

Under current policies (BAU – business as usual), Latvia’s debt is 50 pps higher than the climate-agnostic baseline in 2050 and 173 pps higher in 2070.

With early EU mitigation and sufficient adaptation spending, debt is 63 pps higher in 2050 and 113 pps in 2070.

Delayed EU investments and insufficient adaptation results in higher debt levels of 61 pps in 2050 and 109 pps in 2070.

EU early action combined with global cooperation results in 11 pps higher debt levels than the climate-agnostic baseline in 2050 and 6 pps lower levels in 2070.

Progressive taxation, such as a wealth tax, combined with EU early action would increase debt by 27 pps in 2050 and by 35 pps in 2070 compared to the climate-agnostic baseline.

Note that Latvia is an outlier: early action appears more costly than late action. This reflects top-down, assumption-heavy modelling and should be interpreted as illustrative rather than as forecasts. Adaptation costs allocated on the basis of GDP, CRI score and population and end up large relative to GDP: under an early action scenario, adaptation investment reaches around 2.4% of GDP in Latvia. For all other countries it’s below 2%. By contrast, Latvia ranks relatively low in terms of GDP losses from climate damage under BAU.