Latvia - Military Budget

A precondition for the development of national defense capabilities is the provision of adequate defense funding. The ability to invest in defense not only demonstrates the fulfillment of international obligations, but also demonstrates the country's ability to take responsibility for national defense according to the level of threat.

Adequate defence funding is an important prerequisite for reaching appropriate level of state defence capabilities. Sufficient defence funding demonstrates our commitment to international obligations. It is also a strong signal of political will to ensure adequate state defence.

In 2014, during the Wales Summit, NATO member states agreed to meet the NATO guideline to spend a minimum of 2% of their Gross Domestic Product (GDP) on defence and keep the funding at the same level in future. To meet the NATO target, Latvia has set a defence spending threshold of 2% of GDP in its Law on the Financing of National Defence.

According to NATO guideline, defence funding can only be spent on defence needs. Funding of other needs that are not related to state defence is not considered defence spending. In the duration period of the Concept, Latvia must ensure a balanced defence budget that has the following breakdown between budget lines: personnel and administrative costs (50%), maintenance costs (30%) and investments (at least 20%).

In accordance with the Law "On the Medium-Term Budget Framework for 2016, 2017 and 2018", the approved increase in the budget expenditures of the Ministry of Defense in 2016 reaches 1.4% of the gross domestic product and in 2017 - 1.7% of the gross domestic product . The approved increase in Latvia's defense expenditure until 2018 is 2% of GDP. Latvia is committed to maintaining this amount of funding in the coming years. According to NATO's definition, these resources can only be used for defense purposes. Latvia must adhere to a balanced defense expenditure structure, allocating less than 50% to personnel and administrative expenditure, 30% to maintenance expenditure and at least 20% to the purchase of new equipment, respectively.

The 2014 change in the security situation in Europe led to Estonia's southern neighbor, Latvia, to boost its defense spending, promising to reach Estonian levels of 2 percent of GDP by 2020. The nation is also debating restoring conscription. The Latvian Parliament's largest party, the Harmony Center party, which represents the nation's Russian minority, said the funds should be directed to the police force instead of the army. The party, which is in opposition, said a strong police force and security agencies would be a stronger deterrent against would-be provocateurs and separatists.

Latvia's defense concept was initially based on the Swedish-Finnish rapid response force model. In 1994 the armed forces totaled 6,600, including 1,650 in the army, 630 in the navy, 180 in the air force, and 4,140 in the border guard. Plans call for 9,000 active members in the armed forces. Latvia also has the security service of the Ministry of Interior and the reserve Home Guard (Zemessardze). In addition to serving as a national guard, the Home Guard, with an estimated 17,000 members, assisted the border guard and the police. When they reached the age of nineteen, men served a mandatory one-year period of active military duty, but men and women at least eighteen years of age may volunteer for military service. Alternative service for conscientious objectors was available.

The armed forces were poorly equipped. In the early 1990s, donations of jeeps and field kitchens came from Germany, patrol boats from Germany and Sweden, and uniforms from Norway. The army's equipment included two BRDM-2 reconnaissance vehicles and thirteen M-43 armored personnel carriers. The navy had about six coast guard vessels, three patrol craft, two minesweepers, one special-purpose vessel, and one tugboat. The air force's equipment included two Soviet An-2 and two Czechoslovak L-410 aircraft and several Soviet Mi-2 and Mi-8 helicopters.

The Ministry of Defense provided extremely low remuneration because it was short of funds. The 1993 state budget allotted only 2.9 percent of its expenditures for national security, which included the Ministry of Defense, the security service of the Ministy of Interior, and the Home Guard. This sum was claimed to be only one-tenth of what would be required for normal functioning of the forces. In the second half of 1992, only 40.5 million Latvian rubles were allotted for food, 42 million rubles for clothing, and 79.8 million rubles for equipment purchases, but 59.3 million rubles were allotted for capital construction. In 1993 about US$48 million was allocated to defense.

Many officers were ethnic Latvians from the former Soviet armed forces, who, according to critics, were set in their ways and are difficult to retrain. Such reformers as former Minister of Defense Valdis Pavlovskis, a retired United States Marine Corps officer and instructor, attempted to remedy this situation through the establishment of local military institutes, including the Latvian Military Academy, and through enrollment in programs at Western military institutes. Ongoing correspondence and part-time training programs also were intro-duced.

A continuously increasing defence budget results in more responsibilities and new duties to enhance the system for efficient usage and control of the budgetary funds. Therefore, the Minister of Defence set a condition in 1999 to implement the Planning, Programming and Budgeting System (PPBS) in compliance with the planning principles of the NATO states. Its purpose is to build a planning system, which would assist in elaboration of programs to be implemented and in achieving of the maximum efficiency from expendable resources.

One of the priorities defined by the Government is the Latvian integration to NATO, and it is reflected in the resource allocation to the defence. On 5 April 2001, the Parliament adopted the Law on Financing the National Defence, which stipulates that the funds allocated to the national defence, security and integration to NATO should reach 2% of the GDP in 2003. This law was amended on 9 May 2002 stipulating that 2% of the GDP will be allocated to the national defence, security and integration to NATO till 2008. Therefore, the growth of the funds allocated to the defence will directly depend on the growth of the GDP. 121.96 mill. Ls or 2% of the GDP were allocated to the National Defence, Security and NATO Integration Programme in 2004. Compared to the Clarified Budget 2003, the Defence Budget 2004 was increased by 11.90 mill. Ls or 11%.

A more detailed insight to the expenditure of funds planned to the national defence can be found in the Law on Budget 2004 and Explanatory Paper 2004 of the Ministry of Defence. Financing allocated to the Ministry of Defence in 2004 was 91.39 mill. Ls or 75% of the financing allocated to the National Defence, Security and NATO Integration Programme. The 30.57 mill. Ls is expenditure of other institutions, which is classified as defence expenditure in accordance with the NATO definition on defence expenditure (e.g., it refers to units who are armed and trained in the field of military tactics and are included in the armed forces in the event of war).

The fifth and the last document of the NATO Membership Action Plan – Annual National Programme 2004 – was submitted to the NATO in October 2003. Its purpose was to reflect the Latvian preparation for NATO membership, as well as to be the base for assessing the implementation of the Latvian obligations required for its membership to the North Atlantic Treaty Organisation. Annual National Programme 2004 was produced on the basis of the tasks defined by the Latvian Reform Implementation Plan, which set specific obligations to be implemented till Latvia joined NATO.

By 2009 Latvia's budgetary situation was serious and the issue of defense spending as a proportion of national expenditures was likely to become more heated over the coming years. Latvia's budget cuts reduced the MOD's 2009 budget from 294 Million Lats (approximately USD 600 Million) to 172 Million Lats. As a result the MOD has instituted a number of stringent measures to ruthlessly cut costs. These include halting all Mine Counter Measure exercises, grounding Latvia's small air force and ceasing all training except that devoted to Latvia's deployments to Afghanistan. In addition, there was simply no way to come up with the money to pay for their portion of the new NATO HQ for the three years 2010, 2011 and 2012. The Ministry decided that the HQ was not a priority, when compared to Latvia's commitment to ISAF. Faced with a crippling economic crisis, Latvia decided to withdraw from its other security missions (e.g. the Balkans) and focus solely on Afghanistan.

By 2009 Latvia was in the midst of a significant financial crisis. Its economy was expected to contract by 10-12% of GDP this year, inflation remains high, and unemployment was above 10% and climbing. Falling revenues and the need for a government take-over of the largest Latvian bank at the end of 2008 forced the Latvian government to turn to the IMF, EU and regional allies for financial assistance. Since then the government had trimmed almost a third off the federal budget and was contemplating additional cuts of up to 40% to government spending. Despite these hardships, the Latvian government has promised that they will not reduce their commitment to the mission in Afghanistan. Latvia faced another round of cuts in its 2010 defense budget as a consequence of a severe economic downturn. Latvia was having difficulty in meeting the IMF criterion of 8.5 percent of GDP for Latvia's budget deficit. With 275 million lats in fresh budget cuts and 49 million lats in new revenues still left the 2010 Latvian budget 175 million lats over the limit, according the the IMF methodology of deficit calculation.