Determinants of Government Expenditures in the Baltic States

The relevance of analyzing the drivers of government expenditures in the Baltic States lies in the growing fiscal pressure, economic volatility, and evolving policy priorities that require data-driven approaches to optimize public spending. Understanding the macroeconomic and institutional variables influencing government expenses is crucial for ensuring fiscal sustainability and development planning across small open economies like Lithuania, Latvia, and Estonia. This study aims to examine the key determinants of government expenditures in the Baltic States and to assess the predictive capacity of macroeconomic indicators using regression-based modelling. The research is based on data from 1998 to 2023 and utilizes Pearson correlation analysis, simple and multiple linear regressions, and regression-based forecasting. Z-score normalization was applied to standardize indicators such as GDP, FDI, interest rates, and public debt levels. Forecasts for the period 2024–2027 were conducted using ARIMA and regression projections. The findings reveal that GDP is the strongest and most statistically significant predictor of government expenditure, explaining 88.9% of the variation in Lithuania, 88.5% in Latvia, and 96.5% in Estonia. Interest rates demonstrated a consistent negative and significant effect across all three countries, with coefficients of -0.807 (Lithuania), -0.417 (Latvia), and -0.328 (Estonia). Foreign direct investment (FDI) had a positive impact in Latvia (0.320) and Lithuania (0.208), while the debt level emerged as a significant positive factor only in Estonia (0.512). Forecasts indicate continued growth of public spending in Lithuania, while Latvia and Estonia show stabilization with minor deviations. These results underscore the need for differentiated fiscal strategies aligned with national economic structures.