Taxes, spending and debt: who is carrying the Baltic fiscal burden?

Lithuania has already locked in a broad package of additional taxes. Estonia enters 2027 after two years of higher taxes, selected benefit restrictions and higher user charges, while putting more of the next adjustment on the expenditure side. Latvia has combined targeted tax increases with broader changes to pension financing and indirect taxes, but is leaving its next major fiscal choice to the government formed after the October election. In all three countries, borrowing shifts part of the burden into future budgets.

The first part of this Baltic Focus analysis showed why economic growth alone is not resolving the fiscal pressure facing the three Baltic states. All three remain in deficit, defence spending is around 5% of GDP, and government debt is rising. What differs is the way each country has already distributed part of that pressure between taxpayers, consumers, businesses, recipients of public spending and future budgets. (balticfocus.org)

Their 2027 starting points are also different, and the figures are not all at the same stage of the budget process.

2027 baseline	Lithuania	Estonia	Latvia
General-government deficit	Above 3% of GDP, expected	4.0% of GDP	4.2% of GDP
Government debt	48.9% of GDP	28.3% of GDP	about 52% of GDP*
Defence spending	5.28% of GDP	5% of GDP	5% of GDP
Status	Current government expectation; final budget figure pending	Government-approved 2027 draft	Unchanged-policy baseline before decisions of the next government

* Latvia’s latest July fiscal update gives debt close to 48% of GDP at the end of 2026 and about 54% by 2030 but does not publish a 2027 point estimate in the accompanying release. The roughly 52% figure is the Finance Ministry’s spring projection reported by the Fiscal Discipline Council. (fm.gov.lv)

Lithuania’s spring projection had put the 2027 deficit at 2.8% of GDP, but Prime Minister Mindaugas Sinkevičius said in late September that the forthcoming budget was expected to take it above 3%. The Finance Ministry has not yet published the final figure. The 48.9% debt estimate still comes from the spring projection, while the approved medium-term budget envisaged defence spending of 5.28% of GDP in 2027.

Estonia’s draft puts the deficit at 4%, debt at 28.3% and defence spending at 5%. (valitsus.ee) Latvia’s July unchanged-policy forecast gives a 4.2% deficit and includes defence expenditure of 5% of GDP. (fm.gov.lv)

These figures lead to the central question of this second part: who is directly affected when governments try to finance the additional pressure — taxpayers, consumers, businesses, recipients of public spending, or future budgets through additional debt?

The legal payer of a tax is not always the final bearer of its economic cost. A tax on insurers may be reflected partly in premiums; corporate taxes can affect profits, investment, wages or prices; and expenditure restraint may reduce transfers, employment, contracts or services, while some savings can also come from cheaper procurement, delayed investment or administrative efficiencies. The groups below should therefore be read as those directly affected by the measures, rather than as a complete estimate of their final economic incidence.

	Lithuania	Estonia	Latvia
Who has already been directly affected?	Businesses, higher earners, property, insurance, fuel and other consumption	Income taxpayers, consumers, car owners, users of some public services and selected benefit recipients	Higher incomes and capital, banks, pension-system participants and consumers through selected indirect taxes
What changes in 2027?	Projected revenue from the already adopted tax package rises by about €272m versus 2026	No new broad income-tax increase; published estimates put the additional fiscal improvement at roughly €220–250m, with the incidence still partly unclear	Not yet decided
Expenditure side	2027 decisions still incomplete	Continued multi-year expenditure restraint plus the additional 2027 adjustment	Previously planned expenditure reduced and redirected to priorities; deeper review remains an option
What is deferred?	Part of the financing requirement remains in rising debt	A 4% deficit remains in 2027	A 4.2% unchanged-policy deficit and rising debt remain before new decisions

Lithuania: a broad current tax bill

Lithuania is the clearest case because much of the revenue decision has already been made.

The process began with the Defence Fund package adopted in 2024. From 2025, the standard corporate income-tax rate increased from 15% to 16%, excises on alcohol, tobacco and energy products increased, and additional fuel taxation was explicitly linked to defence financing.

The next package went further. From January 2026, the standard corporate rate increased again, from 16% to 17%. Higher personal incomes became subject to stronger progression, property taxation was broadened, a security contribution was introduced on most non-life insurance premiums and a new excise was imposed on sweetened drinks. Several VAT preferences were also reduced or removed. (finmin.lrv.lt)

The Finance Ministry projects that the tax amendments adopted in 2025 will generate €277.1 million in additional state and municipal revenue in 2026 and €549.4 million in 2027. The latter estimate excludes the effect of separate rules for income from agricultural activities, which received their own PIT treatment instead of being fully incorporated into the general 20%, 25% and 32% progression. (finmin.lrv.lt)

The projected yield therefore rises by about €272 million between 2026 and 2027, although the ministry’s final release does not provide a complete measure-by-measure reconciliation of the €549.4 million total.

A separate Defence Fund table identifies €512.7 million for 2027. Of this, €134.5 million comes from the corporate-tax increase and loss restrictions, €76 million from property taxation, €107.7 million from the security contribution and €25 million from the sweetened-drinks excise. Together, those listed tax changes amount to €343.2 million. The table also includes €169.5 million equal to 2% of existing state and municipal PIT revenue, which represents an allocation of revenue already being collected rather than a new tax increase. (finmin.lrv.lt)

VAT changes sit outside that Defence Fund breakdown and are expected to generate more than €80 million annually. Most categories previously subject to the 9% preferential rate moved to 12%, while preferential VAT on heating, hot water and firewood was abolished. The government retained compensation mechanisms intended to cushion part of the impact on lower-income households. (finmin.lrv.lt)

The current financing package consequently reaches well beyond banks or very high earners. Companies have faced two successive increases in the standard corporate rate, higher incomes face stronger PIT progression, and property, insurance and sweetened drinks have been brought further into the revenue base. Earlier measures affecting fuel, alcohol and tobacco had already extended the adjustment into mass consumption.

At the same time, higher taxation has not been accompanied by a general withdrawal of social support. The adopted 2026 budget increased old-age pensions by 12%, allocating an additional €388.4 million, and expanded several child and other social benefits. Defence was budgeted at 5.38% of GDP in 2026 and at 5.28% in 2027. (finmin.lrv.lt)

Lithuania has thus already fixed a broad set of additional revenue sources during a period of sharply higher defence financing, while continuing to borrow.

The independent Fiscal Institution warns that additional sustainable revenue may still be required later. Its May assessment said that, without further measures, Lithuania could eventually face a choice between defence financing and access to other public services. It also noted that advance payments for military equipment are increasing debt before the corresponding purchases are fully reflected in the deficit, and projected debt rising from 45% of GDP in 2026 to 55.3% in 2029. (valstybeskontrole.lt)

Estonia: taxpayers have already paid before the 2027 adjustment

Estonia looks quite different if 2027 is viewed in isolation.

The government is not proceeding with the previously planned increase in personal and corporate income tax to 24%. Both remain at 22%, and the uniform €700 monthly tax-free allowance has applied since January 2026. The decision to cancel the 24% rate, however, was taken during preparation of the 2026 budget in September 2025, rather than during the current 2027 budget round. (valitsus.ee)

The relevant starting point is therefore the tax and benefit changes that preceded 2027.

From 2025, personal and corporate income-tax rates rose to 22%. Estonia’s corporate tax is generally levied when profits are distributed rather than annually on retained earnings. A motor-vehicle tax and registration charge came into force, excises increased, and from 1 July 2025 the standard VAT rate rose to 24%. (fin.ee)

In January 2026, alcohol and tobacco excises rose by another 10%. A further increase in fuel, natural-gas and electricity excises had been scheduled for May, but the government cancelled it in March in response to higher energy prices. The decision reduced expected budget revenue by about €36 million in 2026 and €20 million in 2027. (fin.ee)

Households have also faced selected changes outside the tax system. From 2025, the prescription charge increased from €2.50 to €3.50. From April, the standard specialist visit fee increased from €5 to €20 and the inpatient daily fee from €2.50 to €5, while lower charges remained for specified vulnerable groups. (sm.ee)

From 2026, the ceiling on parental benefit was reduced from three times to twice the reference average income. The previous earnings limit was removed at the same time, allowing parents to work without having their parental benefit reduced. (sm.ee)

Estonia therefore enters 2027 after a period in which households and businesses have already absorbed higher broad taxes, higher excises, a new vehicle tax and some increased user charges or targeted benefit restrictions.

The 2027 budget continues the tax policy chosen a year earlier: it retains the higher tax base established in 2025–2026, while leaving the planned further increase in income-tax rates cancelled.

The government-approved draft sets the general-government deficit at 4% of GDP and debt at 28.3% of GDP. The government describes its decisions as improving the 2027 budget position by about €250 million. (valitsus.ee)

The Estonian Fiscal Council separately estimates an improvement of about €220 million relative to the summer forecast and says much of it reflects changes in investment, EU funds and accounting rather than a permanent improvement in the underlying revenue and expenditure structure. The two published estimates cannot be treated as interchangeable without a detailed reconciliation.

Estonia is also completing the three-year expenditure-saving programme agreed for 2025–2027. The government describes this as a cumulative 10% reduction across the relevant expenditure base, with the final 2% stage falling in 2027. (valitsus.ee)

Some of this restraint may affect employment, transfers, procurement or service provision, with consequences for workers, suppliers, beneficiaries or users. Other savings can come from lower procurement costs, postponed investments or administrative changes. The published headline figures do not yet allow the full burden to be allocated between those groups.

Estonia’s position is therefore layered. Taxpayers and consumers already absorbed significant increases in 2025–2026; the government is now keeping the next planned broad income-tax increase off the table while tightening the expenditure side in 2027. A 4% deficit remains, so borrowing continues to finance another part of the bill.

Latvia: the next broad choice is still open

Latvia has also changed who pays, although through a more mixed combination of instruments.

The 2025 tax reform increased the fixed non-taxable minimum and was designed to reduce labour-tax pressure for many employees. The Finance Ministry estimates the resulting reduction in budget revenue at about €1 billion over 2025–2028. At the same time, income from capital and capital gains became subject to a 25.5% rate, while an additional 3% rate was introduced on annual income above €200,000. (fm.gov.lv)

Banks were brought into a separate temporary mechanism. The solidarity contribution applies in 2025–2027 at a 60% rate on the part of net interest income exceeding 150% of the average for the 2018–2022 reference period, with rebates available for sufficiently strong lending growth. (fm.gov.lv)

The adjustment has also reached much broader groups through the pension system. From 2025 through 2028, the allocation of pension contributions for participants in the funded scheme was changed from 14% to the first pillar and 6% to the second to 15% and 5% respectively. Participants continue to acquire first-pillar pension rights, while current flows into individually funded second-pillar assets are correspondingly lower. (lm.gov.lv)

Indirect taxation has moved in both directions. Several excises increased, while from July 2026 a temporary reduced 12% VAT rate applies to selected basic food categories. Latvia has therefore combined targeted increases on higher incomes, capital and banks with broader changes affecting pension financing and consumption, while reducing labour-tax pressure for many employees. (fm.gov.lv)

The expenditure side is similarly mixed.

For 2026–2028, the government identified €844.1 million in lower planned expenditure: €243.4 million in 2026, €304.6 million in 2027 and €296.1 million in 2028. These are savings relative to earlier plans and are being redirected towards government priorities rather than representing an equivalent fall in total public expenditure. (fm.gov.lv)

That is the starting point for 2027.

The latest Finance Ministry unchanged-policy forecast puts the 2027 general-government deficit at 4.2% of GDP, rising to 5.4% in 2028. The deterioration reflects both weaker projected tax revenue and higher social spending, particularly old-age pensions. The same forecast includes defence expenditure of 5% of GDP from 2027 and projects debt close to 48% of GDP at the end of 2026 and about 54% by 2030. (fm.gov.lv)

The Finance Ministry has prepared three medium-term scenarios for the next government. Depending on the fiscal objective, they imply a cumulative financing task of €1.48 billion to €8.86 billion over 2027–2030. The scenarios describe alternative four-year trajectories. Possible tools include a review of tax reliefs and tax collection, reassessment of expenditure already approved without permanent financing, zero-based expenditure reviews and a wider search for resources across the public sector. (fm.gov.lv)

The timing matters because Latvia holds its parliamentary election on 3 October 2026, and the new Saeima is due to meet for the first time on 3 November. The final distributional decision therefore belongs to the next political cycle. (cvk.lv)

The Fiscal Discipline Council has warned that the medium-term position will require durable solutions on both sides of the budget. It expects debt to move into the low-50s as a share of GDP and debt-service costs to rise, while stressing that defence financing cannot sustainably depend only on additional borrowing. (fdp.gov.lv)

Latvia has already used higher taxation of some income and capital, a temporary bank contribution, indirect taxes, pension-financing changes and lower planned expenditure. At the same time, it has reduced labour-tax pressure for many employees and maintained or expanded major social commitments.

The remaining question is whether this combination can finance the next stage, or whether the new government will eventually have to reach further into broad tax bases or make larger structural expenditure changes.

Debt is not the alternative to making someone pay

The common feature can easily disappear from view when tax and spending measures are examined country by country: all three Baltic governments are borrowing.

Lithuania’s spring baseline puts debt at 48.9% of GDP in 2027. Estonia’s draft gives 28.3%. Latvia’s available projections place it roughly in the low-50s, with the July update showing a continued rise towards 54% by 2030. The levels differ substantially, but the direction is the same. (elibrary.imf.org)

Borrowing changes the timing of the burden rather than making it disappear. Interest payments become a claim on future budget revenue, while refinancing and eventual debt stabilisation reduce the room available for other expenditure or require additional revenue. The scale of this transfer differs markedly between the three countries, but it is present in each fiscal strategy.

Their current distribution of the burden is much less uniform.

Lithuania has already adopted a broad set of additional revenue measures reaching businesses, higher earners, property and consumers.

Estonia enters 2027 after significant tax increases in 2025–2026. It is retaining that higher tax base, keeping the previously planned further income-tax increase cancelled and adding further restraint on the expenditure side.

Latvia has combined measures affecting both relatively narrow groups and broad bases, including pension-system participants and consumers, while postponing the next major distributional decision until after the election.

The available evidence does not establish which country has already paid the largest share of its total fiscal bill. The measures cover different periods, use different baselines and include both tax increases and tax reductions.

What can be established is who has already been directly affected, which instruments governments have chosen, and which part of the financing requirement continues to be passed into debt.

What comes next

Lithuania’s forthcoming 2027 budget should provide the revised deficit figure and show whether the revenue package already adopted is accompanied by further tax or expenditure decisions.

Estonia’s parliamentary budget process should make the expenditure side of its adjustment more visible and clarify how much of the headline fiscal improvement represents lasting structural change.

Latvia’s next government faces the least settled distributional choice. Its decisions will show whether the existing combination of expenditure review, tax changes and borrowing can be extended or whether a broader part of the economy will be asked to contribute.

The Baltic states are not choosing between paying now and paying later. They are doing both. The difference is who is being asked to pay now — and how much of the remaining bill each country continues to leave to future budgets.

Information and policy decisions included up to 1 October 2026.