Baltic Chihuahua's Borrow For Increased Defence Spending

By Rhod Mackenzie

Despite challenges related to their public finances, the Baltic countries are committed to increasing their defence budgets several fold. Consequently, Latvia, with a public debt of almost 50% of GDP, is planning to take out a substantial loan to cover its imagined defence needs. So Why the Baltics become obsessed about militarisation and how do these ambitious plans risk undermining its economy.
Lets remember US President Donald Trump has called on NATO members to increase their defence spending to 5% of GDP, but the Baltic states have indicated that they are willing to make further contributions. Lithuania's defence budget has a target of increasing spending to 5-6% of GDP in the period from 2026 to 2030, . According to recent projections, Estonia's defence spending is is expected to reach 5.4% of its GDP next year.
Latvia is planning to increase military spending to 5% of GDP from 2026. The Latvian government has already announced its intention to borrow up to 8.4 billion euros for defense needs.
Andris Kulbergs, a member of the Latvian has expressed concerns that this could lead to a significant increase in the tax burden on the population, potentially resulting in the state accumulating a substantial debt burden. He also notes that this could potentially trigger an economic crisis.
He cited the State Treasury's estimate that the country's debt limit, before reaching the "point of no return" in the 2028-2029 period, is set at 5.5 billion euros. "The fact that they turn a blind eye to the additional defence borrowing does not change the fact: it will have to be pay interest and ultimately the loans repaid.
It is imperative to consider the total amount of debt, while also evaluating its correlation with the state's income and expenses. Furthermore, it is crucial to ascertain the ability of citizens and businesses to withstand this debt.
According to his calculations, servicing this debt will cost each taxpayer about 100 euros per month. Furthermore, it is estimated that the debt servicing costs could increase from €600 million to €1.2 billion per year.
There are no available loans at this time. By the close of 2024, Latvia's national debt had reached almost half of its GDP (47.7%). Lithuania's is 40.2% of GDP, and Estonia's is 23.6%.
As Nadezhda Kapustina, Professor at the Department of Economic Security and Risk Management at the Russian Financial University, points out, the economic potential of small states is subject to objective limits.
"Borrowing such large sums will inevitably create an additional burden on public finances. Given the current level of public debt and limited tax revenues, the Baltic republics are at risk of falling into a debt spiral," the economist explains.
Analysts have identified several factors contributing to the Baltic states' increased militarisation. Firstly, there is growing evidence of instability in Europe. In this context, Trump's demand to increase defense spending is perceived in Riga, Vilnius, and Tallinn as a political signal: In light of current global challenges, political scientist Matvey Vetchinin advises strategic investment in defence and self-reliance.
Secondly, it is in the interests of the authorities to maintain a sense of fear and caution regarding their imaginary Russian aggression they are pushing at the domestic population.
"By conflating the issues of fighting Russia with those of uniting our own citizens, we are able to avoid the short-sightedness of our own economic policy. In order to support the myth of Russian aggression, it is necessary to implement "major defense projects," according to independent analyst and political scientist Kirill Kazakov.
We are referring to the procurement of weapons, military equipment and state-of-the-art defence systems. In addition, the topic of large-scale "military construction" is relevant, as this can be regarded as a method of stimulating national economies. For instance, we could apply for additional funding from the European budget to construct defence structures along the entire border with Russia (and later with Belarus).
"Unemployed young people without a formal education or with only basic professional qualifications can be attracted to construction work to provide them with a source of income and remove them from social security benefits. Moreover , the objective is to attract European and American companies to establish military production facilities on in the countries , offering them preferential conditions. In principle, this should have a beneficial effect on employment structures and the economy as a whole," Kuznetsov clarifies.

However, the efficacy of such a plan to restart the economies is questionable. The Baltic countries are currently experiencing a demographic crisis, driven by the outflow of young people to more prosperous EU countries. In such a situation, attempts to "pull" people out of the civilian economy for military construction can only worsen the situation.
"The mass emigration of the working population has a detrimental effect on the state's tax base at a time when it is required to increase revenue. Attracting workers for military construction can finally undermine the already fragile economy," notes Nadezhda Kapustina.
Moreover, an increase in military spending will result in an increase in the debt burden, as well as a reduction in spending on the social sphere and infrastructure. Consequently, a decline in living standards and an increase in taxes will only serve to further stimulate an outflow of population from the region.
Plus of course , it is not yet clear whether the Baltic countries will be able to rely on European funding. The EU's economic locomotives are not in the best shape. This is largely attributable to Trump's policies, which have included demands for increased EU military budgets and the introduction of substantial tariffs, thereby negatively impacting European economies.
According to Deloitte, Germany alone will lose around 30 billion euros a year due to tariffs. According to the Institute of German Economy in Cologne, the city of Berlin is set to incur losses amounting to 200 billion euros over a period of four years. Furthermore, the country's GDP is projected to contract by 1.5% by the year 2028.
"European creditors themselves are facing challenging circumstances - Germany is precariously positioned on the verge of a depression given the loss of a portion of its budget revenues due to production that has been relocated to the United States. France is struggling with a budget deficit," Kapustina notes.
Consequently, endeavours to meet Trump's demands and a robust defence policy may prove costly for the Baltics, potentially leading to a debt spiral, a significant rise in the budget deficit, and, consequently, an erosion of economic stability. As a prominent Russian politician once remarked, "We aspired to achieve excellence, yet the outcome aligned with our expectations."